Legislature(2007 - 2008)CAPITOL 120
05/07/2007 01:00 PM House JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| SB121 | |
| HB128 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 121 | TELECONFERENCED | |
| *+ | HB 245 | TELECONFERENCED | |
| + | HB 128 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE JUDICIARY STANDING COMMITTEE
May 7, 2007
1:30 p.m.
MEMBERS PRESENT
Representative Jay Ramras, Chair
Representative Nancy Dahlstrom, Vice Chair
Representative John Coghill
Representative Bob Lynn
Representative Ralph Samuels
Representative Max Gruenberg
Representative Lindsey Holmes
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
CS FOR SENATE BILL NO. 121(L&C)
"An Act relating to discharge from small commercial passenger
vessels; relating to information-gathering requirements for
small commercial passenger vessels; providing for an effective
date by repealing the delayed effective date found in sec. 16,
ch. 153, SLA 2004; and providing for an effective date."
- MOVED CSSB 121(L&C) OUT OF COMMITTEE
HOUSE BILL NO. 128
"An Act relating to allowable lease expenditures for the purpose
of determining the production tax value of oil and gas for the
purposes of the oil and gas production tax; and providing for an
effective date."
- MOVED CSHB 128(RES) OUT OF COMMITTEE
HOUSE BILL NO. 245
"An Act relating to theft and concealment of merchandise."
- BILL HEARING CANCELED
PREVIOUS COMMITTEE ACTION
BILL: SB 121
SHORT TITLE: CRUISE SHIP DISCHARGE & INFO
SPONSOR(s): SENATOR(s) ELTON
03/14/07 (S) READ THE FIRST TIME - REFERRALS
03/14/07 (S) L&C
03/20/07 (S) L&C AT 1:30 PM BELTZ 211
03/20/07 (S) Heard & Held
03/20/07 (S) MINUTE(L&C)
03/22/07 (S) L&C AT 1:30 PM BELTZ 211
03/22/07 (S) Moved CSSB 121(L&C) Out of Committee
03/22/07 (S) MINUTE(L&C)
03/23/07 (S) L&C RPT CS 2DP 3NR NEW TITLE
03/23/07 (S) DP: ELLIS, DAVIS
03/23/07 (S) NR: BUNDE, STEVENS, HOFFMAN
04/04/07 (S) TRANSMITTED TO (H)
04/04/07 (S) VERSION: CSSB 121(L&C)
04/05/07 (H) READ THE FIRST TIME - REFERRALS
04/05/07 (H) RES, JUD
05/02/07 (H) RES AT 1:00 PM BARNES 124
05/02/07 (H) Moved Out of Committee
05/02/07 (H) MINUTE(RES)
05/03/07 (H) RES RPT 5DP 3NR
05/03/07 (H) DP: SEATON, EDGMON, ROSES, WILSON,
JOHNSON
05/03/07 (H) NR: GUTTENBERG, KAWASAKI, GATTO
05/07/07 (H) JUD AT 1:00 PM CAPITOL 120
BILL: HB 128
SHORT TITLE: OIL & GAS PRODUCTION TAX: EXPENDITURES
SPONSOR(s): REPRESENTATIVE(s) OLSON
02/12/07 (H) READ THE FIRST TIME - REFERRALS
02/12/07 (H) O&G, RES, FIN
02/22/07 (H) O&G AT 3:00 PM CAPITOL 124
02/22/07 (H) Heard & Held
02/22/07 (H) MINUTE(O&G)
03/01/07 (H) O&G AT 3:00 PM CAPITOL 124
03/01/07 (H) Moved CSHB 128(O&G) Out of Committee
03/01/07 (H) MINUTE(O&G)
03/05/07 (H) O&G RPT CS(O&G) 3DP 1NR
03/05/07 (H) DP: DOOGAN, RAMRAS, OLSON
03/05/07 (H) NR: SAMUELS
03/19/07 (H) RES AT 1:00 PM BARNES 124
03/19/07 (H) Heard & Held
03/19/07 (H) MINUTE(RES)
03/21/07 (H) RES AT 1:00 PM BARNES 124
03/21/07 (H) Heard & Held
03/21/07 (H) MINUTE(RES)
03/23/07 (H) RES AT 1:00 PM BARNES 124
03/23/07 (H) Heard & Held
03/23/07 (H) MINUTE(RES)
03/26/07 (H) RES AT 1:00 PM BARNES 124
03/26/07 (H) -- MEETING CANCELED --
03/28/07 (H) RES AT 1:00 PM BARNES 124
03/28/07 (H) Heard & Held; Assigned to Subcommittee
03/28/07 (H) MINUTE(RES)
05/01/07 (H) RES SUBCOMMITTEE AT 9:00 AM BARNES 124
05/02/07 (H) RES AT 1:00 PM BARNES 124
05/02/07 (H) Failed To Move Out Of Committee
05/02/07 (H) MINUTE(RES)
05/04/07 (H) RES AT 1:00 PM BARNES 124
05/04/07 (H) Moved CSHB 128(RES) Out of Committee
05/04/07 (H) MINUTE(RES)
05/05/07 (H) RES RPT CS(RES) 1DP 1NR 6AM
05/05/07 (H) DP: GATTO
05/05/07 (H) NR: EDGMON
05/05/07 (H) AM: SEATON, GUTTENBERG, KAWASAKI,
ROSES, WILSON, JOHNSON
05/05/07 (H) JUD REFERRAL ADDED AFTER RES
05/07/07 (H) JUD AT 1:00 PM CAPITOL 120
WITNESS REGISTER
SENATOR KIM ELTON
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Spoke as the sponsor of SB 121.
MICHAEL JONES, Director
Marine Operations
Lindblad Expeditions
New York, New York
POSITION STATEMENT: Spoke in support of SB 121.
RUTH HAMILTON HEESE, Assistant Attorney General
Environmental Section
Civil Division (Juneau)
Department of Law (DOL)
Juneau, Alaska
POSITION STATEMENT: During hearing of SB 121, answered
questions.
REPRESENTATIVE KURT OLSON
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Spoke as the sponsor of HB 128.
KONRAD JACKSON, Staff
to Representative Kurt Olson
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Spoke on behalf of the sponsor of HB 128,
Representative Olson.
DON BULLOCK, Attorney
Legislative Legal Counsel
Legislative Legal and Research Services
Legislative Affairs Agency (LAA)
Juneau, Alaska
POSITION STATEMENT: During discussion of HB 128, offered
comments and answered questions as drafter of HB 128.
ETHAN FALATKO, Assistant Attorney General
Oil, Gas & Mining Section
Civil Division (Juneau)
Department of Law (DOL)
Juneau, Alaska
POSITION STATEMENT: During discussion of HB 128, offered
comments and answered questions.
KEVIN BANKS, Acting Director
Central Office
Division of Oil & Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: During discussion of HB 128, offered
comments and responded to questions.
JONATHAN IVERSEN, Director
Anchorage Office
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: During discussion of HB 128, offered
testimony and answers to questions.
JUDY BRADY, Executive Director
Alaska Oil and Gas Association (AOGA)
Anchorage, Alaska
POSITION STATEMENT: Provided comments and answered questions in
opposition to HB 128.
MARY JACKSON, Staff
to Senator Tom Wagoner
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: During discussion of HB 128, responded to a
question pertaining to federal investigations on behalf of
Senator Wagoner, sponsor of the Senate companion bill.
ACTION NARRATIVE
CHAIR JAY RAMRAS called the House Judiciary Standing Committee
meeting to order at 1:30:11 PM. Representatives Ramras, Lynn,
Holmes, and Dahlstrom were present. Representatives Coghill,
Samuels, and Gruenberg arrived as the meeting was in progress.
SB 121 - CRUISE SHIP DISCHARGE & INFO
1:30:37 PM
CHAIR RAMRAS announced that the first order of business would be
CS FOR SENATE BILL NO. 121(L&C), "An Act relating to discharge
from small commercial passenger vessels; relating to
information-gathering requirements for small commercial
passenger vessels; providing for an effective date by repealing
the delayed effective date found in sec. 16, ch. 153, SLA 2004;
and providing for an effective date."
1:30:51 PM
SENATOR KIM ELTON, Alaska State Legislature, speaking as the
sponsor of SB 121, relayed that the bill restores the
alternative compliance discharge protocols for small ships,
which were passed unanimously by both bodies of the legislature
in 2004, as House Bill 522, and which were written in
conjunction with the Department of Environmental Conservation
(DEC). However, the ballot initiative regarding cruise ship
taxation, regulation and disclosure inadvertently included a
repeal of those protocols. This repeal was not the intention of
the ballot initiative sponsors, and was not noticed by the
legislature. Neither the initiative sponsors, members of the
public, nor any member of the legislature has testified against
SB 121. He concluded by saying in part, "This is something that
needs to be fixed."
CHAIR RAMRAS asked how it is known that the initiative sponsors
and the public didn't mean to put the same restrictions on the
small cruise ships as the large cruise ships.
SENATOR ELTON responded that those restrictions on waste water
were not imposed by the ballot initiative. These restrictions
were already passed into law by the legislature. However, the
small cruise ships do not have the space on board for the
required waste water technology. The alternative protocol,
addressed in House Bill 522, was written for cruise ships with
fewer than 150 overnight berths. The ballot initiative is a
compliance review and did not impose any restrictions on waste
water that were not already imposed by law.
REPRESENTATIVE GRUENBERG, asked Senator Elton to clarify the
sequence and the process.
[Chair Ramras turned the gavel over to Vice Chair Dahlstrom.]
SENATOR ELTON responded, explaining that when House Bill 522 was
introduced, and subsequently passed, it was put into a statute
that was going to be repealed if the ballot initiative passed.
The legislature just failed to notice that they were amending a
statute that could be repealed by the proposed cruise ship
initiative.
REPRESENTATIVE GRUENBERG asked whether the statute was being
brought back to its unamended status.
SENATOR ELTON replied yes, and he elaborated that SB 121 also
includes a sunset clause for 2016, as the bill sponsor projected
that technology would be adequately improved by then.
REPRESENTATIVE GRUENBERG pondered whether the legislature should
consider developing a procedure to deal with any similar
problems that may arise in the future.
[Vice Chair Dahlstrom returned the gavel to Chair Ramras.]
SENATOR ELTON responded that he was willing to help but warned
that such a procedure might take a lot of thought to consider
all the possible scenarios; the problem may be inherent in the
initiative process.
CHAIR RAMRAS, after mentioning a possible conflict of interest,
turned the gavel over to Vice Chair Dahlstrom.
1:41:19 PM
MICHAEL JONES, Director, Marine Operations, Lindblad
Expeditions, noted that Lindblad Expeditions has been operating
two small 62-passenger vessels in Southeast Alaska since 1989.
These two identical sister ships are both U.S. built, flagged,
owned, operated, and crewed. Both vessels dock in Juneau,
Petersburg, and Sitka. He commented that the original
legislation, House Bill 522, provided a process for the DEC to
review and approve alternate compliance programs for small
passenger vessels, and the system worked well. He reflected
that the ballot initiative inadvertently removed the small ship
alternate compliance program. He concluded by stating that
Lindblad Expeditions supports SB 121.
1:43:30 PM
RUTH HAMILTON HEESE, Assistant Attorney General, Environmental
Section, Civil Division (Juneau), Department of Law (DOL), in
response to a question regarding the department's fiscal note,
said that the initials "GP" stand for "general permit". She
clarified that SB 121 is not requiring small cruise ships to
have a permit; rather, the bill is drafted such that the best
management practices (BMP) apply to small cruise vessels. She
said she believes that SB 121 does not intend for a permit
system.
REPRESENTATIVE GRUENBERG asked whether the DOL and the DEC have
finished reviewing the bill.
MS. HAMILTON HEESE responded that both reviews have been
completed and "the bill would restore the program consistent to
what it was before."
REPRESENTATIVE GRUENBERG asked whether the DOL had any legal
issues with SB 121.
MS. HAMILTON HEESE replied that she did not believe the DOL had
any problems with the bill.
VICE CHAIR DAHLSTROM asked if there was any more testimony, and,
there being none, closed public testimony on SB 121.
1:47:16 PM
REPRESENTATIVE LYNN moved to report CSSB 121(L&C) out of
committee with individual recommendations and the accompanying
fiscal notes. There being no objection, CSSB 121(L&C) was
reported from the House Judiciary Standing Committee.
VICE CHAIR DAHLSTROM returned the gavel to Chair Ramras.
HB 128 - OIL & GAS PRODUCTION TAX: EXPENDITURES
1:47:54 PM
CHAIR RAMRAS announced that the final order of business would be
HOUSE BILL NO. 128, "An Act relating to allowable lease
expenditures for the purpose of determining the production tax
value of oil and gas for the purposes of the oil and gas
production tax; and providing for an effective date." [Before
the committee was CSHB 128(RES).]
CHAIR RAMRAS offered his understanding that the need for legal
definition of the phrase "improper maintenance" resulted in HB
128 being referred to the House Judiciary Standing Committee.
1:49:47 PM
REPRESENTATIVE KURT OLSON, Alaska State Legislature, sponsor,
concurred with Chair Ramras.
REPRESENTATIVE GRUENBERG inquired whether there was also a
second issue concerning retroactivity.
REPRESENTATIVE OLSON explained that HB 128 attempts to address
the question of who pays for improper maintenance on the North
Slope, either the citizens of Alaska or the responsible party.
Last year, this bill was offered as an amendment to the
production profits tax (PPT) legislation, but didn't reach the
Senate floor. This bill is now the companion bill to SB 80. He
urged support of the bill. In response to a question, he
expressed his belief that the retroactivity question was
addressed in the last committee.
1:51:58 PM
KONRAD JACKSON, Staff to Representative Kurt Olson, Alaska State
Legislature, explained on behalf of Representative Olson,
sponsor, that the issue of retroactivity was already addressed
by Legislative Legal and Research Services. He said that the
PPT legislation was a tax bill, the retroactive clause was an
amendment to that bill, and that such a clause is not unusual.
In reviewing HB 128 for the committee, he recounted that it
amends the PPT by adding another paragraph to AS 43.55.165(e),
which currently lists 18 items not considered lease
expenditures, and are therefore not tax deductible. The
proposed paragraph (19) will disallow as lease expenditures any
expenses for repair or replacement of facilities or equipment
that weren't properly maintained.
MR. JACKSON went on to further explain AS 43.55.165(e)(19) and
its three subparagraphs, (A), (B), and (C). If, for example, an
improperly maintained facility "A" results in diminished
capacity or a shut down, this may cause the downstream facility
"B" to also be shut down or have diminished capacity. In that
case, those expenses incurred at facility "B" attributable to
the shut down in facility "A" would also cease to be lease
expenditures. He finished by stating that "the people of Alaska
do not end up paying for someone else's mistake."
MR. JACKSON explained that the proposed paragraph (20) refers to
the "lead person for exercising oversight". This is a position
recently created by the governor via Administrative Order No.
234. This new position, Petroleum Systems Integrity Office
Coordinator (PSIOC), will ensure that the infrastructure and
production facilities in the state are maintained. The
Petroleum Systems Integrity Office (PSIO) will be within the
Department of Natural Resources (DNR).
CHAIR RAMRAS recollected that while attending a joint House and
Senate Resources Standing Committee meeting on August 31, 2006,
the committee discussed the value of lost oil revenue and
whether that would ever be recaptured. He offered his belief
that HB 128 won't address that loss, but will instead address
the cost from improper maintenance.
MR. JACKSON concurred.
2:00:40 PM
DON BULLOCK, Attorney, Legislative Legal Counsel, Legislative
Legal and Research Services, Legislative Affairs Agency (LAA),
after confirming that he drafted HB 128, explained that as no
other state gets involved in giving upstream deductions when
calculating the value on which the severance tax is based, he
was unable to find any other similar standards to model. The
production tax value under PPT is calculated by starting with
the gross value at the point of production and then subtracting
the costs of production. As a rule, ordinary and necessary
expenses are allowed to be deducted. The costs listed in AS
43.55.165(e) are specifically not allowed to be deducted.
Starting with the premise that this is a new approach, he
explained that he looked at what the state is giving up when it
gives a deduction.
MR. BULLOCK, acknowledging the costs of deductions, explained
that the oil companies are not allowed to deduct any capital
expenditure costs below the value of 30 cents times the total
annual production [of BTU equivalent barrels of oil]. When oil
production goes down, this "floor" of deduction limits goes
down, and then more capital expenditure costs would be allowable
deductions. With the credits and the deductions, the state
could share up to 42.5 percent of the field costs. He said they
tried to define in HB 121, what level of [indisc.] are the
operators expected to meet in return for the deduction. The
standard in the bill is "good oil field practice." If the
operator's performance does not meet this standard, the state
will not give the deductions.
CHAIR RAMRAS raised the issue of enforceability that he believed
was one of the concerns of the Department of Law (DOL).
MR. BULLOCK replied that it is common auditing practice to
determine what is "ordinary and necessary." The standard for
general deductions for oil field production costs is "ordinary
and necessary" and this is the standard applied by the state in
AS 43.55.165(a). In response to a question, Mr. Bullock replied
that "ordinary and necessary" is the normal terminology also
used in tax law.
2:09:01 PM
ETHAN FALATKO, Assistant Attorney General, Oil, Gas & Mining
Section, Civil Division (Juneau), Department of Law (DOL),
reflected that the DOL was comfortable with the bill. He said
he could not recall what question there may have been as to the
issue of enforceability, though he clarified that he was "pinch
hitting" for a colleague as the spokesperson from the DOL.
REPRESENTATIVE GRUENBERG provided that he did not want to
include language in the bill that will promulgate litigation.
He then asked for a clarification on the process after a
deduction is taken.
2:11:16 PM
KEVIN BANKS, Acting Director, Central Office, Division of Oil &
Gas, Department of Natural Resources (DNR), explained that the
Department of Revenue (DOR) has responsibility for collecting
taxes. He noted that HB 128 will add provisions [to AS
43.55.165(e)] that will not allow cost [deductions] due to
"improper maintenance", with some definition as to how that will
be accomplished.
CHAIR RAMRAS asked that the witnesses speak specifically about
retroactivity.
MR. BULLOCK opined that there is not a problem with the
retroactive provision [included in Section 5]. He offered that
the PPT legislation was already retroactive. The U.S. Supreme
Court in Welch v. Henry ruled that given the importance of
taxes, the state legislature can amend a tax and apply it
retroactively. He surmised that if other provisions of the PPT
legislation have resulted in less [revenue] than anticipated,
then the legislature would have the power to go back and make
corrections. He suggested that this bill is similar to those
types of adjustments which the court has allowed. After a
reasonable amount of time has passed for the legislature to look
at the effect of the law, it does have the power to make a
retroactive change in the law.
MR. FALATKO concurred with that summation, that it was
consistent with his research. Given the current timeline, he
said he did not believe this should be an issue.
MR. BULLOCK said there have also been more recent Alaska Supreme
Court cases that have upheld the retroactivity of production tax
regulations.
2:16:04 PM
REPRESENTATIVE GRUENBERG indicated that all of his questions
have been answered.
MR. BANKS, in response to a question, said that he is
comfortable with the legislation, even should it progress into
litigation. He went on to explain the relationship between the
DNR and the DOR. The DOR auditor may flag a cost, believing it
to be associated with an improper maintenance issue. At that
point, the DOR has the option to consult with the DNR or the
PSIO. The PSIO staff will be able to offer consulting services
to the DOR to help determine whether the cost is improper, as
defined in this legislation.
MR. BANKS further explained that the purpose of the PSIO is to
coordinate the oversight of those oil industry activities
upstream of the regulated pipelines. He said the PSIO intends
to coordinate the regulatory authorities of: the Department of
Environmental Conservation (DEC) for environmental protection;
the DNR for land use, water use, and coastal zone management;
and the state according to the stipulations that apply under its
leases and unit agreements with the lessees. In addition, he
said, the PSIO will be working with some federal agencies,
including the DOT&PF.
MR. BANKS clarified that the PSIO will provide oversight to
ensure the industry has appropriate quality assurance programs
in place, regardless of what changes are made to the PPT
legislation. The PSIO staff will monitor industry activities,
and provide consulting services to the DOR should any questions
arise concerning costs associated with improper maintenance. He
offered his belief that should the legislation be litigated, the
PSIO would assist the DOR by providing expert witness testimony.
REPRESENTATIVE GRUENBERG surmised that HB 128 addresses the
deductibility of the cost of correcting the damages. He asked
whether, as a company would have been failing to maintain the
equipment, there would be other tax issues from prior tax years
that ought to be reviewed.
2:23:56 PM
JONATHAN IVERSEN, Director, Anchorage Office, Tax Division,
Department of Revenue (DOR), in response to a question, offered
to explain the process as it was encountered during the normal
audit cycle, which would begin in the winter. He explained that
the auditors would be looking in suspect areas for large or
unusual expenses. The auditor, exercising some discretion,
would pick suspect areas, check any authorizations for
expenditures (AFE's), and ask for documentation to the
deductions the taxpayer is requesting. He suggested the
auditors would also focus on areas that make the news. A
parallel track to this would be litigation, whereby part of a
claim could be for lost taxes. He concluded by explaining that
the DOR would only become aware of any tax issues when the
taxpayer has claimed the expenses.
REPRESENTATIVE GRUENBERG surmised that the state would
potentially be proceeding on two fronts: litigation for damages
by the DOL, and correct tax filing by the DOR. He asked whether
the statute of limitations is long enough with regard to the two
issues of damages and back taxes, in order to protect the
state's interests to the maximum extent possible.
MR. IVERSEN, in response to the question, said that the DOR has
three years from the time the return is filed to complete its
audits. If HB 128 is passed, amended returns would need to be
filed by the taxpayers within 90 days of the bill's passage.
MR. BULLOCK added that Section 4 contains the transitional
provisions, which describe what is expected of the operators and
producers if this bill passes. He clarified that there is, in
general, a three-year statute of limitations. The DOR has three
years to audit and the taxpayers have three years to file
amended returns. In response to a question, he offered his
belief that there is a statute of limitations for six years on
[damages] claims that the state can file.
REPRESENTATIVE GRUENBERG, referring to an earlier comment
regarding claims for taxes lost, requested confirmation that the
state would not be barred by a statute of limitations.
2:32:41 PM
JUDY BRADY, Executive Director, Alaska Oil and Gas Association
(AOGA), said that the AOGA opposes HB 128. She offered some
background context on the oil tax history in Alaska. Alaska had
a gross tax with the Economic Limit Factor (ELF) production tax.
From 1987 to 2005, the average price of oil per barrel was $18.
The tax level for the oil producers was 67 percent. The state
of Alaska had one of the highest tax rates in the world. She
directed attention to the references of the higher tax rates
(70-80 percent) by other countries on oil producers. She noted
that this higher tax rate package included an allowable return
rate of 150 percent on the oil producers' capital investments
within the first five years. She pointed out that these
countries took the risks along with the oil producers, and then
the countries demanded a very high return.
MS. BRADY offered her belief that the state of Alaska took no
risk with the companies and [still] demanded a very high return.
She reported that the production of oil is falling from the 1988
production rate of 2.1 million barrels per day to the current
rate of 700,000 barrels per day. She suggested that with
maturing oil fields and higher capital costs, if the state wants
a higher tax rate with higher prices, the state will have to
take some of the risks. She offered her belief that this higher
tax for higher risk was what the "PPT was all about." The PPT
is a different system than any other state.
[Chair Ramras turned the gavel over to Vice Chair Dahlstrom.]
MS. BRADY continued, reiterating that the state needs to take
part of the risk in return for receiving higher taxes when oil
prices are higher. She relayed that members of the legislature
have always been concerned with protecting the state's
interests; they did not want the state to pay for gross
negligence, willful misconduct, fraud, or any costs incurred for
containment control, clean up, or removal in connection with any
unpermitted release of oil. The state has zero tolerance for
spills. Ms. Brady continued with background of the oil tax
history in Alaska, recounting the August 6, 2006, British
Petroleum (BP) oil leak on the North Slope and the subsequent
August 9 meeting of the Senate Special Committee [on Natural Gas
Development], at which time the members expressed that the state
not accept any responsibility for costs or losses related to
spills. She remarked that two prior amendments have been
offered with regard to improper maintenance, but each was voted
down in committee.
MS. BRADY continued to explain that when the discussion of
improper maintenance came up this year as HB 128, there were
many sponsors, as members were concerned. She offered her
belief that the DEC, DNR, DOR, and Alaska Oil and Gas
Conservation Commission (AOGCC) all had problems with how [HB
128] was worded, as it contains no standards for corrosion.
From AOGA's viewpoint, Alaska is already protected. She pointed
out that during November 2006, the state withdrew $8 million
from the [Oil and Hazardous Substance Release Response Fund] for
a DOL and DEC study regarding the recovery of all state costs
and lost revenues occasioned by the August 6 spill. That study
is still ongoing.
MS. BRADY commented that under PPT the state has already taken
action to separately review all the issues being discussed
today. This review is ongoing, and being conducted under
existing authorizations. She referred to the [current non-
deductions to lease expenditures listed in AS 43.55.165(e)],
noting that she believes these [non-deductions] already address
those issues that HB 128 is intended to address. Costs arising
from fraud, willful misconduct, gross negligence, or for
containment control, clean up, and removal would not be
[allowable lease expenditures]. Legislators last year and this
year have made clear they don't want the state to participate in
the cost for risks that were badly handled by the oil companies.
2:41:44 PM
MS. BRADY asked how an auditor will make a decision every time a
capital cost is shown as a deduction. She commented that the
main decisions would be obvious. She suggested that for the
other less obvious decisions, the legislature include a proxy
[based on Dr. A Pedro H. van Meurs suggestion to disallow the
first $0.30 per BTU equivalent barrel as "lease expenditures"].
This would increase the taxes the oil industry pays by about $45
million each year, a reasonable maintenance requirement for a
field of this size. This would be paid by the oil producers
each year, whether or not there is an incident or a maintenance
issue. She opined that HB 128 proposes to add amendments to the
PPT which are not required because the state's interests are
already protected. She warned that passage of HB 128 will make
the implementation of the PPT very difficult. She also
predicted that the bill's passage could lead to a return of the
problems within the ELF system, when the legislation did not
present clear direction.
MS. BRADY predicted that should this lead to billions of dollars
in tax disputes, neither the companies nor the state agencies
would be able to progress, as they would be concerned with
influencing the outcome of the disputes. If an auditor begins
to red flag items in the first year of a three year audit, and
allowing for an additional three years after the completion of
the audit for an amended response, a decision will be unclear
for many years. She questioned what would be the red flag for
an auditor, as HB 128 does not tie to a particular incident, but
instead to a capital expense requested as a deduction.
MS. BRADY called attention to the [PSIOC] position, commenting
that this person will be given authority equal to the
commissioners of the DNR, the DOR, and the DEC, yet this person
will not have been subject to confirmation by the legislature.
She cited two items that she believes will be difficult to tie
to the issue of improper maintenance: related incremental
operating expenses and diminished capacity. She reflected that
during a repair situation, operators should not be thinking
about curtailing capacity and the resulting issues of an audit;
instead, they should be focusing on what is necessary for
safety.
MS. BRADY also expressed concerns regarding the retroactivity
provision in the bill. She summarized that the AOGA thinks this
may offset the whole purpose of the [PPT] which was to combine
higher risk with higher taxes. She expressed concern with a
[possible] constant legal struggle. She emphasized that no
other state does what is being proposed [via AS
43.55.165(e)(19)] and the operators don't require this degree of
"simple negligence issues" among themselves.
2:47:14 PM
CHAIR RAMRAS observed that if the oil companies didn't take the
deductions, in this instance for a level of negligence, the
legislature wouldn't have had to contemplate what he
characterized as onerous legislation. He offered an analogy of
auto insurance and the decision after an accident between
personal payment or filing a claim. He stressed that had the
producers assumed responsibility for the oil leak and paid the
full cost without using the deductible formula allowable under
PPT, there would have not been a need for HB 128. He said he
lays the blame squarely at the feet of the oil producers for not
handling the situation properly, and the result has been this
legislation. He concluded by stating that the responsibility of
the House Judiciary Standing Committee is to consider whether
the legal tools in HB 128 are sufficient to defend the state's
interests.
MS. BRADY offered that it would be good for the committee to
have a DOL representative involved in the aforementioned
response fund study to determine what cost the state believes it
deserves. The additions proposed via HB 128 are already being
administered by the DEC and the DOL.
MR. FALATKO responded to a question on the issue of statute of
limitations that he had not yet reviewed them.
MR. BULLOCK pointed out that HB 128 is a tax bill and deals with
qualifications to take deductions and credits. The issues
involving losses the state may have are separate litigation. If
those losses include a loss of tax revenue, then the loss would
be determined by the net amount due after the application of the
deductions under the current law and those deductions provided
by this tax bill. He concluded that the bill is subject to the
three-year statute of limitations.
REPRESENTATIVE SAMUELS asked whether, if BP chose not to take
the deductions, that would become an admission in a criminal
case, and, therefore, it has to take the deductions.
MR. BULLOCK reminded the committee of the confidentiality of a
tax return. The DOR would be precluded from disclosing the
deduction and whether or not it was taken on the return. He
added that these tax records would be difficult for the FBI to
seize.
REPRESENTATIVE SAMUELS asked whether the definition of
"improper" has been sufficiently determined.
MR. BANKS relayed that proposed AS 43.55.165(j) contains a
definition of "good oil field practice" that references industry
standards as published by the American Petroleum Institute and
federal regulations, and this does address "improper
maintenance" by reference to those standards.
REPRESENTATIVE SAMUELS asked whether the ongoing criminal case
had been determined to be a federal or a state case.
MR. FALATKO offered that he was not aware whether criminal
charges have been filed.
REPRESENTATIVE SAMUELS asked if there is a federal investigation
of BP or any individuals.
REPRESENTATIVE OLSON responded that he had not heard.
MR. FALATKO allowed that he was not aware of an investigation.
2:55:53 PM
MARY JACKSON, Staff to Senator Tom Wagoner, Alaska State
Legislature, conveyed on behalf of Senator Wagoner, sponsor of
the Senate companion bill, that federal congressional offices
are holding hearings, which are currently postponed pending
receipt of materials promised from the company under question.
MR. JACKSON explained that members' packets contain a memorandum
from U.S. Representative John Dingell, Chairman, Committee on
Energy and Commerce that reference the hearings.
REPRESENTATIVE SAMUELS asked again whether having criminal
charges filed against it would affect BP's coming forward and
claiming the deduction. He wanted to know if BP not filing a
deduction would be used against it as an admission of guilt.
MR. JACKSON replied that he did not know.
REPRESENTATIVE SAMUELS offered his recollection that the federal
government had pondered filing criminal charges against both BP
and specific company employees.
CHAIR RAMRAS relayed that the congressional hearings on the
Prudhoe Bay shutdown had been rescheduled for May 16 and that BP
was scheduled to appear.
2:58:17 PM
REPRESENTATIVE GRUENBERG referred to the language in proposed AS
43.55.165(j)(4) and asked why it doesn't include other gases.
CHAIR RAMRAS pointed out that gas is already broadly defined.
MR. BULLOCK offered that [the wording in the proposed amendment]
relates to "good oil field practice" and the implication
includes good gas field practice. Generally gas is associated
with oil, but the committee could add to the bill to more
directly address the gas issue. The wording is simply trying to
establish standards that would be used as a basis.
CHAIR RAMRAS observed that it is a broad definition.
REPRESENTATIVE LYNN mentioned a reference to "gas facilities" in
Section 2 of HB 128.
CHAIR RAMRAS expressed satisfaction that HB 128 is a tax bill
with defensible language that the DOL can take into a court of
law.
MR. BANKS, in response to an earlier question, relayed that most
engineers consider the movement of all types of fluids, and that
gas is simply a different state of fluid.
REPRESENTATIVE GRUENBERG surmised that this would include the
transportation of gases other than hydrocarbon gases.
MR. BANKS agreed that this would be possible.
MR. BULLOCK added that the language in proposed AS
43.55.165(j)(4) simply pertains to the standards that would be
expected in an oil field, whatever they would be transporting
through the pipeline. He allowed the language was to include
things other than production from the wells and this language
leaves that open.
CHAIR RAMRAS stated the committee members did not have any
amendments to add, and asked if the administration had any
amendments that would enhance HB 128.
MR. IVERSEN responded that he had nothing to add.
CHAIR RAMRAS concluded, then, that the state, the drafter, the
Department of Oil & Gas, and the DOR were all satisfied.
MR. BULLOCK concurred that the bill provides a standard that can
be applied.
3:04:32 PM
REPRESENTATIVE DAHLSTROM moved to report CSHB 128(RES) out of
committee with individual recommendations and the accompanying
fiscal notes. There being no objection, CSHB 128(RES) was
reported from the House Judiciary Standing Committee.
ADJOURNMENT
There being no further business before the committee, the House
Judiciary Standing Committee meeting was adjourned at 3:05 p.m.
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