Legislature(2005 - 2006)SENATE FINANCE 532

08/08/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV


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09:15:00 AM Start
09:15:49 AM HB3001
09:20:14 AM Dr. Pedro Van Meurs, Consultant to the Governor
09:42:04 AM Dan Dickinson, Cpa, Consultant to the Governor
10:55:53 AM Bill Corbus, Commissioner, Department of Administration
11:00:06 AM Robynn Wilson, Director, Tax Division, Department of Revenue
04:46:31 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 4:00 pm --
+= HB3001 OIL/GAS PROD. TAX TELECONFERENCED
Heard & Held
                CSHB 3001(FIN)-OIL/GAS PROD. TAX                                                                            
                                                                                                                                
CHAIR   SEEKINS   announced   CSHB   3001(FIN)  to   be   up   for                                                              
consideration.                                                                                                                  
                                                                                                                                
9:15:49 AM                                                                                                                    
^Dr. Pedro van Meurs, Consultant to the Governor                                                                                
DR.  PEDRO VAN  MEURS,  Consultant to  the  Governor, provided  an                                                              
economic  analysis of  the variable  PPT rate  and noted that  the                                                              
conclusions are the same as those that were presented yesterday.                                                                
                                                                                                                                
DR. VAN MEURS  said the idea of  "Invest or Pay" has  already been                                                              
well explained.  It is  a new  concept for  figuring the  PPT rate                                                              
whereby the higher of two alternative rates is selected:                                                                        
1) based on the investment per barrel ("$/barrel rate") or                                                                      
2) based  on the  relationship between  qualified investments  and                                                              
production tax value (the "R rate").                                                                                            
                                                                                                                                
The dollar  per barrel rate changes  with the level  of investment                                                              
and it is very  sensitive to the production decline  curve and the                                                              
level of investment measured in nominal dollars.                                                                                
     $1 per barrel - 25%                                                                                                        
     $6 per barrel - 20%                                                                                                        
     In between the rate is:                                                                                                    
     25% - 1% (IF-1)                                                                                                            
     IF = Qualified Capex/production                                                                                            
                                                                                                                                
The first  two graphs  illustrate what happens  with the  PPT rate                                                              
if production  is maintained  at current  nominal levels.  Dr. van                                                              
Meurs said  we know  that production is  declining at  the current                                                              
nominal  levels  of  investment   because  that's  what  has  been                                                              
happening over the last 10 years.                                                                                               
                                                                                                                                
The top blue line  in the graph shows the level  of investment and                                                              
the bottom  pink line  indicates production  decline. Because  the                                                              
dollar per barrel  in nominal terms would increase  over time, the                                                              
PPT  rate would  automatically  decline from  22.5  percent to  20                                                              
percent. If a business  plan wants to get to 20  percent PPT rate,                                                              
or if the plan  is to continue the current level  of investment in                                                              
nominal term, then  over time as production declines  the PPT rate                                                              
would be 20 percent.                                                                                                            
                                                                                                                                
In  real  terms  the  investment   shows  that  in  2006  dollars,                                                              
investment would decline  to almost half of what it  had been over                                                              
20 years, but the  PPT rate would still be about  20 percent after                                                              
10 years.                                                                                                                       
                                                                                                                                
DR.  VAN  MEURS  said  if the  investments  decline  at  the  same                                                              
nominal capex  rate as the production,  the PPT rate  would remain                                                              
constant. That  is illustrated  in the graphs  on slides 8  and 9.                                                              
In real terms  the graphs show investment declining  to about $200                                                              
million per year  for the next 20 years with the  PPT rate staying                                                              
the  same. He  commented  that that  isn't  a particularly  strong                                                              
incentive to increase investment.                                                                                               
                                                                                                                                
9:20:14 AM                                                                                                                    
The next two graphs  show a business plan whereby  a company could                                                              
accelerate  certain capital  investments so  the PPT rate  quickly                                                              
declines to  the 20 percent rate.  After that the 20  percent rate                                                              
can be  maintained by declining  investment at the same  rate that                                                              
production  declines.  In real  terms  that  would be  a  dramatic                                                              
decline of  investment in  Alaska and is  consistent with  what he                                                              
said yesterday.                                                                                                                 
                                                                                                                                
The R rate is based on the following formula:                                                                                   
[{(R*QC)+(0.2*QC)+[(0.25-R)*PT]}*(1-IR)]+(QC*IR)=0.75*QC                                                                        
     R=rate                                                                                                                     
     QC=qualified capex                                                                                                         
     PT=production tax value                                                                                                    
     IR=US tax rate                                                                                                             
In principle it  links the qualified capex as a  percentage of the                                                              
production tax value.  So if the production tax value  and the tax                                                              
rate  value are  constant,  then there  is  a direct  relationship                                                              
between the qualified investment and the PPT rate.                                                                              
                                                                                                                                
With  a zero  reinvestment  the rate  is 25  percent,  and with  a                                                              
reinvestment  of  23.2 percent  the  PPT  rate  is 20  percent.  A                                                              
company that  only reinvests  25 percent of  its net  revenues and                                                              
transfers 75  percent to other  jurisdictions could  reasonably be                                                              
considered a "harvester."                                                                                                       
                                                                                                                                
The  R   rate  graph  shows   the  reinvestment  rate   curve  and                                                              
illustrates that the  R rate is directly linked  to the percentage                                                              
of  net revenues  that  companies reinvest.  If  they reinvest  23                                                              
percent of  net revenues the PPT  rate is 20 percent.  To maintain                                                              
a 22.5  percent PPT  rate, reinvestment  of just  12.5 percent  of                                                              
net revenues  is all  that is required.  The percentages  that are                                                              
shown  are the  qualified capital  expenditures  as percentage  of                                                              
the  production  tax  value.  The  importance  is  that  price  is                                                              
eliminated as  a variable so it  holds true whether the  price per                                                              
barrel is $20 or $100.                                                                                                          
                                                                                                                                
DR.  VAN MEURS  said  the  idea is  to  select whichever  rate  is                                                              
higher between the  dollar per barrel rate and the  R rate so that                                                              
gold  plating   is  slowed.   He  explained   that  he   used  Mr.                                                              
Dickinson's table,  but he  added color to  illustrate that  it is                                                              
relatively  easy to reach  a 20  percent PPT rate  as long  as oil                                                              
prices  (net  of royalties)  are  up  to  $50 per  barrel.  Modest                                                              
increases in  investment will  quickly bring  the rate down  to 20                                                              
percent.                                                                                                                        
                                                                                                                                
Under higher  prices it's increasingly  difficult to stick  to the                                                              
lower  rates  because  23.2  percent   of  net  revenues  must  be                                                              
reinvested  and at $100  per barrel  that becomes significant.  At                                                              
$50 to  $70 per  barrel it  is relatively  easy to  get to  the 20                                                              
percent rate.                                                                                                                   
                                                                                                                                
9:26:58 AM                                                                                                                    
The chart  on slide 19 illustrates  that Alaska contributes  up to                                                              
$1.20 in  PPT loss  when a company  increases investment  by $1.50                                                              
per barrel from  $3 per barrel. If  the 2 for 1 feature  is in the                                                              
system,  which  he  would  support,   the  company  would  receive                                                              
another  $0.15  per barrel  so  the  state contribution  would  be                                                              
$1.35 per  barrel and U.S. federal  tax would result in  a further                                                              
reduction  of $0.05  per barrel.  Thus, a  company that  increases                                                              
investment by $1.50  per barrel only contributes  $0.10 per barrel                                                              
from "its  own pocket" because the  rest is tax  deductions. Since                                                              
government is  really paying,  it would be  easy for  companies to                                                              
increase investment for a short while.                                                                                          
                                                                                                                                
The chart on  the next slide illustrates the  same overall pattern                                                              
if a  company increases investment  from $3  per barrel to  $6 per                                                              
barrel.  When  oil  is  at  $70  per  barrel  and  after  all  the                                                              
deductions  - the base  PPT, the  2 for 1  and the federal  income                                                              
tax - a company  would spend about $0.25 of the  $3 out of pocket.                                                              
Again,  government is  paying and  that is a  concern because  the                                                              
reduction  of the  PPT rate  is  basically built  in and  Alaska's                                                              
money is used to come down to twenty percent.                                                                                   
                                                                                                                                
DR. VAN MEURS said  the information is basically the  same as what                                                              
was presented  the previous  day, but  the graphs  are up  to date                                                              
and  reflect  the   actual  economic  results.  He   reminded  the                                                              
committee of  the virtue  of a simple  fiscal system  and appealed                                                              
to the Senate  to take such an  approach. He noted that  all other                                                              
nations  in  the world  have  successfully  used a  simple  fiscal                                                              
system to encourage investment and increase government revenues.                                                                
                                                                                                                                
9:31:16 AM                                                                                                                    
SENATOR BERT  STEDMAN referenced the  bar charts on slides  19 and                                                              
21 and asked about computing percentages.                                                                                       
                                                                                                                                
DR.  VAN  MEURS  replied  he  could  show  the  information  as  a                                                              
percentage,  but   the  idea  is   to  show  the  result   of  the                                                              
combination of the two formulas.                                                                                                
                                                                                                                                
SENATOR STEDMAN asked  if at $70 per barrel Alaska  would actually                                                              
pay for $1.20 of the $1.50 per barrel increase in capex.                                                                        
                                                                                                                                
DR. VAN  MEURS said yes;  then there is the  2 for 1  feature that                                                              
would  add another  $0.15 and  the federal  income tax  deduction.                                                              
Increasing  investment  by $1.50  per  barrel  would result  in  a                                                              
company spending very little out of pocket.                                                                                     
                                                                                                                                
9:33:12 AM                                                                                                                    
SENATOR CON  BUNDE asked if  using a fixed  rate would  reduce the                                                              
"gold plating" problem.                                                                                                         
                                                                                                                                
DR. VAN  MEURS replied  that would  eliminate it.  Internationally                                                              
it  is  recognized  that  it's   a  stimulus  to  reduce  the  net                                                              
investment by  about 40 percent, but  for the state to  pick up 80                                                              
to  90   percent  of   the  cost   is  clearly  over   stimulating                                                              
investment. A  project's rate of  return wouldn't  matter because,                                                              
on  an  incremental  basis,  everything   would  look  good.  That                                                              
induces  companies to  do  projects for  the  purpose of  lowering                                                              
taxes,  which  isn't  typically   seen  as  a  healthy  investment                                                              
strategy.                                                                                                                       
                                                                                                                                
9:35:31 AM                                                                                                                    
SENATOR  GARY  WILKEN referenced  the  issues  left on  the  table                                                              
yesterday  and asked  if they  wouldn't all  be taken  care of  if                                                              
subsection (f) were replaced with a simple formula.                                                                             
                                                                                                                                
DR. VAN MEURS replied it is that simple.                                                                                        
                                                                                                                                
SENATOR BUNDE thanked Dr. van Meurs for his contribution.                                                                       
                                                                                                                                
SENATOR  STEDMAN  noted  that  later   in  the  meeting  he  would                                                              
introduce amendments.                                                                                                           
                                                                                                                                
9:37:47 AM                                                                                                                    
^Dan Dickinson, CPA, Consultant to the Governor                                                                                 
DAN DICKINSON,  CPA, Consultant  to the  Governor, said  before he                                                              
responded  to questions  that were  asked yesterday  he wanted  to                                                              
clarify  that he  agrees  with  Dr. van  Meurs  on  the math.  The                                                              
difference is that  they look at different aspects.  Dr. van Meurs                                                              
said a modest  increase in investment  will lead to a  lower rate.                                                              
That's   correct;  under   this  proposed   mechanism  there   are                                                              
situations in which  increased increase investment  will drive the                                                              
tax rate down.                                                                                                                  
                                                                                                                                
However,  he said,  the  information on  the  chart labeled  "Five                                                              
Step Calculation  of  Tax Rate under  Produce  or Pay" provides  a                                                              
different  and important  perspective. It  shows how  much of  the                                                              
production tax  value is being reinvested.  He noted that  Dr. van                                                              
Meurs  suggested that  23 percent  would be  "harvesting" and  the                                                              
state ought to  look for something higher. Mr.  Dickinson said his                                                              
observation  is  that  at  $70 per  barrel  and  $1.2  billion  in                                                              
investment,  about 8 percent  would be  reinvested into  the state                                                              
and if  that could be  raised to something  closer to  23 percent,                                                              
he  would suggest  that that  would be  a job  that was  extremely                                                              
well done.  He noted that  the stair step  across the  chart shows                                                              
the  level of  investment  that  the state  would  receive at  any                                                              
price if  it did  attain 23.5 percent  reinvestment. He  described                                                              
the  difference  in  perspective  as the  difference  between  the                                                              
glass being half empty or half full.                                                                                            
                                                                                                                                
9:42:04 AM                                                                                                                    
MR. DICKINSON  began his  presentation with  the explanation  that                                                              
the first graph  shows oil at $20/bbl  for the next 30  years. The                                                              
severance tax is  indicated under: the status quo,  the Produce or                                                              
Pay Plan  (POP) with  .25 percent  Net $40,  the governor's  20/20                                                              
proposal,    the    conference    committee    22.8/20    proposal                                                              
with .175 percent  Net  $35,  and   the  Senate  22.5/20  proposal                                                              
with .100 percent Net $35.                                                                                                      
                                                                                                                                
Clearly,  at  very  low  prices  the status  quo  is  better  than                                                              
systems  based on  a net.  For several  years the  POP rate  under                                                              
consideration  today  lines  up   with  the  conference  committee                                                              
version  before falling  away. By  2021, which  is about the  same                                                              
time that there  are zero revenues, it aligns  with the governor's                                                              
bill.                                                                                                                           
                                                                                                                                
9:44:53 AM                                                                                                                    
The next  graph shows  $40/bbl oil  for 30  years and  illustrates                                                              
the tax rate starting  in the 23 percent range and  moving down to                                                              
the 20 percent range.                                                                                                           
                                                                                                                                
The next  graph shows  $60/bbl oil  for 30  years and  illustrates                                                              
that  POP  starts  midway between  the  conference  committee  and                                                              
Senate versions,  but over  time as  production declines  it drops                                                              
to 20/20.                                                                                                                       
                                                                                                                                
9:46:00 AM                                                                                                                    
The next  graph shows  the Cumulative Severance  Tax from  2007 to                                                              
2030  when oil  is $30/bbl  to  $80/bbl. The  status  quo and  the                                                              
governor's  bill are  the least  aggressive in  terms of  revenue.                                                              
The current  POP proposal is  also low  at $30/bbb, but  over time                                                              
and  particularly  with  progressivity,  the POP  plan  begins  to                                                              
rise. When oil is  in the $65/bbl range, HB 3001  generates higher                                                              
revenue than any of the other bills.                                                                                            
                                                                                                                                
9:46:50 AM                                                                                                                    
The  next two  graphs  deal with  total take  so  the state  share                                                              
includes royalties,  income taxes,  and property taxes.  Again the                                                              
state share  goes down as the price  per barrel goes up  under the                                                              
status quo  and it dips just  slightly under the  governor's bill.                                                              
Because of  the progressivity features,  the percentage  rises for                                                              
the other three  models, but it rises the most under  HB 3001 when                                                              
the dollar per barrel  prices are at the highest  levels. The last                                                              
slide  is essentially  the same,  but it  includes federal  income                                                              
taxes  so the  percentages are  higher.  The percentages  increase                                                              
with progressivity  and at  $80/bbl HB  3001 is  seen to  have the                                                              
highest percentage take.                                                                                                        
                                                                                                                                
MR. DICKINSON  warned that  the modeling system  is ill  suited to                                                              
differentiate between the incentives.                                                                                           
                                                                                                                                
9:49:16 AM                                                                                                                    
MR.  DICKINSON  offered a  matrix  of  the different  bills  under                                                              
three price scenarios: $30/bbl, $50/bbl, and $70/bbl.                                                                           
                                                                                                                                
Under  the  $30/bbl  scenario  each  of  the  three  proposed  net                                                              
methods  have a  production tax  value  of $13.37.  At this  price                                                              
progressivity is  not a factor.  Under HB  3001 the base  tax rate                                                              
is 25  percent and then 3.63  percentage points are  subtracted as                                                              
investment adjustment  for an actual tax rate of  21.3 percent. At                                                              
this level  the R rate  does not become  part of the  equation and                                                              
the effective rate on gross is 4.1 percent.                                                                                     
                                                                                                                                
The final  Senate bill has  the same taxable  value of  $13.37 per                                                              
barrel.  Again progressivity  is not  a factor  so the actual  tax                                                              
rate is  22.5 percent.  The only adjustment  that is  different is                                                              
that all  taxpayers qualify for  the $12 million rather  than just                                                              
those that fall  below a certain barrel threshold.  The net effect                                                              
is that  the rate on  gross is 4.2  percent. The final  House bill                                                              
has a  higher tax  rate, but  it is similar.  The governor's  bill                                                              
would  have the  lowest rate  on gross  at 3.4  percent while  the                                                              
status quo would have the highest at 7.5 percent of gross.                                                                      
                                                                                                                                
9:52:42 AM                                                                                                                    
Under the $50/bbl  scenario the calculations are  the same. Again,                                                              
there  is  no  progressivity.  HB  3001 has  a  0.5  percent  gold                                                              
plating correction  so the  actual tax rate  is 21.88  percent and                                                              
the effective rate  on gross is 12.4 percent. He  observed that Dr                                                              
van Meurs is correct  that the anti gold plating  formula does not                                                              
include   transitional   investment    expenditures   (TIE).   For                                                              
measuring  purposes  it  would be  appropriate  to  include  those                                                              
expenditures and doing  so would bring the reinvestment  to the 75                                                              
percent cap.                                                                                                                    
                                                                                                                                
The  effective rate  on gross  for  the different  bills is:  12.4                                                              
percent under the  current proposal, 12.5 percent  under the final                                                              
Senate  bill,  13.3  percent  under the  final  House  bill,  10.9                                                              
percent  under  the  original governor's  bill,  and  7.5  percent                                                              
under  the status  quo.  The slight  difference  in the  effective                                                              
rates for the  final Senate version and the current  bill reflects                                                              
a difference in credits.                                                                                                        
                                                                                                                                
The  final  scenario  starts  at  $70/bbl  and  subtracts  $12  in                                                              
operating   and  transportation   costs  and   $4.63  in   capital                                                              
investment  costs for  a production  tax value  of $53.37/bbl.  At                                                              
this  price  the  progressivity  feature is  factored.  Under  the                                                              
current  bill  the  base  rate is  25  percent;  3.63  percent  in                                                              
investment adjustment  is subtracted, 1.8 percent  gold plating is                                                              
added  (if   TIE  is  added  it   is  a  bit  higher),   and  3.34                                                              
progressivity is added for an actual tax rate of 26.5 percent.                                                                  
                                                                                                                                
The  effective rate  on gross  for  the different  bills is:  19.2                                                              
percent under the  current proposal, 17.2 percent  under the final                                                              
Senate  bill,  20.3  percent  under the  final  House  bill,  13.8                                                              
percent  under  the  original governor's  bill,  and  7.5  percent                                                              
under the status quo.                                                                                                           
                                                                                                                                
9:56:24 AM                                                                                                                    
MR. DICKINSON  observed that  the charts show  that as  the prices                                                              
rise, the  effect of  the anti gold  plating feature  becomes more                                                              
important.                                                                                                                      
                                                                                                                                
The committee took an at-ease from 9:58:00 AM to 10:00:14 AM.                                                               
                                                                                                                                
CHAIR RALPH  SEEKINS recognized  Representative Ralph  Samuels and                                                              
Representative Mike Kelly.                                                                                                      
                                                                                                                                
10:02:50 AM                                                                                                                   
REPRESENTATIVE   RALPH  SAMUELS   reviewed  the  discussions   and                                                              
decisions that  led to the current  bill including: tying  oil and                                                              
gas together  or keeping them  separate; doing something  with the                                                              
investment;  making the system  practical  for all parties;  using                                                              
gold plating; and going to actual production.                                                                                   
                                                                                                                                
He commented that  most people are looking at  investment in terms                                                              
of  how  it affects  state  revenues,  but  dollars to  the  state                                                              
treasury aren't  the only  consideration; it's  any way  the money                                                              
is  spent into  the  economy. Sheet  metal  fabricators, the  flow                                                              
line  in  Fairbanks,  Doyon,  ASRC  Energy  and  many  others  are                                                              
affected so  the more money  that is spent  here the better  it is                                                              
for the economy statewide.                                                                                                      
                                                                                                                                
REPRESENTATIVE  SAMUELS said some  discussion centered  on putting                                                              
an inflation indexer  on capital expenditures, but  all the groups                                                              
that have  supported that  notion have been  told that  they could                                                              
petition  the government  if  something isn't  right.  He said  he                                                              
stands  by  that  philosophy although  he  understands  there  are                                                              
practical concerns right now.                                                                                                   
                                                                                                                                
10:05:00 AM                                                                                                                   
Because  some companies  choose to  invest here  and some  do not,                                                              
the next decision  was to reward companies that  do. He emphasized                                                              
that companies  that are  willing to spend  more money  here ought                                                              
to be encouraged.  He noted that he has argued  with Mr. Dickinson                                                              
that it  isn't fair when investment  is seen to  increase greatly,                                                              
but production  does not. Clearly,  gold plating is an  issue, but                                                              
that  can be  stopped.  Although production  may  not increase  in                                                              
aggregate, it will  increase more than if the  investment were not                                                              
made at all and certainly it will stop the production decline.                                                                  
                                                                                                                                
Heavy  oil was  the  next issue.  Representative  Samuels said  he                                                              
firmly believes  that is  where the  major increase in  production                                                              
in  Alaska  will   come  from  so  it's  important   to  encourage                                                              
investment for  that to  happen. Thus, the  current bill  is aimed                                                              
more at the  heavy oil investment  than at some of  the explorers.                                                              
He noted  there are  separate programs  for royalty reduction  and                                                              
exploration tax credits.                                                                                                        
                                                                                                                                
The House  looked at  different scenarios  and found that  getting                                                              
to any of the  barriers too quickly was problematic.  If a company                                                              
gets to the  25 percent rate  too quickly then incentive  is lost.                                                              
The same problem  exists if the 20 percent rate  comes too quickly                                                              
because  additional  investments   won't  do  any  good.  Previous                                                              
testimony indicated  you get  to the 20  percent rate in  about 10                                                              
years  so the  House decided  to  have a  study done  in 2011.  It                                                              
would ask:  how much  investment there has  been compared  to what                                                              
there  is today,  where  the money  was  spent,  what happened  to                                                              
production,  what   happened  to  heavy  oil,  what   happened  to                                                              
investment,  who invested,  and who  did not  invest. He said  the                                                              
process is  slow and it would probably  take five years  to get to                                                              
the  board level  where  investment decisions  are  made. In  fact                                                              
with Prudhoe  and Kuparuk  three boards  must agree before  moving                                                              
forward  on a  capital  expenditure. He  expressed  the view  that                                                              
hitting either  of the barriers  signifies failure, but  the House                                                              
believes  that by  2011  there will  still  be  incentive to  move                                                              
within  the range.  In conclusion  he said  to pressure  corporate                                                              
behavior, you must keep the pressure on.                                                                                        
                                                                                                                                
10:09:07 AM                                                                                                                   
REPRESENTATIVE  MIKE KELLY described  himself as a  counterbalance                                                              
to Representative  Samuels. From the  beginning he has  favored: a                                                              
higher tax  rate, a  robust progressivity  feature, separation  of                                                              
oil and  gas, elimination of the  clawback, a January  1 effective                                                              
date,  and  a floor.  To  that  end  he was  heavily  involved  in                                                              
developing the  bill that passed the  House. That bill  had a 23.5                                                              
percent  tax rate,  a  2.5 percent  progressivity  with a  $35/bbl                                                              
trigger, and a floor.                                                                                                           
                                                                                                                                
HB 3001 is  an attempt to  move forward after two  failed attempts                                                              
and  get over  the triple  hurdle  of satisfying  the Senate,  the                                                              
House, and the  Governor. When going over the  bill several things                                                              
were apparent.  First, regardless of  where you stand on  the rate                                                              
curve, the bill  doesn't allow the rate to fall  below 20 percent.                                                              
Also, it has  no new credits. The  concept is simple and  it would                                                              
be  easy  to  put  into  effect.   In  comparison,  he  said,  the                                                              
production-based  concept that  Dr.  van Meurs  discussed is  much                                                              
more complex.                                                                                                                   
                                                                                                                                
REPRESENTATIVE KELLY  said 30 House  members passed this  bill and                                                              
he believes it is worth serious consideration in the Senate.                                                                    
                                                                                                                                
10:14:57 AM                                                                                                                   
SENATOR  ELTON referenced  a  previous statement  about  rewarding                                                              
new  investment  and  said  he   was  struck  by  Dr.  van  Meurs'                                                              
testimony that  the state  is rewarding new  investment and  it is                                                              
paying  for it.  He recapped  that Dr.  van Meurs  said that  with                                                              
each $1.50  in new  investment, government is  paying for  all but                                                              
$0.10 and  that the new  investment can get  the tax rate  down to                                                              
20  percent very  quickly.  He asked  for a  response  to Dr.  van                                                              
Meurs' point.                                                                                                                   
                                                                                                                                
REPRESENTATIVE SAMUELS responded as follows:                                                                                    
     I'll fall  back on  what Mr.  Dickinson said. Right  now                                                                   
     we have  7 percent of the  money gets reinvested  in the                                                                   
     state of  Alaska. Some people  - some companies  do come                                                                   
     here  and  reinvest  and  others   do  not  reinvest.  I                                                                   
     believe that  in a snapshot  of today, that we  tried to                                                                   
     hit the  middle ground at  22.5 today. Today's  spending                                                                   
     at $3.50  per barrel - the  goal was to hit  22.5. Exxon                                                                   
     would be higher  than that; they spend less  per barrel.                                                                   
     ...  BP would  be  about at  that  and Conoco  would  be                                                                   
     below that.                                                                                                                
                                                                                                                                
     If  you do  increase  - I  wasn't  involved  in all  the                                                                   
     writing of the  formula for the gold plate and  if the 2                                                                   
     for 1 credits  need to be included in there  then that's                                                                   
     fine, but let's do that.                                                                                                   
                                                                                                                                
     The bill  has a set rate.  You're at 60  percent already                                                                   
     that the government's  paying. We set it at  75. At very                                                                   
     high  prices 75  kicks in.  ... 75 percent  is what  the                                                                   
     goal  that we  set  in this  gold plating  formula  was.                                                                   
     We're  at 60  right  now.  ... Counting  the  deduction,                                                                   
     counting  the credit, and  counting the implications  of                                                                   
     the federal  government you're  at 60 percent  right now                                                                   
     anyway.  Just with a  set number.  That hasn't  changed.                                                                   
     We did  not add  a credit. You're  using the credit  for                                                                   
     another purpose  - to set  the rate. ... The  criticisms                                                                   
     were,  'We're  giving  them  the  20  percent  rate  and                                                                   
     they're not  going to invest  money anyway.' I  heard it                                                                   
     over and over again.                                                                                                       
                                                                                                                                
     So  we  kind of  flipped  that  on  its head  and  said,                                                                   
     'Well, if  you spend the money  then we'll give  you the                                                                   
     20 percent rate.  But you've got to spend a  lot.' ... I                                                                   
     can't  remember if  it was  Dr. van  Meurs or  Dickinson                                                                   
     said it took  ten years to get the aggregate  over time.                                                                   
     I think  we need to  look at the  aggregate - you  can't                                                                   
     look  at what's  going  to happen  in  one year  because                                                                   
     investments  are going  to go  up and  down. Every  year                                                                   
     you start  over again at 25  - it's in the bill.  ... If                                                                   
     you don't invest this year, up you go.                                                                                     
                                                                                                                                
     The criticism  of the small players ... you're  going to                                                                   
     have somebody  come in here and go, 'We  have these huge                                                                   
     capital expenditures  right now,  but we don't  have any                                                                   
     production  so we get  to sell  the credits forward  and                                                                   
     we get  to do  all of  these things,  but the minute  we                                                                   
     have production,  we don't need to spend  any more capex                                                                   
     and our tax  rate is going to go up.' Yea,  because your                                                                   
     risk  is gone, your  capital recovery  has taken  place,                                                                   
     and we're going to raise the tax rate. If you just set                                                                     
     a number you won't get that.                                                                                               
                                                                                                                                
10:20:21 AM                                                                                                                   
SENATOR ELTON  reiterated he  was struggling  with the  concept of                                                              
reinvestment because  a company is only investing  $0.10 for every                                                              
$1.50 it puts back while government is paying the balance.                                                                      
                                                                                                                                
SENATOR  ELTON changed  topics  and  said that  when  he read  the                                                              
morning paper he  realized there seems to be  disagreement between                                                              
what  Representative Samuels  believes  is in  the  bill and  what                                                              
Director Wilson believes  is in the bill in terms  of credits that                                                              
might apply  to the current  pipe issue  in the Prudhoe  Bay unit.                                                              
Director  Wilson suggests  that  the investment  would be  allowed                                                              
under this bill  and Representative Samuels suggests  it would not                                                              
be  allowed. It's  extremely  unsettling to  have  two people  who                                                              
were  fundamentally involved  in  crafting this  proposal come  to                                                              
such different conclusions, he said.                                                                                            
                                                                                                                                
REPRESENTATIVE  SAMUELS  responded  he  would  defer  to  the  tax                                                              
division on tax issues.                                                                                                         
                                                                                                                                
SENATOR ELTON asked  if he is suggesting that the  tax division is                                                              
correct in its characterization.                                                                                                
                                                                                                                                
REPRESENTATIVE  SAMUELS replied  he did not  know if the  division                                                              
would call it capital expenses or operating expenses.                                                                           
                                                                                                                                
CHAIR SEEKINS recognized  that Senator Gene Therriault  had joined                                                              
the meeting.                                                                                                                    
                                                                                                                                
10:22:10 AM                                                                                                                   
SENATOR  DYSON said  originally  he  was told  that  $0.25 out  of                                                              
every  dollar would  come from  the  company's pocket  and he  was                                                              
pleased to  hear that. Now  he hears that  it might be  just $0.10                                                              
and he questioned what happened.                                                                                                
                                                                                                                                
REPRESENTATIVE   SAMUELS  said   if  transition  credits   weren't                                                              
included in the  formula it was probably an  inadvertent omission.                                                              
They  tried to  look at  every benefit  the spending  gives -  the                                                              
deductions, the  credits, and the federal implications.  They also                                                              
looked at the TIE credits that are in the legislation.                                                                          
                                                                                                                                
REPRESENTATIVE KELLY  said he wasn't  sure how that got  left out,                                                              
but the  point Senator Dyson  raised is important  considering how                                                              
Senator Elton ended  up on how much of the $1.50  is being paid by                                                              
the state  and how  much is being  paid by  the company.  He asked                                                              
members to keep  in mind that the state isn't going  to be writing                                                              
checks;  the  money  comes  from   the  stack  of  cash  that  the                                                              
companies  bring   and  that  point  isn't  being   addressed.  He                                                              
emphasized that in  all respects the credits on the  table are the                                                              
same ones that Dr.  van Meurs has been looking at  for half a year                                                              
or longer. Furthermore,  he is really bothered  by the implication                                                              
that there  is a  new round of  credits in  here and they've  just                                                              
made  this  thing  ridiculously  tilted from  former  versions  in                                                              
favor of the companies.                                                                                                         
                                                                                                                                
SENATOR  DYSON said  he was  not implying  a thing,  but he  would                                                              
like an explanation  about keeping a company's  investment down to                                                              
a minimum of  $0.25 out of every  dollar because he missed  it the                                                              
first time.                                                                                                                     
                                                                                                                                
REPRESENTATIVE  SAMUELS  said  that   referred  to  the  2  for  1                                                              
clawback credit that were first introduced in Senate Resources.                                                                 
                                                                                                                                
10:29:55 AM                                                                                                                   
SENATOR  STEDMAN said  he just received  an update  from Econ  One                                                              
and the  last page  depicts sharing  capital expenditures  between                                                              
the industry and  the state. He asked for some  time to distribute                                                              
copies to the members.                                                                                                          
                                                                                                                                
The committee took an at-ease from 10:30:37 AM to 10:45:07 AM.                                                              
                                                                                                                                
SENATOR  DYSON asked  Dr. van  Meurs  about the  concern that  the                                                              
House  gold plating  feature  will drive  investments  up and  tax                                                              
rates down. He asked  if the yellow line, which  shows the produce                                                              
or  pay  variable  rate/20  with   .25%  Net  40,  is  the  likely                                                              
scenario.                                                                                                                       
                                                                                                                                
DR. VAN MEURS clarified  that is a DOR model that  has a number of                                                              
assumptions.  His testimony  was that an  inherent tendency  would                                                              
be for companies  to plan operations to lead to 20/20  or close to                                                              
that. He  suggested that the actual  behavior of the  oil industry                                                              
is that  a few years out  the curve would  be much lower  than the                                                              
yellow line indicates.                                                                                                          
                                                                                                                                
10:48:22 AM                                                                                                                   
DR.  VAN MEURS  highlighted  that his  first  graph presented  the                                                              
scenario  that even  if  investment continued  at  $1 billion  per                                                              
year, production would  decline by 6 percent and  that is entirely                                                              
consistent with  testimony the oil industry made.  The consequence                                                              
is that over time  that inevitably leads to a 20  percent rate. He                                                              
noted that  the problem is  that the DOR  model is  standalone and                                                              
the current  discussion is about  incremental decisions.  There is                                                              
nothing wrong  with the standalone  model, but it  looks different                                                              
than an incremental model.                                                                                                      
                                                                                                                                
SENATOR DYSON asked for an explanation of the difference.                                                                       
                                                                                                                                
DR.   VAN  MEURS   explained  that   a   standalone  model   makes                                                              
assumptions  about   the  future,  but  it  doesn't   analyze  the                                                              
investment behavior.  In comparison  he used an incremental  model                                                              
to  analyze gold  plating  and that  looks  at  how behavior  will                                                              
change over time.                                                                                                               
                                                                                                                                
SENATOR DYSON  asked if  he said that  the producers  might tailor                                                              
investments to be  front end loaded to get to the  20 percent rate                                                              
and then they could  reduce investments and still hold  on to that                                                              
rate.                                                                                                                           
                                                                                                                                
10:51:52 AM                                                                                                                   
DR. VAN  MEURS replied that's  correct. Once  a company is  at the                                                              
20 percent  level the formula is  reset every year, but  it is set                                                              
at a  much lower  level of production  so the  per barrel  rate is                                                              
inherently  higher at  the  start. That  leads  to the  conclusion                                                              
that the 20 percent rate could be maintained.                                                                                   
                                                                                                                                
SENATOR DYSON recapped the explanation.                                                                                         
                                                                                                                                
CHAIR SEEKINS asked Commissioner Corbus to come forward.                                                                        
                                                                                                                                
10:52:58 AM                                                                                                                   
SENATOR WILKEN asked  if the administration has a  team working on                                                              
the situation  and if the legislature  should do something  to set                                                              
a process in motion.                                                                                                            
                                                                                                                                
^Bill Corbus, Commissioner, Department of Administration                                                                        
BILL CORBUS,  Commissioner, Department of Administration,  replied                                                              
it would help if  the legislature passed the PPT.  He related that                                                              
the administration  is working  diligently and  is looking  at the                                                              
issue from a technical and a financial standpoint.                                                                              
                                                                                                                                
SENATOR   WILKEN   asked   that  the   administration   keep   the                                                              
legislature in the loop.                                                                                                        
                                                                                                                                
BILL CORBUS assured members that that is the intention.                                                                         
                                                                                                                                
10:55:53 AM                                                                                                                   
SENATOR  ELTON  asked  if  Director  Wilson's  comments  were  the                                                              
definitive  answer with regard  to the  application of  credits to                                                              
investments that are now required in the Prudhoe Bay unit.                                                                      
                                                                                                                                
BILL CORBUS deferred to Ms. Wilson.                                                                                             
                                                                                                                                
^Robynn Wilson, Director, Tax Division, Department of Revenue                                                                   
ROBYNN  WILSON, Director,  Tax  Division,  Department of  Revenue,                                                              
said she was  asked how the costs  would be treated under  the PPT                                                              
and she  tried to  clarify  that it would  depend  on the kind  of                                                              
costs. Briefly,  they could  take two forms.  One would  be repair                                                              
and   maintenance   and   the    second   would   be   capitalized                                                              
expenditures.  For example  roof repairs  on a  building would  be                                                              
routine  maintenance and  would  not be  capitalized.  But if  the                                                              
entire  structure  of  the  roof  and the  roofing  needed  to  be                                                              
replaced, that  would extend  the life of  the building  and those                                                              
expenses  would be  capitalized  under the  IRS  code. That's  the                                                              
dividing line,  she said,  but it's not  necessarily a  clear line                                                              
because of questions  of magnitude. Generally  though, maintenance                                                              
and repair  would be  operating expenses and  under the  PPT those                                                              
would  be deductible  if it's a  lease expenditure.  On the  other                                                              
hand, a  major replacement that  would be capitalized  for federal                                                              
purposes.  Those would  be  a capex  under  the PPT  and would  be                                                              
deductible and subject to credits.                                                                                              
                                                                                                                                
SENATOR ELTON asked if her answer would be the same for HB 3001.                                                                
                                                                                                                                
MS. WILSON  replied  yes; the variable  tax rate  that's based  on                                                              
capital investment  is the  same definition that  is used  for the                                                              
capex credit.                                                                                                                   
                                                                                                                                
SENATOR  DYSON said  there is  a dilemma  because the  idea is  to                                                              
have  incentives  so  that  people  keep  up  on  maintenance.  He                                                              
commented that  it's a  worry that  the inadvertent outcome  might                                                              
be that  maintenance  is allowed  to slide until  a project  would                                                              
qualify as  a credit  rather than  a deduction.  He said  he would                                                              
like  assurance   that  the  intention  isn't  distorted   to  the                                                              
taxpayers' disadvantage.                                                                                                        
                                                                                                                                
COMMISSIONER CORBUS  responded the  administration will  take that                                                              
under consideration.                                                                                                            
                                                                                                                                
The committee was in recess from 11:00:06 AM to 4:46:23 PM.                                                                 
                                                                                                                                
SENATOR  GREEN  reconvened  the  meeting and  announced  that  the                                                              
committee would meet again at 10 a.m. tomorrow, August 9, 2006.                                                                 

Document Name Date/Time Subjects