Legislature(2009 - 2010)HOUSE FINANCE 519
03/18/2010 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB280 | |
| HJR8 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HJR 8 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 280 | TELECONFERENCED | |
HOUSE BILL NO. 280
"An Act relating to natural gas; relating to a gas
storage facility; relating to the Regulatory
Commission of Alaska; relating to the participation by
the attorney general in a matter involving the
approval of a rate or a gas supply contract; relating
to an income tax credit for a gas storage facility;
relating to oil and gas production tax credits;
relating to the powers and duties of the Alaska Oil
and Gas Conservation Commission; relating to
production tax credits for certain losses and
expenditures, including exploration expenditures;
relating to the powers and duties of the director of
the division of lands and to lease fees for the
storage of gas on state land; and providing for an
effective date."
1:38:01 PM
Co-Chair Hawker discussed previous committee actions
related to HB 280 amendments. He noted that conversations
had led to the conclusion that Amendment 2, previously
adopted by the committee, could be more effectively
presented.
Co-Chair Hawker MOVED to RESCIND Amendment 2. There being
NO OBJECTION, it was so ordered. Amendment 2 was RESCINDED.
Co-Chair Hawker MOVED to ADOPT Amendment 5:
Page 15, following line 9:
Insert a new subsection to read:
"(o) For the purposes of (m) and (n) of this
section, a Cook Inlet well lease expenditure that
is incurred in the Cook Inlet sedimentary basin
that is
(l) directly related to a well. A lease
expenditure is directly related to a well if
(A) during exploration and development,
the lease expenditure is a qualified capital
expenditure as that term is defined in (1)
of this section;
(B) during production, the lease
expenditure is an expenditure that is
intended to increase, enhance or mitigate
the decline of well production and directly
related to the processes of operating a well
and moving fluids to the assembly of valves,
pipes, and fittings used to control the flow
of oil and gas from the casinghead, but does
not include the processes of gathering,
separating, and processing well fluids
downstream from that assembly;
(2) an overhead expenditure authorized under
AS 43.55.165(a)(2) and calculated on the
Cook Inlet well lease expenditures allowed
under (1) of this section; or
(3) an expense for seismic work conducted
within the boundaries of a production or
exploration unit."
Co-Chair Stoltze OBJECTED for discussion.
Co-Chair Hawker explained that Amendment 5 accomplishes the
same intent as Amendment 2 with better language and
specifically utilizes existing statute with existing
regulations.
MARCIA DAVIS, DEPUTY COMMISSIONER, OFFICE OF THE
COMMISSIONER, DEPARTMENT OF REVENUE, added that Amendment 5
addressed Department of Revenue (REV) concerns regarding
use of the term "lease expenditures" with a only a
reference to Internal Revenue Code (IRC) 263 for describing
the types of costs that would be allowed as a credit in the
exploration and development phase. She reported that the
sponsor had become more comfortable with using the current
clause in AS 43.55.023 [Alaska's Clear and Equitable Share
(ACES), Alaska oil and gas production tax credits, here
called "023"], which references qualified capital
expenditures and has a definition that encompasses the IRC
263 intangible cost concept. Instead of creating a new term
that means roughly the same thing, subsection (o)(1)(A) was
modified to reference the qualified capital expenditure.
Ms. Davis continued that subsection (o)(1)(B) addresses
administration concerns that the tax credit given during
the production phase could potentially cover well
operations such as well abandonment and suspension.
1:41:48 PM
Ms. Davis reported that to clarify intent the sponsor had
agreed to insert language specifying that the lease
expenditure is intended to "increase, enhance or mitigate
the decline of well production." She detailed that the
language would tighten the scope of the costs that would be
allowed in the production phase.
Representative Gara asked whether the overhead expenditure
language in (o)(2) incorporates the existing rule with the
formula determining what can be written off as overhead
expenditures. Ms. Davis responded that the current rule
would not allow overhead expense as a credit. She believed
the issue would be a policy call for the committee. She
pointed out that the sponsor was open to adding language
directing the department how to calculate the overhead
expenditure portion of the credit. The amendment subsection
includes the language. The overhead credit (4.5 percent of
costs under current regulation) will be calculated with
reference to the costs listed in (o)(1)(A) and (B). The
calculation would apply 4.5 percent to the costs to derive
the overhead element of the credit. She added that the
underlying overhead lease expense that is deductible will
not change; there is more clarity to the extent that there
is now credit that incorporates an additional financial
incentive related to overhead.
Ms. Davis clarified that the 4.5 percent was of the costs
listed in either (1)(A) or (1)(B).
Representative Gara asked whether overhead expenditures
would be allowed to be deducted on top of the 4.5 percent.
Ms. Davis replied yes. She explained that costs that
qualify as lease expenditures are first deducted from the
gross proceeds to arrive at a net production tax value.
Representative Gara queried whether overhead expenditures
are allowed under ACES (referring to deduction, not
credit). Ms. Davis responded yes. She added that under
ACES, overhead is only allowed as a lease expenditure
deduction; the cost element is not picked up in any other
credit under current law. The credit being discussed would
be the only credit existing with an overhead element.
1:45:38 PM
Representative Gara queried the relationship between ACES
and the proposed legislation regarding the 4.5 percent. Ms.
Davis responded that they were the same; in order to
understand how much overhead is associated with the
incursions of any category of cost (related to lease
expenditures), the department derives an allowed amount of
overhead which is deemed to be 4.5 percent of the costs.
The rule is used to derive the amount of overhead. All the
lease expenditures are a deduction; in addition, 4.5
percent of the lease expenditures are considered the
overhead expense. The two added together equal the
deduction at the basic level of calculating the net
production tax value. Credits are applied when the tax rate
has been calculated and a tax amount is established. When
REV came to interpreting the credit being discussed, the
department would look at the costs that are either in
category (1)(A) or (1)(B) and determine if they qualify.
Forty percent of the qualifying amount would be
characterized as a (o)(11)(m) credit. In addition, a credit
would be created that is 4.5 percent times whatever was
deemed to be the base underlying lease expenditures,
creating an overhead element that would then become an
expense to which the 40 percent credit is applied.
Representative Gara summarized that a credit would be
received on top of the deduction and the credit would be
based on overhead, defined as roughly 4 percent of the
lease expenditures. Ms. Davis agreed.
Co-Chair Hawker concurred completely. He pointed to
concerns that previous language could apply to statewide
activities of an organization. He believed the language in
Amendment 5 clearly limited the subject to qualified
capital expenditures specifically related to activity in
the Cook Inlet basin.
Representative Gara asked whether the intent of language in
subsection (o)(1)(B) was to limit the credit to work that
expands or prevents mitigation of production. Ms. Davis
replied that the language intends to target the credit at
any activity that will cause production to increase, such
as well reworking. The goal is to encourage expenditures
that would maintain and keep up production. The natural
course of a well is decline; anything done to forestall the
decline adds production.
1:50:14 PM
Representative Gara summarized that a producer could choose
either 40 percent of the credit for work that promotes
production or the existing 20 percent for the flat credit.
Ms. Davis agreed.
Co-Chair Stoltze WITHDREW his OBJECTION. There being NO
OBJECTION, it was so ordered. Amendment 5 was adopted.
Co-Chair Hawker MOVED to ADOPT Amendment 3:
Page 5, following line 22:
Insert a new bill section to read:
"*Sec.4. AS 38.15.035 is amended by adding a new
subsection to read:
(n) The director may not deny an application
for a lease or assignment of a lease of state
land for the development and operation of a gas
storage facility solely because the gas storage
facility would be used exclusively or primarily
to store gas owned by the owner or operator of
the gas storage facility. In this subsection,
"gas storage facility" has the meaning given in
AS 31.05.032."
Renumber the following bill sections accordingly.
Co-Chair Stoltze OBJECTED for discussion.
Co-Chair Hawker summarized that there were three types of
storage that could exist in Cook Inlet:
· Gas storage owned by a public utility for its own
benefit and the benefits of its customers.
· Third-party open-access storage that could be owned by
someone in the business of providing storage for a
fee. This category would be available to a utility.
· Proprietary storage owned by a producer in the inlet
to warehouse their own gas.
Co-Chair Hawker stressed that HB 280 is structured to
provide incentives for the first two types of storage.
Rates for both are regulated by the Regulatory Commission
of Alaska (RCA) and both qualify for the incentives offered
in HB 280. He noted that the third type of storage
(warehouse storage used by a producer for their own gas) is
specifically not regulated in the bill and specifically not
rewarded by the bill, in order to incentivize storage to
promote energy security for individual Alaskan consumers.
Co-Chair Hawker pointed out that there are people involved
in regulation that do not wish to allow any further gas
storage permits in Cook Inlet for proprietary storage.
Amendment 3 would direct the regulators at the Department
of Natural Resources (DNR) to not deny application for a
storage lease "solely" because the gas storage facility
would be used exclusively or primarily for proprietary
storage.
1:54:51 PM
Co-Chair Hawker informed the committee that the issue had
been brought to his attention by producers in Cook Inlet
who want to establish storage facilities to manage their
own gas. The producers were told by DNR that proprietary
storage is not going to be allowed, only open-access
storage.
Co-Chair Hawker believed the regulators should not prohibit
producers from the development of needed storage capacity.
He expected disagreement from DNR. He argued that
restricting producers would compromise the state's long-
term objective of having ample in-state storage, especially
not offering tax and inventory incentives that would be
allowed to open-access third-party storage.
Co-Chair Hawker concluded that the amendment would preserve
an option for an independent producer to create storage for
their own inventory management.
1:58:04 PM
KEVIN BANKS, DIRECTOR, DIVISION OF OIL & GAS, DEPARTMENT OF
NATURAL RESOURCES (via teleconference), noted that there
are currently three storage facilities in Cook Inlet. Two
of the facilities have been leased by DNR and would fall in
the category of proprietary storage. He stated that DNR has
had discussions with producers and has tried to accommodate
an expansion in the marketplace for storage requirements.
Mr. Banks informed the committee that there are no
opportunities for underground storage of any sort in Cook
Inlet in anything but an existing oil and gas lease; the
current oil and gas leases do not allow for the injection
of outside substances into the reservoirs. In order to use
a depleted resource reservoir as storage, a storage lease
has to be promulgated.
Mr. Banks believed that issuing a storage lease would
create a private right to a public land resource that had
not existed before. The department judged that the storage
leases could last forever and believed that a public
purpose should be served when allowing private rights over
public land.
Mr. Banks continued that DNR views proprietary storage as
an issue of supply management for a particular producer who
has certain obligations under various commitments that have
already been made. The producer makes a choice to use the
storage to provide for their customers because it is less
expensive than other alternatives, such as drilling more
wells or adding more compression in existing fields. There
may also be reasons that a producer cannot drill more wells
or add compression, such as commercial misalignments with
business partners. He described an example: one producer in
a field has a customer with steady gas supply requirements
and a second producer in the same field has a customer with
dramatic fluctuation in gas requirements from month to
month. The second producer must come up with a storage
solution, but is unable to drill more wells without the
agreement of the first producer. The two producers go to
DNR to try and solve the problem.
Mr. Banks stressed that there are issues with
deliverability and supply and demand, but there are also
institutional economic challenges to each of the producers.
The challenges are not necessarily physical problems.
2:03:28 PM
Mr. Banks believed that some principle of third-party
access should be realized in offering a storage lease. He
pointed to a category that had not been considered in
discussions so far: new producers in Cook Inlet who want to
drill for gas and could potentially help by adding more
supply. Without access to storage, the producers would only
be able to produce gas during winter months. He wanted DNR
to be able to anticipate the challenge by insisting on some
kind of third-party access.
Mr. Banks disagreed that DNR was creating difficulties
related to how third-party access would work. During
discussions regarding third-party access, the department
had wanted to consider the particular situation of a
company coming to them needing proprietary storage to meet
existing contracts. The department wanted to allow for the
supply requirement to be met and provide for some kind of
third-party access as the contracts fall off and storage
space becomes available. He thought the AS 42 (utility
regulations) would apply in the situation. Under AS 42, a
regulated storage facility may have only one customer using
it, but as space becomes available and people want access
to the storage, appeal could be made to the RCA for
permission to have the utility provide the storage on a
non-discriminatory basis.
Mr. Banks offered that another option would be allowing
third-party access when a lease was assigned or transferred
to someone else. He noted that new producers coming to Cook
Inlet would be discouraged without access to storage.
Mr. Banks stressed that DNR wanted to "unbundle" the
service of storage so that there was a clear price signal
in the marketplace and utilities, consumers, and producers
would know that gas would cost more in the wintertime than
in the summer. He suggested limited gas consumption during
the higher use time to improve deliverability.
2:08:25 PM
Mr. Banks commended the evolution of the legislation. He
thought the department had worked well with the sponsor.
Mr. Banks agreed with the goal of achieving third-party
storage. He commented on the credits built into Section 10
that would be awarded only to a storage facility. He
pointed to line 26, page 9: "where the storage facility
must be available for the storage of gas that is owned by a
utility regulated under AS 42.05" and opined that
"available" was a "quirky" word to use, but he interpreted
it to mean that if a utility needs the storage and the
storage is available, the credit would be awarded.
Mr. Banks remarked that there may not be a proprietary
storage problem if the credits are valuable and working and
effectively creating third-party storage. He was concerned
that all the applications could be for third-party access
storage if companies choose to take a credit and build
utility storage.
Co-Chair Stoltze queried DNR's position on Amendment 2. Mr.
Banks urged caution regarding the amendment. He noted that
the storage leases would last a very long time and that the
market is changing. He wanted the state to evolve with the
market so it has something like the gas markets in the
Lower-48, where almost all storage is third-party storage.
He opined that third-party access type storage is a step
towards deregulating the market rather than imposing more
regulation.
2:13:11 PM
Co-Chair Hawker believed his position on Amendment 2 was in
alignment with DNR's position. He maintained that the
amendment delineates an outer perimeter and does not
establish the standard or norm for storage in Cook Inlet.
The legislation would create reasonable benefits to
encourage producers to manage their own inventory and
perhaps go beyond that. The central focus is promoting
third-party regulated facilities. He underlined the word
"solely" in the amendment: application will not be denied
"solely" because it will be proprietary storage.
Co-Chair Hawker did not believe DNR would be compromised on
determining lease terms. He noted that even the original
production leases create a private property right; the
storage lease would create a private property right in a
public asset, but the storage would only exist to serve a
public asset.
2:16:03 PM
Representative Gara voiced concerns about creating enough
storage. He asked whether there were enough wells in Cook
Inlet to use for storage if one-party storage were allowed.
Mr. Banks replied that all the available storage already
belongs to current producers. He could not imagine a
situation in which a third party would drill a well in
order to create new storage. He thought it more likely that
some kind of commercial arrangement would be made with the
oil and gas lessee, and that the gas storage lease would be
awarded eventually because of the deal between the oil and
gas lessee and the storage sponsor.
Representative Gara asked what would happen if one company
dominated available storage and would not lease to a
utility. He wondered whether there were other storage
opportunities. Mr. Banks answered that there were enough
opportunities and that companies were planning for the
storage they would need, though some opportunities were
more efficient than others. He stated that every company
currently in business could develop their own proprietary
storage in order to get through the cold months.
Representative Gara queried the possible harm of allowing
exclusive storage. Mr. Banks believed that HB 280 would
provide the incentives needed for new gas development, but
that the state would also need to rely on other lessees who
do not currently have access and may not have it when the
time comes. He provided the example of Armstrong: the
company could develop the North Fork Unit and deliver gas
to ENSTAR, but if ENSTART cannot find storage, Armstrong
would have to find it or be limited to the expensive
prospect of running wells in the wintertime.
2:22:04 PM
Representative Gara asked whether a company would want
regulated ability to use someone else's existing storage
facility because the cost to build its own storage facility
was too high. Mr. Banks returned to his Armstrong example:
the company does not have access to subsurface horizon that
can be used for storage. They are producing, but do not yet
have depleted reservoirs, and would have to find a company
that has an empty one.
Representative Gara was concerned about the inability to
find affordable storage if there is not regulated access to
another company's storage. Mr. Banks replied that the
company might be forced to produce only in the winter
months when the demand is high enough to take the gas; this
might discourage new producers.
Co-Chair Hawker agreed with the hypothetical, but he
pointed out that in reality there will be large, open-
access storage facilities created in Cook Inlet. He
emphasized that the purpose of HB 280 was specifically to
resolve impediments to establishing large, open-access
facilities, especially the need for regulatory and
inventory management certainty. He cautioned against a
hypothetical reflecting what would happen without HB 280.
He stressed that a working market is evolving in the Cook
Inlet area that will include adequate storage. He
underlined the importance of the outer perimeter that HB
280 was attempting to create.
2:25:55 PM
Representative Gara asked whether the measure could be
written so that other companies could use the storage. Mr.
Banks suggested a sunset provision for Amendment 3; for
example, that leases could require third-party access for
applications that came after 2014.
Co-Chair Hawker believed the department already had the
latitude to make public-interest determinations. He
emphasized the limitation "solely" on the open-access
criteria. He was hesitant to micromanage the regulatory
process. He argued that the bill would protect the ability
of an individual producer to manage their own inventory.
2:28:58 PM
Co-Chair Hawker pointed out that ConocoPhillips and other
producers have already diverted gas to the community in
recent winters, to their own detriment. He did not want to
cast big oil as bad.
Co-Chair Stoltze WITHDREW his OBJECTION to Amendment 3.
Representative Gara OBJECTED.
A roll call vote was taken on the motion.
IN FAVOR: Thomas, Austerman, Doogan, Fairclough, Foster,
Joule, Kelly, Hawker, Stoltze
OPPOSED: Gara
The MOTION PASSED (9-1). Amendment 3 was ADOPTED.
2:31:34 PM
Representative Kelly stated that Amendment 5 had solved
problems he had had with HB 280, especially the "solely"
language. He queried the possibility of a negative tax
situation. Co-Chair Hawker replied that the drafters had
taken care to prevent the situation.
Co-Chair Hawker noted that fiscal note 4 was outdated and
requested an updated note by REV. He spoke to funding for a
continuing auditor position. He did not expect gas storage
to happen quickly or for there to be a lot of applications
in the near future. He advised zeroing out the incremental
expense, leaving the change in revenues as indeterminate,
and submitting the question of additional positions to the
continuing budget process.
Co-Chair Hawker highlighted mistakes in the outdated fiscal
note, including that the maximum credit amount had been
reduced by half.
2:36:37 PM
Representative Kelly read from fiscal note 4 (REV)
analysis:
The language relating to credits has the potential to
be interpreted quite broadly with the potential for
large reductions in state revenues when compared to
future developments that might occur under the current
law.
Representative Kelly commented that the obvious number was
the reduction [of allowed credits] from $30 million to $15
million. He asked if there were other concerns that he was
not seeing.
Co-Chair Stoltze stated his intent to have REV submit
fiscal notes and any commentary or analysis to the
committee on department letterhead.
Co-Chair Hawker pointed out concerns brought by REV related
to opportunity to "game the system." He asserted that the
issues were already specifically addressed, including
delineating that pipe packing would not used as a storage
facility under the bill.
Representative Gara questioned whether the credit of $1.50
per Mcf might in some years be greater than the amount
expended by an entity; the first year they would get $1.50
per Mcf to develop the storage facility but the fiscal note
says the cost is not expected to be higher than $0.72 per
Mcf. He wanted assurance that during the first year the
state would not pay a credit larger than expenditures.
Co-Chair Hawker believed the fiscal note analysis was
misleading. He stated that the investment tax credit
related to the construction of a storage facility is a one-
time credit offered only at construction; it is not a cost-
of-service calculation. He gave the example of a person who
decides to go into the taxi business and buys a taxi cab
for $15,000 and then charges a customer $0.50 per mile for
a ride.
Co-Chair Hawker asserted that the credit in the bill
functioned differently. The credit is one time. He reported
that information gathered shows that capital cost estimates
between $7 million and $15 million per Bcf are expected for
Cook Inlet gas storage facilities. Approximating roughly at
10 percent on cost credit provides the $1.50 front-end
credit. The credit has nothing to do with the annual cost
of service.
2:41:48 PM
Representative Gara questioned where in Section 10 the bill
limits someone to the cost of development of the storage
facility and not the cost-of-service. Co-Chair Hawker noted
that he would entertain an amendment to allow the credit on
an annual basis. He explained that Section 10 describes a
tax credit being available in an amount equal to $1.50 per
Mcf of working storage capacity (certified under the
provisions of the bill). He detailed that the Alaska Oil
and Gas Conservation Commission (AOGCC) would certify the
working storage capability; the credit would be calculated
on that basis. He added that there was nothing in the
section about a benefit occurring more than once; the bill
is an investment tax credit bill. He pointed to line 11
saying the credit would be available against a tax imposed
for the "taxable year" in which the gas storage facility
commences commercial operations. He felt the language was
clear about the fact that the item was one time.
Representative Gara was comforted that the expense was a
one-time expense for the development of storage, and
comforted by Amendment 5. However, he wanted assurance that
the $1.50 per Mcf granted would never be greater than the
cost of constructing the storage facility. He wanted
correct numbers. Co-Chair Hawker stated that the $1.50
amount arrived at in the bill was based on analysis
resulting from proprietary discussions with proposers of a
significant natural gas storage facility in Southcentral
Alaska. His understanding based on preliminary estimates
was that the cost of gas storage development would be
between $7 million and $15 million per Bcf of storage
capacity. He recognized the latitude of the figures. He
added that subsequent conversations with the some of the
same people indicated to him that costs would escalate.
2:45:40 PM
Representative Gara pointed to line 19 on page 9 of the
bill saying that someone would be eligible for the credit
if they had storage capacity of one-half Bcf or more. He
questioned the numbers. Co-Chair Hawker replied that the
section referred to also contains the additional
requirements for a facility to receive and qualify for the
credit. He asserted that the requirements include that the
working gas storage capacity be at least one-half Bcf, or
500 Mcf. He noted the importance of also having a
withdrawal capacity in case operations are too slow; that
is the reason for the minimum withdrawal capability
requirement of 10 Mcf per day, also certified by AOGCC. In
addition, there are requirements related to anti-churning
and provisions stipulating that an existing proprietary
facility cannot receive credit for converting to an open-
access facility. The facility must also be accessible for
utility-owned gas.
Representative Kelly thought the proposition was a good one
given the numbers described. Co-Chair Hawker agreed.
CODY RICE, PETROLEUM ECONOMIST, TAX DIVISION, DEPARTMENT OF
REVENUE (via teleconference) clarified that a cost of
service includes capital and operating expenses. He added
that a cost of service is typically a levelized cost and
includes the allowable rate base, or the costs of
construction and the operating expenses as deemed allowable
by the regulating entity, and an allowable return on
equity.
Co-Chair Stoltze asked that the analysis be submitted in
writing to the committee. Mr. Rice replied that he would
pass the information on.
Vice-Chair Thomas MOVED to report CSHB 280 (FIN) out of
Committee with individual recommendations and the
accompanying fiscal notes.
CSHB 280 (FIN) was REPORTED out of Committee with a "do
pass" recommendation and with a new zero note by the House
Finance Committee for the Department of Revenue and
previously published fiscal notes: FN1 (ADM), FN2(CED), FN3
(DNR).
2:51:56 PM RECESS
3:01:25 PM RECONVENE
| Document Name | Date/Time | Subjects |
|---|---|---|
| 01 Sponsor Statement HJR 8.pdf |
HFIN 3/18/2010 1:30:00 PM |
HJR 8 |
| 06 HJR 8 Backup.pdf |
HFIN 3/18/2010 1:30:00 PM |
HJR 8 |
| HJR 8 House Finance.ppt |
HFIN 3/18/2010 1:30:00 PM |
HJR 8 |
| HJR 8 State Affairs Press Release.pdf |
HFIN 3/18/2010 1:30:00 PM |
HJR 8 |
| State Affairs Q&A.pdf |
HFIN 3/18/2010 1:30:00 PM |
HJR 8 |
| HJR 8 House Finance V1 (2)03182010.ppt |
HFIN 3/18/2010 1:30:00 PM |
|
| HB 280 Amendment # 5 Hawker.pdf |
HFIN 3/18/2010 1:30:00 PM |
HB 280 |