Legislature(2009 - 2010)
04/16/2010 10:47 AM House FIN
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 305(FIN)(title am) "An Act providing that the tax rate applicable to the production of oil as the average production tax value of oil, gas produced in the Cook Inlet sedimentary basin, and gas produced outside of the Cook Inlet sedimentary basin and used in the state increases above $30 shall be 0.4 percent multiplied by the number that represents the difference between that average monthly production tax value and $30, or the sum of 25 percent and the product of 0.1 percent multiplied by the number that represents the difference between that average monthly production tax value and $92.50, except that the total rate determined in the calculation may not exceed 50 percent; providing for an increase in the rate of tax on the production of gas as the average production tax value on a BTU equivalent barrel basis of gas produced outside of the Cook Inlet sedimentary basin and not used in the state increases above $30; relating to payments of the oil and gas production tax; relating to availability of a portion of the money received from the tax on oil and gas production for appropriation to the community revenue sharing fund; relating to the allocation of lease expenditures and adjustments to lease expenditures; and providing for an effective date." 2:09:30 PM Co-Chair Hawker related that an accord had been set with the Department of Revenue concerning the technical competency of the legislation. Vice-Chair Thomas MOVED to ADOPT the work draft for HCS for CSSB 305 26-LS-1577\U, Bullock, 4/15/10 as a working document. Co-Chair Hawker OBJECTED for discussion. ROGER MARKS, PETROLEUM ECONOMIST, LEGISLATIVE BUDGET AND AUDIT COMMITTEE, detailed that the changes from Version "K" to Version "U" were the result of requests from the administration. He cited the technical amendments adopted in Version "U" (copy on file). PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, clarified that technical problems had been identified in Version "K" and subsequently amended in Version "U". He expressed interest in examining the current version for any necessary technical changes. 2:17:33 PM Mr. Marks stated that he would be comparing Version "K" with Version "U", while highlighting the changes. He referred to, "List of Technical Amendments to HCS CS SB 305 Adopted in Version "U"", Prepared by Representative Hawkers' Office (copy on file). 2:20:02 PM Representative Kelly queried the removal of the language "from each lease or property", from Page 15, line 10. Commissioner Galvin replied that the phrase had been removed to for clarity. Mr. Marks relayed that next change was in Section 8, which stated that lease expenditures occurring prior to commercial production, or during exploration, could be off- set against income within specific areas. Representative Doogan requested clarification as to which version of the bill was being discussed. Mr. Marks replied that the latest version of the bill was the "U" Version, and that the discussion concerned the changes form Version "K" to Version "U". Co-Chair Hawker added that Section 8 was physically located in the same place in the "U" version, but the language had been changed from Version "K". Mr. Marks reiterated that the new Section 8 language stated that expenditures incurred within an area, could only be used in that area. The department preferred the word "commercial" over "sustained", because "commercial production" was a defined term. 2:23:38 PM Co-Chair Hawker asked Mr. Marks and Commissioner Galvin if they supported the version changes. Both replied in the affirmative. Co-Chair Hawker WITHDREW his OBJECTION. The work draft for HCS for CSSB 305 26-LS-1577\U, Bullock, 4/15/10 was ADOPTED as a working document. Co-Chair Hawker WITHDREW Amendment 1 (Hawker).(copy on file). Co-Chair Hawker MOVED to ADOPT Amendment 2 (Hawker): Page 8, line 20 Delete "land , lease," Insert "land or lease or" Page 9, line 19 following "property" Insert "in the state" Page 11, line 25 Delete "land, lease," Insert "land or lease or" Page 12, line 9 Delete "land, lease," Insert "land or lease or" Page 12, line 21 Delete "land, lease," Insert "land or lease or" Page 13, line 2 Delete "land, lease," Insert "land or lease or" Page 16, line 13 Delete "Sections 2 - 4" Insert "Sections 2 - 5" Co-Chair Stoltze OBJECTED for discussion. Commissioner Galvin pointed out to the committee the language changes in the bill. The word "lease or "property" were defined terms. The purpose of the language change was to distinguish the land from the lease or property. Co-Chair Hawker clarified that the language included everything in the amendment, except Lines 5 and 6, and Line 24 through 26. Commissioner Galvin stated that the amendment would provide consistency between bill sections. The last lines of the amendment ensured that the department's directive to adopt regulation was made retroactive. Co-Chair Hawker asked if the sponsor was comfortable with Amendment 2. Mr. Marks replied yes. Commissioner Galvin said that the amendment fulfilled the technical concerns raised by the department. Co-Chair Stoltze WITHDREW his OBJECTION to Amendment 2. There being no further OBJECTION, Amendment 2 was ADOPTED. Co-Chair Hawker asked if the amendments were sufficient to the department. Commissioner Galvin replied yes, for the moment. 2:29:27 PM Representative Gara attempted to summarize his understanding of the bill. Until gas was exported, Alaska's Clear and Equitable Share (ACES) remained unchanged, a 25 percent production tax on oil, and the equivalent of a 25 percent production tax on gas, with progressivity, under the agreed upon terms. Producers received a benefit if they turned gas fields for production into a pipeline, and gas costs could be deducted from the oil taxes. He understood that the policy conversation about decoupling would happen at a future date. Mr. Marks concurred. Co-Chair Hawker asked about the intent of the legislation. Commissioner Galvin concurred with Representative Gara's assessment of the bill. Co-Chair Hawker reminded the committee that the mission was to take a bill that accomplished the tasks recommended to the House Floor, where the policy call would be made by the entire body. He added that it was the sponsor's belief that the dilutive effect of the current statutory construct would cause an immediate decrease in tax revenues the minute gas was produced. The sponsor predicated that the issue was urgent. He requested an evaluation and policy discussion by the Department of Revenue concerning the issue. 2:33:18 PM Commissioner Galvin introduced the PowerPoint presentation, "Comments On HCS CSSB 305 (FIN) Ver.U" (copy on file). Slide 2 details the three major concerns to the department regarding the bill: · Decoupling is not necessary at this time. Æ’SB 305 could be passed at anytime in the next 10 years, and the result would be the same. · SB 305 "locks-in" a lower gas production tax obligation Æ’Would reduce the state's negotiating flexibility in the coming years o We could always lower the gas tax after "lock-in", but we might not be able to raise it · SB 305 is a significant overall tax increase Æ’It sends the Producers and the rest of the world the wrong message about Alaska's interest in promoting a gasline project Representative Gara understood that the legislation would lower the gas tax. Commissioner Galvin responded that the under the current law, the entire tax obligation for oil and gas was divided equally between the two resources. The legislation would separate the tax systems between oil and gas to determine the tax obligation. Commissioner Galvin stressed that the current formula resulted in a larger obligation than when calculated under SB 305. Representative Gara asked if the breadth of the term "gas tax" had been defined in the original regulations. Commissioner Galvin responded that defining the gas tax obligation had been a priority. The department believed it would not be in the state's interest to imply that the impact on the oil tax was caused by the introduction of natural gas into the conversation. The department chose the point of production formula, which reflected the value of the two commodities when combined. 2:41:18 PM Representative Gara stated that when the bill passed in the other body the gas tax was calculated on the British Thermal Unit (BTU) equivalent. He pointed out to the committee that under the current Version "U", a point of production approach was being used to calculate the tax. He asked if the language change expanded the breadth of the gas tax. Commissioner Galvin replied that the version that had passed out of the senate indicated that the department would develop regulations on cost allocations while considering the barrel of oil equivalent (BOE). The current version placed an expectation that the point of production formula would be used when possible. Representative Gara requested an estimate of how much lower the tax would be using the department's preferred formula. Commissioner Galvin referred to the presentation, "Comments on HCS CSSB 305 (FIN) VER. U" (copy on file), Page 21, which charts the gas tax with prices ranging from $40 per barrel to $200 per barrel. The slide compares the status quo with the other possible formulas. 2:43:41 PM Co-Chair Hawker noted that the chart detailed the tax that was attributable to gas. Commissioner Galvin said that SB 305 would be an overall tax increase. The tax burden on the gas pipeline project would be significantly raised. He stressed that decoupling now would send a negative message to producers. Commissioner Galvin directed committee attention back to Slide 3. If SB 305 were enacted in 2020, the resulting state revenue would be the same as if it were enacted in 2010. Slide 4 indicated that in all of the modeling cases run by the department, the "locked-in" gas production tax obligation was larger under the current system than it would be under SB 305. Commissioner Galvin continued to Slide 5, "Sample Cases: Comparing SB 305, Petroleum Production Tax (PPT), and the Status Quo". At current prices, SB 305 would be a larger tax increase than adjustment from PPT to ACES. The Status Quo brings in nearly the same tax revenue that would be generated if the PPT system had been decoupled (Slide 6). Slide 7 shows another example of a comparison of the total tax revenue under a PPT/Stranded Gas Development Act (SGDA) scenario. When compared with the Status Quo, there was no perceived significant loss. He said that the projected tax numbers under SB 305 could be misleading, and would color public discussion about an appropriate fiscal system for the gasline far into the future. He cited the charts on Slide 8 and 9 of the presentation, which illustrate different comparisons of the overall tax-take between oil and gas in different combinations. He questioned the problem being solved by SB 305, Slide 10. 2:53:47 PM Commissioner Galvin pointed out to the committee that the trepidation of becoming locked in to an obligation for fear of economic loss was unwarranted. Slide 10 refuted the claim of a potential $2 billion dollar loss in the Department of Law analysis, which states: · Only the gas production tax obligation (not the rate) is "locked-in" at the open season; · The legislature can change the oil tax system anytime before or after the open season; · The so-called "$2 billion loss" will only occur if three things happen: o We are successful in achieving a large capacity gas pipeline; o The price of oil and gas remain far apart (defying fundamental economic principles); AND o The next 5 Legislatures decide that it is appropriate to leave the current tax system as is. Commissioner Galvin continued to Slide 11, which states: "What is the "Problem Being Solved by SB305?" · Is It?: That any "dilution" of oil taxes caused by mixing in a lower value hydrocarbon is an unacceptable "loss" of oil tax revenue? · Response: Should the Legislature react similarly when a large volume heavy oil project is proposed? · Will it have the same dynamic; highly profitable sweet crude will be diluted, thus reducing its profitability and it progressivity tax rate · State will "lose" oil tax revenue due to the introduction of heavy oil 2:57:26 PM Commissioner Galvin addressed the question proposed on Slide 12: "What is the "Problem Being Solved by SB305?" · Is It?: That under the status quo, at high oil/gas price parity, the state is at risk of seeing a reduction of overall production tax revenue when they "flip the gas switch"? · Response: Legislature has 10 years to decide if it wants to take on that risk in exchange for a gasline; · If it is not an acceptable risk, then there are a number of alternative options (including decoupling) that could be carefully considered. One alternative approach to address the possible revenue loss would be to establish in the current tax system a minimum tax equal to a separate oil tax (i.e. the combined tax cannot be lower than what the separate oil tax would be). This would preserve the economic incentive nature of the current system, while protecting the state's downside risk in the case of high parity, and did not require significant structural changes to the current system, such as cost allocation. Commissioner Galvin offered closing observations. He relayed that passing such a large tax increase just before the two upcoming open seasons sent a confusing message about the state's desire for a gasline, SB 305 locked in a lower gas production tax obligation, thus reducing the state's negotiating flexibility, and SB 305 could be passed after the open season without legal restriction or economic limitation. He felt that the bill failed to meet the best interest of the state and maintained strong opposition to the legislation. 3:03:05 PM Co-Chair Hawker revealed that were the bill to pass committee, he would be attaching a "no recommendation" to his signature on the committee report. He urged the committee to compare and contrast the arguments presented by the bill sponsor with that of Commissioner Galvin, when weighing the legislation. Representative Austerman questioned the use of the word "might" on Slide 2 of the presentation. Commissioner Galvin replied that the language hedged the legal risk in the event that the state failed to honor the Alaska Gasline Inducement Act (AGIA) tax inducement exemption. Representative Austerman believed that the bill was too complicated. Commissioner Galvin attempted to clarify. He assured the committee that the gas tax obligation was on the gas that was shipped through the AGIA acquired facility. Representative Austerman requested that the bill be broken down into layman's terms to facilitate further discussion. Commissioner Galvin endeavored to simplify: "You have $8 gas and your all-on cost for transportation and so forth is $4, just to make it easy. So you have $4, what is called "point of production" value. Then the question at that point is, "What is the production tax that's gonna be ascribed to that?" And under the current system you would tax that gas with whatever oil, and you'd end up splitting it based upon the relative values at the point of production, and you might end up with a gas tax obligation of $1.50, say. With SB 305 you're gonna take that $4 dollar point of production, you're gonna take some of the costs for production and subtract it from that, and you are going to have a tax rate that you are going to then charge, and you're going to end up with a tax obligation somewhere less than $1.50. It's going to be, maybe, $1.25 or $1.00. And that's the difference, is that, at the end of the day, the tax obligation on that gas is going to be lower with SB 305 than ostensibly what you have under the status quo." 3:09:10 PM Representative Kelly asked Commissioner Galvin how he would have constructed the tax from the beginning; for Alaska, and then for the rest of the world. Commissioner Galvin responded comparing the state's options with the rest of world presents two thoughts. One, Alaska was in a unique situation in the world going from a full oil providence with a long-term existing fiscal system, into a world class oil and gas province. Most provinces do not have a transition; they enter into the production of oil and gas simultaneously. He queried the opportunity to "start from scratch". He said that if the state were to take tax cues from other areas of the world, it would be discovered that most places had a tax combination of oil and gas. However there were places that kept them separate. He felt that separating the profitability streams of oil and gas was an arbitrary accounting exercise. Representative Kelly cited Page 15, Line 6. He commented that "the department shall" could be changed to "the department may". Commissioner Galvin responded that the amount of discretion that was appropriate to give the department in establishing the cost allocation methodology had been under discussion. The issue was a policy call, without empirical arguments to weigh when establishing a right or wrong answer. The department preferred to receive direction from the legislature as to which methodology to use. 3:16:18 PM Representative Doogan asked about the 3 closing observations found on Slide 14 of the presentation. He requested reconciliation between points 1 and 2. Commissioner Galvin responded that, as illustrated on Slide 18, using the status quo method to derive the gas production tax obligation, although the overall tax is lower, the proportion of tax attributed to gas is greater. The relationship holds true throughout the different price scenarios. Decoupling would cause the oil tax to rise faster than the gas tax decreased. As the costs between oil and gas were moved, oil was moved up the progressivity line. Gas was not at the progressivity line, and remained flat. This resulted in a lesser gas tax under SB 305. Representative Doogan understood that under the current system, gas production diluted the effect of the higher oil price, but the lower gas tax did provide a favorable position. Commissioner Galvin agreed. He added that the passing of the bill would be off-putting to producers because it would insinuate that the state should receive considerably more tax revenue when gas was being produced. 3:22:19 PM Representative Gara expressed concern that without SB 305, the "lock-in" gas tax rate defined by regulation could be successfully challenged in court. Commissioner Galvin said that a challenge to the department's regulations would be unprecedented. He pointed out to the committee that the regulations had been reviewed during a public comment period, and had been accepted by producers. He believed that the state should be confident with the system already in place. Representative Fairclough asserted that the gasline and gas revenues were not a "silver bullet" for the state. She pointed out to the committee that all of the models in question had been modeled out to 10 years. She wondered if modeling to 20 years would be more beneficial, as a point would eventually be reached where production was going to adversely, in an inverse way, affect the value of oil and the taxes the state collected. She asked if the department had modeled out further than ten years in order to know the ramifications on projections of oil going down and gas coming online. Commissioner Galvin answered yes. Representative Fairclough probed how much the state could receive if oil were provided for under a different rate through decoupling, specifically, in the second 10 year section. Commissioner Galvin replied that if there were a disincentive for a gas pipeline, then the state could expect to continue to see a decline of oil production, and overall state revenue. Representative Fairclough wondered if the benefit to the state for not collecting taxes in the first 10 years of production would be significant. Commissioner Galvin replied that in order to answer the question, the legislature would need to decide on the price relationship between oil and gas for the years 2020 through 2030. 3:29:06 PM Commissioner Galvin stated that he could not fully answer the question with the information available. He stated that if the tax system for the next 20 years were put into place under the legislation, the state would not succeed in building a gas pipeline. Representative Fairclough clarified that the Commissioner had presented a scenario explaining the problems with SB 305. She requested that he provide the committee with an alternative scenario, for 2020 through 2030, that explains what the state would receive in the second 10 years of production. Commissioner Galvin argued that if SB 305 failed, and the state were to move forward in the development of the gas pipeline, when the time arrived for the state to "lock-in" the oil tax, the price relationship would remain $120/$8 gas. He predicted that the current system would be replaced by an alternative minimum tax in order to capture the value. He contended that Alaska was not in a position to make the decision right now. He stressed that the state should leave its options open in order to create a system that provides for a pipeline, and the ability to change the system if necessary. Representative Fairclough voiced discomfort with the risk that not decoupling could "lock-in" tax rates for the state. Co-Chair Hawker requested that someone from the department schedule a sit down with Representative Fairclough. 3:34:14 PM Representative Salmon queried the urgency of the May 1, 2010 passage of the legislation suggested by the bill sponsor. Commissioner Galvin felt that the difference between the priority of the sponsor, and what the department recommended was moot, as only the gas portion of the obligation was relevant going into the open season. 3:36:53 PM MICHAEL HURLEY, DIRECTOR, GOVERNMENT AFFAIRS, CONOCOPHILLIPS, stated that the bill did not solve the problem of gas taxation. He said that ConocoPhillips understood the sponsor's intent, but feared that the public would misinterpret what the bill would do. He remarked that the bill was a reflection of one of the many flaws in AGIA. The fundamental issue of how gas would end up being taxed was not addressed. The lack of clarity concerning how the gas would be taxed added to the uncertainty that producers faced when considering proposing gas into the pipeline in the 2, upcoming open seasons. He thought that fiscal issues would eventually need to be addressed. He shared that ConocoPhillips appreciated the sponsor's intent in designing the bill to speak to the flaws in AGIA. He felt that the bill added to the complexity of the issue. He reported that ConocoPhillips would continue to work with the state to create a tax structure that encouraged investment, production, and jobs for Alaskans. Representative Gara stated that there was an anomaly in the existing tax. He asserted that it was not the desire of the legislature to put into place a system that produced less revenue for the state with gas and oil pipelines, than would be received with solely an oil pipeline. He thought that the issue would need discussed further. 3:42:21 PM Representative Kelly asked Mr. Hurley if he preferred the House Resources version of the bill (Version N), or the current Version "U". Mr. Hurley replied that he would suggest "no recommendation" for Version "U". Representative Fairclough asked if there was a version that worked best for the industry. Mr. Hurley replied that, in the end, both versions accomplish same thing. He thought that Version "N" had been cleaner than Version "U". The "U" version required the commissioner to write additional pages of regulations, ConocoPhillips would need restructuring, and cost allocations would need review. Overall the "U" version was messier for the company. However, both versions keep current businesses operating at the status quo, until the big gas flows in the big gasline. Representative Fairclough wondered if the state would retain the flexibility to change the tax rate for Alaskans in the future. She requested the industry perspective on whether there was a "drop-dead" date that would benefit Alaskans. Mr. Hurley opined that what was designed and promoted in AGIA as an inducement, was now being described as something that could change on a whim. Representative Fairclough added that the understanding had been that there was a date certain that AGIA anticipated, and now it was understood that the date still had flexibility to either raise or lower the gas tax. 3:46:28 PM Representative Kelly asked if locking in a tax rate now would be enough for producers to go forward with a gasline. Mr. Hurley replied no. Representative Kelly perceived that Alaskans were being told that locking in a rate now would be ineffective. 3:48:35 PM Commissioner Galvin clarified why the state might not be able to raise the tax in the future. He cited the discussions during the special session on AGIA. At that time, the administrations recommendation was that the AGIA tax inducement be made a contractual commitment between the state and the producers. The recommendation was removed because the legislature wanted to retain the ability to change the tax system and disregard what was being offered during the open season. The Department of Law (DOL) believed that there may still be an obligation inherent in the AGIA language. The enactment of AGIA had never stated that the tax inducement was an absolute "lock-in". The administration acknowledged that the agreement should have been contractual. Co-Chair Hawker requested that Commissioner Galvin explain the revised fiscal note. 3:51:13 PM Commissioner Galvin stated that the necessary expenditures as a result of Version "U" would mandate that the department develop 2 sets of regulations; one handling cost allocation, and the other dealing with the allocation of adjustments to the cost. Based upon information from DOL and the department's experience with the regulatory process, the cost estimate generated was $330,000. Vice-Chair Thomas MOVED to report HCS CS SB 305(FIN) out of Committee with individual recommendations and the accompanying new fiscal note. Representative Joule OBJECTED for the purpose of discussion. Representative Joule WITHDREW his OBJECTION. Co-Chair Hawker OBJECTED for the purpose of discussion. Co-Chair Hawker closed public testimony. Co-Chair Hawker WITHDREW his OBJECTION. There being NO further OBJECTION, it was so ordered. HCS CSSB 305(FIN) was REPORTED out of Committee with "no recommendation" and attached new fiscal note by the Department of Revenue. 3:56:07 PM AT EASE 4:22:16 PM RECONVENED
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