Legislature(2005 - 2006)HOUSE FINANCE 519

03/28/2006 02:00 PM FINANCE

Download Mp3. <- Right click and save file as

Audio Topic
02:09:20 PM Start
02:10:11 PM HB488
04:28:50 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 488                                                                                                            
     An  Act  repealing  the   oil  production  tax  and  gas                                                                   
     production  tax and  providing for  a production  tax on                                                                   
     the  net  value   of  oil  and  gas;  relating   to  the                                                                   
     relationship  of  the  production  tax to  other  taxes;                                                                   
     relating to  the dates tax  payments and  surcharges are                                                                   
     due   under   AS   43.55;  relating   to   interest   on                                                                   
     overpayments under  AS 43.55; relating to  the treatment                                                                   
     of  oil   and  gas  production   tax  in   a  producer's                                                                   
     settlement  with the royalty  owner; relating  to flared                                                                   
     gas,  and to  oil and  gas used  in the  operation of  a                                                                   
     lease  or  property, under  AS  43.55; relating  to  the                                                                   
     prevailing  value   of  oil  or  gas  under   AS  43.55;                                                                   
     providing for  tax credits against the tax  due under AS                                                                   
     43.55 for certain expenditures,  losses, and surcharges;                                                                   
     relating to statements or  other information required to                                                                   
     be  filed  with  or  furnished   to  the  Department  of                                                                   
     Revenue,  and relating  to  the penalty  for failure  to                                                                   
     file certain  reports, under  AS 43.55; relating  to the                                                                   
     powers  of  the  Department   of  Revenue,  and  to  the                                                                   
     disclosure  of   certain  information  required   to  be                                                                   
     furnished to the Department  of Revenue, under AS 43.55;                                                                   
     relating to criminal penalties  for violating conditions                                                                   
     governing access to and use  of confidential information                                                                   
     relating to the oil and gas  production tax; relating to                                                                   
     the  deposit of  money collected  by  the Department  of                                                                   
     Revenue under  AS 43.55; relating to the  calculation of                                                                   
     the gross  value at  the point of  production of  oil or                                                                   
     gas; relating  to the determination of the  net value of                                                                   
     taxable oil and gas for purposes  of a production tax on                                                                   
     the  net  value   of  oil  and  gas;  relating   to  the                                                                   
     definitions  of 'gas,'  'oil,' and  certain other  terms                                                                   
     for purposes of AS 43.55;  making conforming amendments;                                                                   
     and providing for an effective date.                                                                                       
2:10:48 PM                                                                                                                    
REPRESENTATIVE   RALPH   SAMUELS,  CHAIR,   HOUSE   RESOURCES                                                                   
COMMITTEE, attempted  to explain the changes  made during the                                                                   
House Resources Committee (HRC)  process.  That Committee did                                                                   
not change  the general  structure of  the bill, which  would                                                                   
have changed the system, but instead  changed the net profits                                                                   
after costs were recovered by the industry.                                                                                     
Representative  Samuels  voiced  concern  regarding  how  the                                                                   
State of Alaska would keep up  with the global functions.  He                                                                   
pointed out that  the Administration testified  that in major                                                                   
fields, there  is more  than one  owner and already  concern.                                                                   
He said  there needs  to be safeguards  for fields  that have                                                                   
most of the revenue for the State.    Other factors addressed                                                                   
were  cost recovery  for the  State's tax  advantage and  the                                                                   
methodology used.                                                                                                               
Representative  Samuels noted items  changed made  during the                                                                   
Committee process:                                                                                                              
   · Kept the tax rate @ 20% until a price reached $50                                                                          
     dollars  per barrel.   There  was  talk about  increased                                                                   
     cost  to cover  inflation.   Representative Samuels  did                                                                   
     not support adding a dollar  figure to the bill.  It was                                                                   
     argued  that  technology  could decrease  the  escalator                                                                   
   · A separate escalator was tied to the price of gas.                                                                         
2:16:23 PM                                                                                                                    
Representative   Samuels  did   not   anticipate  a   problem                                                                   
resulting   from  the   change   to  the   escalator.     The                                                                   
transitional money was eliminated  by an amendment offered in                                                                   
the Committee.  Additionally,  a $73 million dollar allowance                                                                   
was  changed  to  a  tax  credit.     The  credit  cannot  be                                                                   
transferred or sold.                                                                                                            
HRC placed language that does  not allow for abandonment cost                                                                   
fees for  tax credits.   Private  royalty owners  will  pay a                                                                   
severance tax on their royalties at a rate set of 5%.                                                                           
2:18:22 PM                                                                                                                    
Representative   Samuels   stated    that   the   contingency                                                                   
surcharges were  left in place, both non-deductible  and non-                                                                   
creditable.    Currently, there  is  a five-cent  per  barrel                                                                   
charge, with  two-cents suspended;  the suspended  amount was                                                                   
lowered to one-cent per barrel and they increased the non-                                                                      
suspended amount to four cents per barrel.                                                                                      
HRC changed the effective date  from the 1  of July to the 1                                                                    
of April 2006.   That change would reach the  nearest quarter                                                                   
after  signed,  making  it  easier   for  the  Department  of                                                                   
Revenue's quarterly system.                                                                                                     
Representative Samuels  noted that the Committee  implemented                                                                   
a tax credit purchase  program.  The State could  buy at full                                                                   
face value  up to ten million  gallons per year  per company.                                                                   
A tax credit would be sellable;  it would allow them to go to                                                                   
a big company.   In the bill,  only 20% of the  tax liability                                                                   
could be paid for the purchased tax credit.                                                                                     
2:20:31 PM                                                                                                                    
The House  Resources Committee  decided that the  State could                                                                   
buy up  to $10 million  dollars per  year per company  at the                                                                   
100% value as long as the money was reinvested into lease-                                                                      
purchases.   It was  indicated that  the $10 million  dollars                                                                   
might not  be enough.   He encouraged  the Finance  Committee                                                                   
reconsider  that number  and  adjust it  upward.   There  are                                                                   
penalties  imposed  on  underpayment.   More  penalties  were                                                                   
added in addition to a high interest rate.                                                                                      
Representative  Samuels  said  during  the  amendment  phase,                                                                   
language  was added  that costs  could  not be  used as  cost                                                                   
recovery.   He noted that the  State requires an  industry to                                                                   
have the necessary  clean-up machinery.  The  language of the                                                                   
bill addresses catastrophic oil spill needs.                                                                                    
2:23:16 PM                                                                                                                    
Representative  Samuels stipulated that  there was  no action                                                                   
taken on  tax credits for heavy  oil.  He commented  that HRC                                                                   
choose not to have  a separate tax for gas and  oil.  He knew                                                                   
that the future of the slope would  include heavy oil.  There                                                                   
was discussion, however, no action  was taken on tax credits.                                                                   
Amendments discussed but rejected were:                                                                                         
   · Removing "gas" from the bill and replacing it with                                                                         
     simply "oil".                                                                                                              
   · The tax floor amendment failed and that concern was in                                                                     
     regard to cost recovery.                                                                                                   
   · Energy assistance failed.                                                                                                  
   · Moving the effective date back to January failed.                                                                          
2:25:38 PM                                                                                                                    
Representative Samuels continued:                                                                                               
   · There was debate to move the price point and that                                                                          
He admitted there had been major issues.                                                                                        
Representative  Samuels urged  two points  that the  member's                                                                   
not be lobbied on:                                                                                                              
   ·    Risk and cost recovery; and                                                                                             
   ·    How much exposure received through the credits.                                                                         
2:26:56 PM                                                                                                                    
Co-Chair  Meyer inquired  why West  Texas Intermediate  (WTI)                                                                   
was chosen  over Alaska  North Slope  (ANS).   Representative                                                                   
Samuels acknowledged it was debated.   There were variations,                                                                   
with  roughly   a  $2  dollar  per  barrel   difference.  [In                                                                   
2:28:34 PM                                                                                                                    
Co-Chair Meyer  asked why  the $50  dollars per barrel  price                                                                   
was chosen rather than current  market price.  Representative                                                                   
Samuels explained  that the Committee attempted  to move past                                                                   
the  current bell-curve.   He  mentioned the  $45 dollar  per                                                                   
barrel range, which  would have had less impact.   During the                                                                   
Committee process,  there was an amendment  offered, however,                                                                   
he warned  that prices could get  out of control.   No one is                                                                   
expecting the price to remain at $60 dollars per barrel.                                                                        
2:30:08 PM                                                                                                                    
Co-Chair  Meyer  questioned  if the  "credit-side"  had  been                                                                   
mentioned.    Representative  Samuels  replied  it  had  been                                                                   
discussed and that he believed  from testimony heard, some of                                                                   
the major players  could use it.  Regardless,  they were more                                                                   
concerned with the tax rate than the credit.                                                                                    
2:30:58 PM                                                                                                                    
Co-Chair  Meyer   mentioned  action   taken  in   the  Senate                                                                   
Resources Committee  and asked how HRC understands  the 2 for                                                                   
1 provision brought forward.   Representative Samuels replied                                                                   
2:32:17 PM                                                                                                                    
Representative Holm  asked if different rates  for incentives                                                                   
were   considered  for   the   majors  and   the   explorers.                                                                   
Representative  Samuels advised that  they had looked  at the                                                                   
current  tax  credits for  SB  185  [passed last  year],  for                                                                   
premature  true exploratory.   He believed  that most  of the                                                                   
production expenditures  occurred in  Prudhoe & Kuparuk.   He                                                                   
warned about providing incentives  and not adding to the true                                                                   
2:34:08 PM                                                                                                                    
Representative  Samuels mentioned  small changes proposed  by                                                                   
the  Alaska Oil  and Gas  Association (AOGA).   The  original                                                                   
bill had  the term "the  net value of  oil and gas"  and AOGA                                                                   
wanted  it  changed  to  "taxable  value".    AOGA  requested                                                                   
applying the  Petroleum Production  Tax (PPT) against  income                                                                   
taxes; HRC  chose not to grant  that.  Discussions  with AOGA                                                                   
did not happen  in Committee; however, they met  with the two                                                                   
Co-Chairs   of  the   House  Resources   Committee  and   the                                                                   
Commissioner  of the  Department of  Revenue, in  considering                                                                   
the  letters  from  AOGA.    The   Committee  made  only  the                                                                   
technical changes proposed by AOGA.                                                                                             
2:36:05 PM                                                                                                                    
Representative   Kelly   inquired   if  the   Committee   had                                                                   
considered  different  tax  rates.    Representative  Samuels                                                                   
replied  that there had  been many  graphs providing  various                                                                   
numbers.  There  are numerous assumptions regarding  how much                                                                   
investment would  be appropriate  versus the amount  of risk.                                                                   
He hoped that the ultimate choice would be the middle rate.                                                                     
2:38:43 PM                                                                                                                    
Representative Holm  asked if there had been  assurances made                                                                   
by any of  the oil companies.  Representative  Samuels stated                                                                   
that would be impossible.                                                                                                       
2:39:34 PM                                                                                                                    
DAN  DICKINSON, CONSULTANT,  OFFICE  OF  THE GOVERNOR,  noted                                                                   
that  he  would  assist  Mr. Mintz,  Department  of  Law,  to                                                                   
navigate  through the  Governor's  bill as  proposed and  the                                                                   
committee substitute  brought forward by the  House Resources                                                                   
2:40:21 PM                                                                                                                    
ROBERT  MINTZ,  (TESTIFIED  VIA   TELECONFERENCE),  ASSISTANT                                                                   
ATTORNEY GENERAL,  DEPARTMENT  OF LAW, ANCHORAGE,  referenced                                                                   
the handout, comprised of two parts:  (Copy on File).                                                                           
   ·    The logical connections of how the new production                                                                       
        tax would work, while attempting to identify the                                                                        
        main differences between the two bills; and                                                                             
   ·    The second part provides a flow chart identifying                                                                       
        how the calculations had been determined.                                                                               
Mr.  Mintz noted  Page 2,  indicates the  new production  tax                                                                   
provisions, which apply to oil  and gas produced on or after,                                                                   
July 1, 2006 (HB 488) and April 1, 2006, (CS HB 488 RES).                                                                       
Mr.  Mintz referenced  Page  3, AS  43.55.011(a)  - There  is                                                                   
levied upon the producer, a tax  for all oil and gas produced                                                                   
each month.  The tax is equal  to 20% of the net value, under                                                                   
AS  43.55.160.   He  emphasized  that  Section was  the  most                                                                   
fundamental of the bill.                                                                                                        
2:43:39 PM                                                                                                                    
Mr. Mintz  referenced Page  4, Section  5, AS 43.55.011(a)  -                                                                   
there is levied upon the producer,  a tax for all oil and gas                                                                   
produced  each   month,  [except  for]  a   lessor's  royalty                                                                   
interest.   The tax  is equal  to 20%  of the production  tax                                                                   
value, under AS 43.55.160.                                                                                                      
2:44:56 PM                                                                                                                    
Page 5,  Section 6,  AS 43.55.011(e) -  There is  levied upon                                                                   
the producer, a tax for all oil  and gas produced each month,                                                                   
the  ownership  or  right to  which  constitutes  a  lessor's                                                                   
royalty interest.   The tax is  equal to five percent  of the                                                                   
gross value at the point of production.                                                                                         
2:45:53 PM                                                                                                                    
Mr.  Mintz referenced  Page 6,  AS 43.55.011-(k).   There  is                                                                   
levied upon the  producer a tax for all oil equal  to .30% of                                                                   
the gross  value at  the point  of production, multiplied  by                                                                   
the oil  price index and  a tax for all  gas, equal to  2% of                                                                   
the gross value at the point of  production multiplied by the                                                                   
gas price index.                                                                                                                
2:46:55 PM                                                                                                                    
Representative Hawker  asked what "lessor" meant on  Page 4 &                                                                   
5; he thought it  should be defined.  Mr. Mintz  advised that                                                                   
the  slides  only  highlight,  and that  they  do  leave  out                                                                   
language.   The assumption  is "lessor under  an oil  and gas                                                                   
lease".  It is  clear in oil and gas terms  and is frequently                                                                   
referred  to in  that  Industry.   He  thought  if there  was                                                                   
ambiguity,  the Department  of  Revenue could  clarify it  by                                                                   
2:48:47 PM                                                                                                                    
Mr. Mintz  noted on Page  7, the original  bill has  a single                                                                   
production tax of  20% of the net value and  in contrast, the                                                                   
committee substitute has four production tax components:                                                                        
   · 20% of net value except for lessor royalty share                                                                           
   · 5% of gross value for lessor royalty share                                                                                 
   · A progressive-rate oil tax on gross value, including                                                                       
     lessor royalty share                                                                                                       
   · A progressive-rate gas tax on gross value, including                                                                       
     lessor royalty share                                                                                                       
2:50:12 PM                                                                                                                    
Page   8,   Section   21,   AS   43.55.160(a),   provides   a                                                                   
determination  of the net  value, which is  the total  of the                                                                   
gross value  at the point of  production of oil and  gas from                                                                   
all  leases   or  properties   in  the   State,  less   lease                                                                   
expenditures as adjusted and 1/72  of transitional investment                                                                   
2:51:59 PM                                                                                                                    
Representative  Kelly referred  to  the 5%  royalty rate  and                                                                   
asked what happened  to the 12.5%, indicated on Page  7.  Mr.                                                                   
Mintz   explained  that   12.5%  was   the  typical   royalty                                                                   
percentage, which  represents the  share production  that the                                                                   
royalty owner (lessor) is entitled to.                                                                                          
Mr.  Dickinson  clarified that  the  royalty  rates were  not                                                                   
being changed;  there would be a  royalty in the lease.   The                                                                   
point made is the private royalty  share, which the committee                                                                   
substitute  places a  5% tax.   He  noted that  the 5%  would                                                                   
apply to the landowner.  On the  piece of the private royalty                                                                   
share, a  separate tax would be  placed upon that at  a lower                                                                   
rate, to  acknowledge the fact  that the royalty  owner would                                                                   
not be sharing net costs allowed in the bill.                                                                                   
Representative  Weyhrauch noted  Section 21  of the  original                                                                   
bill, pointing  out that  the language  indicates all  leases                                                                   
from producers  in  the State.   He asked  if that  literally                                                                   
meant  "all".    Mr.  Mintz responded  it  was  meant  for  a                                                                   
particular producer.   He pointed  out that on Page  18, Line                                                                   
17 of  the committee  substitute addresses  that.   There are                                                                   
leases on properties in the State.   Representative Weyhrauch                                                                   
worried about the ambiguity of  that language.  Mr. Dickinson                                                                   
pointed  out that  language has  been in statute  for a  long                                                                   
time and is not the issue.                                                                                                      
2:56:38 PM                                                                                                                    
Mr. Mintz  stated that Page  9, Section 28, AS  43.55.160(a),                                                                   
production tax value  is the total of the gross  value at the                                                                   
point  of  production of  oil  and  gas  from all  leases  or                                                                   
properties in  the State, less [progressively  taxes on gross                                                                   
value] and less lease expenditures.                                                                                             
2:57:42 PM                                                                                                                    
Mr.  Mintz highlighted  Page  10, Sections  31  [HB 488]  and                                                                   
Section  34, (RES),  AS  43.55.900(7),  "gross  value at  the                                                                   
point of production"  means, for oil, the value  at the meter                                                                   
in pipeline quality; for gas,  the value where metered [after                                                                   
any separation or gas processing].                                                                                              
2:59:03 PM                                                                                                                    
Page  11,  AS  43.55.150(a),  gross value  at  the  point  of                                                                   
production  is  calculated  using  the  reasonable  costs  of                                                                   
transportation.   Most oil is  transported to the  West Coast                                                                   
and includes the cost of transportation.                                                                                        
3:00:06 PM                                                                                                                    
Mr.   Mintz  referenced   Page  12,   AS  43.55.150(d),   the                                                                   
Department  may allow  gross value  [to  be calculated  based                                                                   
upon] a royalty  settlement agreement or a  formula that uses                                                                   
[DNR or the  U.S. Department of Interior]  royalty, valuation                                                                   
or another formula that reasonably estimates a value.                                                                           
3:01:33 PM                                                                                                                    
Page 13,  Section 21, AS  43.55.160©, lease expenditures  are                                                                   
the total  costs upstream  of the point  of production  on or                                                                   
after  July  1,  2006,  that are  the  direct,  ordinary  and                                                                   
necessary  costs of  exploring for,  developing or  producing                                                                   
oil or gas deposits located in the State.                                                                                       
3:02:18 PM                                                                                                                    
Mr.  Mintz  pointed   out  that  Page  14,   Section  28,  AS                                                                   
43.5.160©,  the   lease  expenditure  are  the   total  costs                                                                   
upstream of  the point of production  on or after  January 1,                                                                   
2006, that  are the direct,  ordinary and necessary  costs of                                                                   
exploring  for developing  or producing  oil or gas  deposits                                                                   
located in the State.                                                                                                           
Mr. Dickinson  interjected that the Administration  addresses                                                                   
that differently  from Representative Samuels.   He noted the                                                                   
transitional  investment expenditures  for five years,  which                                                                   
was  entirely  removed.    There  was  a  separate  amendment                                                                   
regarding the taxation date.                                                                                                    
3:03:59 PM                                                                                                                    
Mr. Mintz  noted a question in  HRC regarding if  those terms                                                                   
were defined.   The producer can add on the  cost anywhere in                                                                   
the State.  The costs of exploration  and development are all                                                                   
combined.  It  is not necessary to distinguish  between those                                                                   
stages.   He added  that there  are a  few minor  exceptions.                                                                   
The  term direct,  ordinary and  necessary  are addressed  on                                                                   
Page 15.                                                                                                                        
3:05:20 PM                                                                                                                    
Page  15, AS  43.55.160©,  Section  21/28, explains  that  in                                                                   
determining  direct,   ordinary  and  necessary   costs,  the                                                                   
Department shall give substantial  weight to typical industry                                                                   
practices  and  standards as  to  billable costs  under  unit                                                                   
operating agreements and the Department  of Natural Resources                                                                   
net profits share lease regulations.                                                                                            
3:06:42 PM                                                                                                                    
Mr.   Mintz    referenced   Page    16,   Section    28,   AS                                                                   
43.55.160(j)(2),  and that  the committee  substitute adds  a                                                                   
definition of "ordinary and necessary"  to make it clear that                                                                   
Internal Revenue Code (IRC) meaning is adopted.                                                                                 
3:07:04 PM                                                                                                                    
Mr.  Mintz noted  that Page  17, Section  28, AS  43.55.160©,                                                                   
continues  language  that  the   lease  expenditures  do  not                                                                   
include catastrophic oil discharge expenses or damages.                                                                         
3:07:31 PM                                                                                                                    
Page 18,  AS 43.55.160(d) provides  specific examples  of and                                                                   
exclusions  from "direct  costs".   The committee  substitute                                                                   
has several improvements recommended by the Administration:                                                                     
   ·    (d)(1)(A) and (d)(2)(A), clarifying treatment of                                                                        
        capitalized expenditures                                                                                                
   ·    (d)(2)(L), ensuring that conservation surcharges are                                                                    
        not deductible                                                                                                          
Page  19,  AS 43.55.160(e)  -  [Lease  expenditures  must  be                                                                   
adjusted by subtracting payments the producer receives for:                                                                     
   (1) Another's use of a production facility;                                                                                  
   (2) Reimbursement, e.g. field costs paid by State, that                                                                      
        offset lease expenditures; and                                                                                          
   (3) Sale of assets acquired through lease expenditures                                                                       
        or of non-taxable oil or gas used in lease                                                                              
3:10:14 PM                                                                                                                    
Mr. Mintz  referenced Page 20,  Section 28, AS  43.55.160(a),                                                                   
(b)(2),   and   (e).     At   the   recommendation   of   the                                                                   
Administration, the committee  substitute addressed potential                                                                   
timing mismatches  between lease expenditures  and adjustment                                                                   
that would be  recognized even if a producer  or explorer has                                                                   
no  production or  has low  lease expenditures,  and when  an                                                                   
adjustment payment is received.                                                                                                 
Representative Hawker  inquired who had identified  the issue                                                                   
on Page  20.  Mr.  Mintz believed it  was an internal  catch.                                                                   
Representative  Hawker  recommended  it  would be  easier  to                                                                   
understand if a separate section  addressed mis-matches.  Mr.                                                                   
Dickinson replied  that could be considered,  acknowledged it                                                                   
would add important clarification.                                                                                              
3:14:54 PM                                                                                                                    
ROBYNN  WILSON,  DIRECTOR,  DIVISION OF  TAX,  DEPARTMENT  OF                                                                   
REVENUE, acknowledged that was  a long section.  She deferred                                                                   
to the Department of Law attorneys.                                                                                             
3:15:45 PM                                                                                                                    
Mr.  Mintz  referenced   Pages  21  &  22,   Section  21,  AS                                                                   
43.55.160(g)&(i),   regarding  the  transitional   investment                                                                   
expenditures  being capital  expenditures  less  the sale  of                                                                   
assets  acquired  as  a  result of  those  expenditures.    A                                                                   
producer  that  is qualified  may  reduce  the net  value  by                                                                   
deducting an  allowance.  The  total of the allowance  during                                                                   
the calendar  year does not exceed  $73 million dollars.   An                                                                   
unused allowance may not be carried forward.                                                                                    
3:16:44 PM                                                                                                                    
Page 23, AS 43.55.020(a), the  tax levied under AS 43.55.011,                                                                   
net of any credits  applied under that chapter, is  due.  The                                                                   
tax levied  under AS 43.55.0119(a),  net any credits  applied                                                                   
under that chapter are due.                                                                                                     
Mr. Mintz  continued Page 24,  explains that a  producer that                                                                   
incurs a  qualified capital expenditure  may elect to  take a                                                                   
tax credit in the amount of 20% of that expenditure.                                                                            
3:18:39 PM                                                                                                                    
Mr. Mintz identified the types of credits found on Page 25:                                                                     
   · Qualified capital expenditure - a lease expenditure for                                                                    
     G&G exploration, intangible drilling costs and other                                                                       
     expenditures capitalized under IRC; and                                                                                    
   · Does not include purchase of a previously acquired or                                                                      
     used asset.                                                                                                                
3:20:40 PM                                                                                                                    
Page 26, Section  14, AS 43.55.024(i)(2),  "qualified capital                                                                   
expenditure" does not include  an expenditure incurred for an                                                                   
extended   period  of  disuse,   dismantlement,  removal   or                                                                   
abandonment or for the restoration of a lease, field, etc.                                                                      
Representative  Hawker   asked  if  that  would   provide  an                                                                   
adequate "comfort  zone"; he worried  it might be  too broad.                                                                   
Mr. Dickinson  replied they were receptive to  any additional                                                                   
thoughts.    Traditionally,  the  individuals  regulated  are                                                                   
usually three  years behind.   The Senate is  looking closely                                                                   
at that also.                                                                                                                   
Representative  Hawker pointed out  the amount of  regulatory                                                                   
authority needed  and was concerned with about  the amount of                                                                   
time essential to create regulations.                                                                                           
3:23:32 PM                                                                                                                    
Ms. Wilson  pointed out  that the  bill specifically  address                                                                   
asset credits i.e. capitalization.   She noted on that issue,                                                                   
the Department believes  that to the extend  the ordinary and                                                                   
necessary, if there are transactions  occurring that generate                                                                   
a price  over fair  market value, it  would not be  ordinary,                                                                   
necessary  or  direct.    She  agreed  that  there  could  be                                                                   
language added to tighten it.                                                                                                   
3:24:53 PM                                                                                                                    
Mr. Mintz advised,  there is a need for  extensive regulation                                                                   
implementation.   One of the provisions of  the bill provides                                                                   
authority   to  the   Department   of  Revenue   to   provide                                                                   
retroactive  regulations.    Representative   Hawker  worried                                                                   
about "retroactive regulations".                                                                                                
Representative  Weyhrauch inquired  if the Legislature  would                                                                   
have to  authorize retroactive  regulations by statute.   Mr.                                                                   
Mintz   said  it  is   important  for   the  Legislature   to                                                                   
specifically authorize  that.  The Administrative  Procedures                                                                   
Act recognizes two types of regulations:                                                                                        
   ·    Legislative regulations and                                                                                             
   ·    Interpretative regulations.                                                                                             
3:27:49 PM                                                                                                                    
Mr.  Mintz  highlighted  Page   27,  AS  43.55.024(b),  which                                                                   
addresses that a  producer may elect to take a  tax credit of                                                                   
20% of a carried-forward annual  loss, which is the amount of                                                                   
a  previous   year's   lease  expenditures   that  were   not                                                                   
deductible because  they would have reduced the  net value of                                                                   
the oil and gas below zero.                                                                                                     
Mr. Mintz explained  that on Page 28, a producer  entitled to                                                                   
a tax credit might  apply to the Department of  Revenue for a                                                                   
transferable  tax  credit  certificate.    Once  issued,  the                                                                   
certificate may be used for its  face value, but a transferee                                                                   
may not apply  for a certificate to reduce  its tax liability                                                                   
by more than 20% during a calendar year.                                                                                        
3:32:10 PM                                                                                                                    
Representative  Hawker  inquired  if  the intent  was  to  be                                                                   
limited to  producers only.   He  thought that the  explorers                                                                   
should  be included  in the  provisions.   Mr. Mintz  replied                                                                   
that was  correct and true  in the original  bill.   It would                                                                   
only matter to an explorer that is not also a producer.                                                                         
Representative Hawker  pointed out that it is  language found                                                                   
in the original bill, not the committee substitute.                                                                             
Ms. Wilson informed  members that there are two  parts of the                                                                   
bill  indicating  purposes  of   that  section  and  that  an                                                                   
"explorer"  is considered a  producer.   It is already  taken                                                                   
care of.                                                                                                                        
3:36:57 PM                                                                                                                    
Mr. Mintz referred  to Page 29, Section 14,  AS 43.55.024(f),                                                                   
the Department  of Revenue  shall issue a  cash refund  for a                                                                   
transferable tax credit certificate if:                                                                                         
   · Producer's total refunds in calendar year do not exceed                                                                    
     $10 million dollars;                                                                                                       
   · Producer invests or buys an oil and gas lease for at                                                                       
     least the amount of the refund;                                                                                            
   · Producer owes no delinquent taxes.                                                                                         
Mr.  Mintz  explained  Page 30,  Section  28,  AS  43.55.170-                                                                   
Additional  nontransferable  credits.    Up  to  $12  million                                                                   
dollars in  a calendar year may  be taken as a tax  credit if                                                                   
taken  under   AS  43.55.024   or  43.55.025  for   the  same                                                                   
   ·    Unused credit may not be carried forward or                                                                             
   ·    The provision expires April 1, 2016                                                                                     
3:40:24 PM                                                                                                                    
Representative  Weyhrauch  referenced  Page 29,  Section  14,                                                                   
regarding issuance  of the tax credit by the  Department.  He                                                                   
asked if the intent was that no  credit be paid if it were in                                                                   
dispute.    Mr.  Mintz  replied  that  would  depend  on  the                                                                   
definition  of  "delinquent".     He  offered  to  check  the                                                                   
Mr. Dickinson  added that  the policy  call requested  by the                                                                   
Department is if  there is an amount legally  owed, no checks                                                                   
would be issued until it was resolved.                                                                                          
Representative  Hawker followed  up regarding provisions  for                                                                   
refunding the  credit; he wondered  about the  terminology of                                                                   
an  investigative  audit.   He  questioned if  accepting  the                                                                   
audit would compromise  the State's ability to  provide other                                                                   
3:43:54 PM                                                                                                                    
Ms.  Wilson   mentioned  the  production  audits   the  State                                                                   
provides.    Mr. Dickinson  added  if  there was  an  ongoing                                                                   
income tax audit, a person would  not hold up the issuance or                                                                   
refunding of a credit if there was no delinquency.                                                                              
Representative  Hawker  asked  if  the State  had  the  human                                                                   
resources  to actually  investigate the  claims.  Ms.  Wilson                                                                   
affirmed  that  the  fiscal  note  would  provide  sufficient                                                                   
Mr. Mintz added  that the State is not precluded  from future                                                                   
audits as long as the statute  of limitation has not run out.                                                                   
3:45:45 PM                                                                                                                    
Mr.  Mintz pointed  out that  Page 31,  AS 43.55.170(b),  the                                                                   
producer's qualification  for the additional  nontransferable                                                                   
credit.  It  is an anti-splitting provision  to prevent abuse                                                                   
of  the  $12 million  dollar  per  producer  credit.   It  is                                                                   
essential  that  the  same  anti-splitting  provision  is  in                                                                   
Section 21 of  the original bill, for the $73  million dollar                                                                   
per producer allowance.                                                                                                         
3:48:01 PM                                                                                                                    
Page 32 - the original bill allowed  a credit to be taken for                                                                   
conservation surcharge payments  and the committee substitute                                                                   
does  not, but  reduces Section  201 surcharge  from $.02  to                                                                   
$.01  per barrel  and increases  Section  300 surcharge  from                                                                   
$.03 to $.04 per barrel.                                                                                                        
3:49:30 PM                                                                                                                    
Mr.  Mintz  discussed   Page  34,  Section  7,   90%  of  the                                                                   
production  tax,  net  credits,  is  due  each  month.    The                                                                   
remainder is due March 31 of the next calendar year.                                                                            
Mr. Mintz  observed that  100% of  the total production  tax,                                                                   
net credits are due each month.   Payment of less than 90% of                                                                   
the total  tax due  triggers an automatic  5% penalty  on the                                                                   
3:51:31 PM                                                                                                                    
Representative  Weyhrauch  referred  to Page  35,  addressing                                                                   
payment  of less  than 90%  without  facing a  penalty.   Mr.                                                                   
Mintz  stated  that  anytime there  is  an  underpayment,  it                                                                   
automatically triggers an interest obligation.                                                                                  
3:52:57 PM                                                                                                                    
Representative   Hawker  clarified   that  in  the   original                                                                   
version,  every month,  90% of  the estimated  amount of  the                                                                   
obligation would be  paid; the last 10% would be  paid at the                                                                   
end of the calendar  year and that the final  report would be                                                                   
due on March 31.  Ms. Wilson agreed.                                                                                            
Representative  Hawker  said that  the  committee  substitute                                                                   
indicates   they  would   pay  every   month,  100%   of  the                                                                   
obligation.  He mentioned the penalty provision.                                                                                
3:55:33 PM                                                                                                                    
Ms. Wilson  agreed, pointing  out the  offset; she  requested                                                                   
that Mr. Mintz add further clarification.                                                                                       
3:55:53 PM                                                                                                                    
Representative Hawker reiterated  his concerns, noting he was                                                                   
worried  that  it would  require  the  State  to audit  on  a                                                                   
monthly cycle.   Ms.  Wilson understood  that there  would be                                                                   
monthly returns and  when an audit occurs for  the production                                                                   
tax, that information is considered  discrete and the returns                                                                   
are audited monthly.                                                                                                            
Mr. Dickinson  stated that the production tax  currently does                                                                   
not have  a 90%  repay; it  is due  monthly.   Representative                                                                   
Hawker commented that is a policy call.                                                                                         
3:57:52 PM                                                                                                                    
Representative Holm  asked why the interest rate  was tied to                                                                   
a fixed  number; in  normal circumstances,  it  is prime  + a                                                                   
number.   Mr. Dickinson replied that  they do that and  add a                                                                   
floor of  11%; interest rates  in the early '80's  were above                                                                   
11%, the  federal discount  rate number  used, San  Francisco                                                                   
plus 5%.                                                                                                                        
3:59:05 PM                                                                                                                    
Mr.  Mintz  referenced  "safe-harbors"  providing  a  monthly                                                                   
calculation  and tax and  has the  option of annualizing  the                                                                   
lease expenditures  over the course of a calendar  year.  The                                                                   
language provides the option of  deducting 1/12 of the annual                                                                   
expenditures versus the monthly expenditure.                                                                                    
4:00:31 PM                                                                                                                    
Mr. Mintz  referenced  Page 36, which  addresses the  royalty                                                                   
share.   The producer may deduct  from royalty the  amount of                                                                   
the tax paid on taxable royalty oil and gas.                                                                                    
   · The original bill provides a default formula for                                                                           
     allocating the 20% tax on net value to the royalty                                                                         
   · The committee substitute provides a slightly different                                                                     
     formula for allocating the 20% tax on net value to the                                                                     
     non-lesser royalty share.                                                                                                  
Mr. Mintz informed members that  the remainder of the handout                                                                   
illustrates   the  steps   used   in  determining   the   tax                                                                   
4:03:22 PM                                                                                                                    
He continued,  Page 38, AS 43.55.150, AS  43.55.900, itemizes                                                                   
the gross  value of  oil in the  State.   Oil should  be kept                                                                   
separate from gas.   The numbers provide the  total statewide                                                                   
gross value of producer's oil.                                                                                                  
4:04:09 PM                                                                                                                    
Page 39,  AS 43.55.150,  AS 43.55.900,  highlights the  gross                                                                   
value of total gas statewide, value of producer's gas.                                                                          
Page 40, AS  43.55.150, AS 43.55.900, provides  a calculation                                                                   
of the  gross value of  oil and gas  and the total  statewide                                                                   
gross value of producer's oil and gas.                                                                                          
Page   41,   AS   43.55.160(b)-(f)   highlights   the   lease                                                                   
expenditures, which provide the:                                                                                                
   ·    Exploration, development & production costs                                                                             
   ·    Adjusted lease expenditures                                                                                             
   ·    Deductible lease expenditures                                                                                           
Mr. Mintz continued,  Page 42, AS 43.55.160(a),  provides the                                                                   
production tax value  including the total gross  value of oil                                                                   
and gas  leading to the production  tax value of oil  and gas                                                                   
including the progressive  rate tax on gross  value and lease                                                                   
4:06:29 PM                                                                                                                    
Page 43,  AS 43.55.170,  highlights Nontransferable  Credits,                                                                   
including qualified producer,  qualified capital expenditures                                                                   
with credit amounts, and credit up to $12 million dollars.                                                                      
Mr. Mintz  continued, Page 44,  Section 024, Tax  Credits, AS                                                                   
43.55.024(a)&(b)  highlights excess  lease expenditures  in a                                                                   
calendar  year  carried  forward,  the  annual  loss  credit,                                                                   
qualified  capital expenditures,  and  the qualified  capital                                                                   
expenditure credit.                                                                                                             
4:08:41 PM                                                                                                                    
Page   45,    Transferable   Tax-credit   Certificates,    AS                                                                   
43.55.024(d)-(g).   The  page summarizes  the producer's  tax                                                                   
credit application to the Department  of Revenue and approval                                                                   
from that Department, leading  to the transferable tax credit                                                                   
4:09:32 PM                                                                                                                    
Mr.  Mintz  pointed   out  Page  46,  Tax   Calculations,  AS                                                                   
43.55.011(a),  43.55.024, 43.55.025,  and  43.55.170.   These                                                                   
sections indicate production tax  value of oil and gas at the                                                                   
20% tax  before credit,  minus the  producer's own  credit by                                                                   
subtracting up  to 20% of the  remainder of the tax  and then                                                                   
determining the payable tax.                                                                                                    
4:10:45 PM                                                                                                                    
Page  47, Tax  Calculations, AS  43.55.011(f)-(h)  highlights                                                                   
the chart  providing the additional  taxes payable.   The tax                                                                   
is deductible from the gross value.                                                                                             
Page 48, Tax  Calculation, as 43.55.011(i)-(k),  demonstrates                                                                   
the  same  calculation   for  the  tax  rate   based  on  the                                                                   
percentage index providing the tax payable.                                                                                     
Page  49, Tax  Calculation, AS  43.55.011(e),  speaks to  the                                                                   
gross  value  at the  point  of  production of  the  lessor's                                                                   
royalty share of  oil and gas multiplied by  5%, creating the                                                                   
tax payable.                                                                                                                    
Mr. Mintz  concluded with  the presentation, addressing  Page                                                                   
50, Tax Payment, AS 43.55.020(a), (g), and (h).                                                                                 
   · (a)-Tax payable under AS  43.55.011(a)                                                                                     
   · (e)-Tax payable under AS  43.55.011(e)                                                                                     
   · (f)-Tax payable under AS  43.55.011(f)                                                                                     
   · (i)-Tax payable under AS  43.55.011(i)                                                                                     
   · This total would be due at the end of the following                                                                        
4:13:36 PM                                                                                                                    
Co-Chair Chenault  referenced Page 48 and asked  how that tax                                                                   
rate  would  apply to  Cook  Inlet.    Mr. Mintz  replied  it                                                                   
applies to the total statewide  gross value of the producer's                                                                   
gas, including Cook Inlet.                                                                                                      
Mr. Dickinson  noted that Cook  Inlet prices are  usually not                                                                   
as high as  the Henry Hub area.   There is only  one contract                                                                   
tied to  it.  He thought  that the averages fell  below Henry                                                                   
Hub.   The  point  is  that it  applies  to the  lower  price                                                                   
contracts  even if  they are  triggered by  payment, then  it                                                                   
would apply on the gross value.                                                                                                 
4:15:56 PM                                                                                                                    
Representative  Holm asked if  the 5% penalty  was compounded                                                                   
annually.  Ms. Wilson explained,  it is a "one time penalty",                                                                   
specific to  that month.   The general penalty  provisions do                                                                   
apply but does have an offset.                                                                                                  
4:16:37 PM                                                                                                                    
Ms.  Wilson reviewed  the  fiscal note  dated  3/25/06.   She                                                                   
referenced  Page 3 of  the note,  which provides three  price                                                                   
assumptions, the  first based on the Department  of Revenue's                                                                   
forecast.   The second  was based  on a  medium price  of $40                                                                   
dollars  per  barrel;  the  third,  based  on  a  high  price                                                                   
scenario  @ $60  dollars per  barrel.   Modeling  corrections                                                                   
have been  made to the original  fiscal note,  which indicate                                                                   
the recalculation  of  effects of the  corporate income  tax.                                                                   
That information  is separately  shown in columns  4 &  5, on                                                                   
Page 3.                                                                                                                         
Ms. Wilson  continued, Page 4  of the fiscal  note, indicates                                                                   
the spring forecast  of production and price.   Columns 6, 7,                                                                   
and 8  apply the  spring forecast.   The  last three  columns                                                                   
show all changes made to the proposed committee substitute.                                                                     
4:20:12 PM                                                                                                                    
A detail analysis and assumptions  are explained on Page 2 of                                                                   
the  fiscal note.    Overall,  the Department  is  requesting                                                                   
three auditor positions with a  net increase of six auditors.                                                                   
In  addition,  the  contractual  expenses  are  included  for                                                                   
writing the regulations, with numbers summarized on Page 1.                                                                     
4:22:22 PM                                                                                                                    
Co-Chair Chenault  inquired if  the three unfilled  requested                                                                   
positions were  current departmental  positions.   Ms. Wilson                                                                   
explained there would be three new auditor positions added.                                                                     
4:23:01 PM                                                                                                                    
Representative Joule  asked if the three new  requested audit                                                                   
positions would give a total of  six for the Department.  Ms.                                                                   
Wilson  stated  that  currently,  the  Department  has  three                                                                   
vacant  positions and  if  the bill  passes,  those would  be                                                                   
filled, with  the addition of  the three vacant  positions, a                                                                   
total new hire of six positions.                                                                                                
4:23:55 PM                                                                                                                    
Representative   Joule  inquired   if   the  fiscal   request                                                                   
represented  the  number  of auditors  needed.    Ms.  Wilson                                                                   
replied it  was part of the  request and that passage  of the                                                                   
legislation   clearly    requires   new   audit    positions.                                                                   
Representative  Joule  questioned  the Department  about  the                                                                   
auditing  procedures  for these  companies.    He thought  it                                                                   
would not be good "self-policing".                                                                                              
Mr. Dickinson commented that the  Department has attempted to                                                                   
establish  a standard,  regarding  as long  as the  operating                                                                   
agreements do not  change, there will be cost  obligations to                                                                   
address  those  concerns and  the  State is  obligated  under                                                                   
statute to do just that.                                                                                                        
4:26:31 PM                                                                                                                    
Representative Kelly agreed with Representative Joule.                                                                          
4:27:02 PM                                                                                                                    
Co-Chair Chenault questioned if  the three unfilled positions                                                                   
had been  funded positions  for the  Department.  Ms.  Wilson                                                                   
responded they were funded positions.                                                                                           
4:27:44 PM                                                                                                                    
Representative Hawker advised  that there is a bill currently                                                                   
in  the  House   Finance  Committee  addressing   funding  of                                                                   
unfilled positions.  He added  that the salary ranges for the                                                                   
State's  audit  positions are  not  competitive.   The  State                                                                   
needs  to put out  a competitive  salary; he  urged that  the                                                                   
Legislature "step up to the plate"  to address such concerns.                                                                   
Co-Chair  Chenault commented  that the  State could  get some                                                                   
auditors cheaper.                                                                                                               
4:28:50 PM                                                                                                                    
HB 488 was HELD in Committee for further consideration.                                                                         

Document Name Date/Time Subjects