Legislature(1997 - 1998)
04/23/1998 10:04 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 440 - OIL & GAS AUDITS/INCENTIVE CREDITS CHAIRMAN HODGINS stated that the committee would hear HB 440, "An Act relating to certain audits regarding oil and gas royalty and net profits and to audits regarding costs relating to exploration incentive credits and oil and gas exploration licenses; and providing for an effective date." Number 0046 WILSON CONDON, Commissioner, Department of Revenue, stated that HB 440 would move the royalty audit function from Department of Revenue back to the Department of Natural Resources. He stated that it was there until 1980 when it was moved to the Department of Revenue. He stated that the rationale for putting the audit responsibility in the Department of Revenue was because they were also auditing the production tax and both the royalty and production tax are calculated on the basis of a net back calculation. It was recommended by the legislative auditor that those functions be combined. Since that time, the royalty obligation and the production tax have headed in somewhat different directions. He stated that the royalty obligation is a product of a contract and it requires contract administration and enforcement to deal with the royalty obligation. He stated that on the other hand, taxation is the exercise by the state through the legislature of the sovereign power of taxation and it goes about enforcing a tax obligation in a somewhat different way then dealing with a partner in a contract. The long litigation with respect to the royalty obligation, led to a set of settlement agreements which use a different approach then what is used in the tax arena for determining the value of oil for royalty purposes as opposed to tax purposes. The royalty obligation is one of the important elements of contract administration from the Department of Natural Resources and they believe it is important for the responsibility of all the elements of contract enforcement to be put under the umbrella of the contract administrator or the Commissioner of Natural Resources. Number 0423 CHAIRMAN HODGINS stated that it shows there would be a negative fiscal note. Number 0488 COMMISSIONER CONDON stated that is a matter that he just learned about and he is sure that between the Department of Revenue and the Department of Natural Resources, a set of arrangements can be made to make it a zero fiscal note. He stated that he cannot do that today but pledges that is what they will do. They will find a way to take care of the $31,000. Number 0506 REPRESENTATIVE SCOTT OGAN stated that the bill is more than a transfer. It is a change of policy from "the Department of Revenue shall order reports" to the "Department may conduct audits". He stated that he sees this as a major policy shift and not just to simple transfer functions. He asked if that is a good policy call. Number 0705 COMMISSIONER CONDON replied that they believe they have interpreted the statute correctly. The Department of Revenue conducts audits when Department of Natural Resources asks them to do so. He stated that they have interpreted the "shall" to mean that they will do it if asked to do so. He stated that in terms of the way the department has applied this statute is that they have conducted the audits when the Department of Natural Resources believed they wanted to have one. Currently, the way audits work, is the Department of Natural Resources asks the Department of Revenue to do an audit and there are three different areas that they do audits in; regular production tax obligation, exploration and incentive credits and profit share leases. In the determination of regular royalty obligation it is just an audit of the net back from the disposition point to the point of production and the application of the terms in the lease. He stated that in respect to the exploration incentive credit he is not fully familiar with those audits. He stated that with the profit share lease not only do they do net back audit but also the upstream expenses to determine the profit. Once an audit is completed, it is sent to the royalty accounting and auditing group in the Department of Natural Resources which has its own audit staff. He stated that the audit staff looks at the audit and they make a judgement on whether they have correctly applied the interpretive policies that they have made with respect to terms of the lease. The Department of Natural Resources in turn deals with the lessee. Number 1041 COMMISSIONER CONDON stated that this bill would change all of that as it would put the responsibility solely on the auditors in the Department of Natural Resources instead of two groups of auditors passing audits back and forth. Number 1106 REPRESENTATIVE OGAN asked if this bill reflects the settlement agreement. Number 1136 COMMISSIONER CONDON stated that there are three settlement agreements that govern North Slope oil production. They are ARCO, B.P. and Exxon and each of them uses a slightly different approach to calculate a definition value for North Slope oil and each of them uses a slightly different approach for the marine transportation element. He stated that the other North Slope producers have either picked one of those settlement agreements to calculate their royalty obligation. He stated that each of the settlement agreements are different and are public records. Number 1322 REPRESENTATIVE OGAN stated that the settlement agreements are probably laborious to read and he asked if there was a way that he could provide an executive summary of them. He asked if this legislation reflects part of what is in that settlement agreement. Number 1343 COMMISSIONER CONDON stated that this legislation does not reflect what is in the settlement agreement. The settlement agreement and the approach they represent, makes this legislation a good idea because what is done to come up with a value under the royalty settlement agreement "is not -- it is certainly figuring out a destination value and a set of transportation charges but the elements that go in the calculation are different and so you do not get a material benefit of having the same auditors dealing with the royalty settlements and the tax, as was once believed would be the case." He stated that there is the inefficiency of having the Department of Revenue doing these audits and the law is such that a certain amount of information is not disclosed to the Department of Natural Resources who has the obligation to deal with the lessee and enforcing the obligation. He stated that it makes sense to put it all under the Department of Natural Resources to give them the authority to get whatever information they need to do their job. Number 1545 REPRESENTATIVE CON BUNDE stated it sounds like there are two competing ideas. One can be described as checks and balances with the two departments and the other is stream lining and efficiency. He asked why in 1980 was there a legislative audit that got "us" to the checks and balances position. He said, "Maybe you can help me understand why we should come back." Number 1568 COMMISSIONER CONDON replied that there are many historical reasons why this happened. He stated that he started working in this area in 1972 and had the responsibility of dealing with the litigation that dealt with both taxes and royalties in one lawsuit in respect to the Cook Inlet production that began in the end of 1965. He stated the litigation continued to the end of 1975 and then was settled. He stated that he was an early advocate as a consequence of his responsibility to the Department of Law at the time of combining royalty and production tax administration. He stated that before he came to work for the state in 1967, the state had attempted to combine the administration of royalty and production tax and actually place that responsibility in the Department of Natural Resources. He stated that it did not work, he advocated combining tax and royalty. He said "You can combine that with the fact that people in the Department of Revenue were as we all are from time to time, in bureaucracies imperialistic, though it would be a great thing to combine these. So you would have a combination of some eager lawyers who think they know the right answer together with some bureaucratic imperialists talking to a legislative auditor about what they think might work and low and behold they were able to convince the auditor that this is a great idea and the auditor put it in the audit report and the legislature generally believes what its auditor tells them and so that is how the responsibility got put in the Department of Revenue." He stated that he has learned what happens when there are two different organizations that have to pass things back and forth. He stated that he does not believe that there is that much to be gained in checks and balances rather an awful lot is lost in terms of accountability and efficiency. He stated that putting it under the responsibility of the Department of Natural Resources and eliminating the departments' ability to point fingers will bring about a better system. Number 2023 REPRESENTATIVE NORMAN ROKEBERG stated that the fiscal note from the Department of Revenue is very positive in the sense that it is lower then the Department of Natural Resources. He asked if anyone could talk to that. Number 2138 COMMISSIONER CONDON replied that Mr. Banks may be able to talk to that. He stated that the net of all the fiscal notes "is a minus two hundred and whatever from our department, the same amount going to DNR [Department of Natural Resources] and then another $31,000 that DNR has put as a net cost to this fiscal note." He stated that he was unaware that was the figure until last night and the two departments would figure out a way for this to be a net zero cost. Number 2203 REPRESENTATIVE ROKEBERG stated that it is clear that the bureaucratic imperialists have been at work here; something that is intended to remove duplicative services and be more efficient but is going to cost more money is very strange. Number 2219 COMMISSIONER CONDON replied, "I could not agree with you more and I pledge to fix that." Number 2246 KEVIN BANKS, Petroleum Market Analyst, Department of Natural Resources, stated that he can't say much except to say that he would like to see this happen and he would work with the Commissioner to make sure that the fiscal impact is what it should be. He stated that he would be happy to provide highlighted copies of the settlement agreement, especially the areas where they particularly affect the need for auditing. Number 2347 REPRESENTATIVE BUNDE made a motion to move HB 440, with the attached but soon to be revised fiscal note with individual recommendations. He stated that he would like to make the comment that if we seem suspicious it is because they are but they would appreciate the endeavor if it accomplishes what it says it will. Number 2443 CHAIRMAN HODGINS asked if there was an objection. Hearing none, HB 440 moved out of the House Oil and Gas Special Committee.
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