Legislature(2009 - 2010)
03/24/2010 02:12 PM House RES
| Audio | Topic |
|---|---|
| Start | |
| HB229 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 229-GAS EXPLORATION\DEVELOPMENT TAX CREDIT
2:14:11 PM
CO-CHAIR NEUMAN announced that the first order of business is
HOUSE BILL NO. 229, "An Act amending and extending the
exploration and development incentive tax credit under the
Alaska Net Income Tax Act for operators and working interest
owners directly engaged in the exploration for and development
of gas for delivery and sale from a lease or property in the
state; providing for an effective date by amending the effective
date for sec. 2, ch. 61, SLA 2003; and providing for an
effective date." [Before the committee was Version 26-LS0900\E,
Bullock, 2/18/10, adopted as a work draft on 3/15/10.]
2:14:25 PM
TOM WRIGHT, Staff, Representative Mike Chenault, Alaska State
Legislature, said the sponsor has prepared an amendment that
addresses Representative Seaton's concerns.
REPRESENTATIVE SEATON moved to adopt Amendment 5, labeled 26-
LS0900\E.5, Bullock, 3/23/10, written as followed [original
punctuation provided]:
Page 3, lines 17 - 24:
Delete all material.
Renumber the following bill sections accordingly.
Page 4, lines 12 - 13:
Delete ", topping plants, and processing units"
Insert "designed for field operations, gas
processing plants, and gas treatment plants, but not
including liquefied natural gas or manufacturing
plants [, TOPPING PLANTS, AND PROCESSING UNITS]"
Page 5, line 2:
Delete "sec. 8"
Insert "sec. 7"
CO-CHAIR NEUMAN objected for discussion purposes.
MR. WRIGHT explained that Amendment 5 would eliminate Section 4
because the language that was added at the end of this section
was unnecessary. Deletion of the language regarding topping
plants and processing units and the insertion of new language
clarifies what would and would not be available for this tax
credit, a change that is at the advice of Deputy Commissioner
Marcia Davis of the Department of Revenue.
2:17:49 PM
CO-CHAIR NEUMAN requested an explanation of the new language
that would be added by lines 8-9 of Amendment 5.
MARCIA DAVIS, Deputy Commissioner, Office of the Commissioner,
Department of Revenue, explained that topping plants would be
removed, in part, because it is incongruous to gas development
given that a topping plant refines crude oil into a product for
making diesel. Processing units is such a broad, generic term
that a concern was raised at the last hearing as to whether this
could include a liquefied natural gas (LNG) plant, which,
technically, it could. So, to address the concern that this
stay within the scope of the processing that would occur in
moving gas from the reservoir to the point of transport through
commercial gas lines, the department recommended using the terms
"gas processing" and "gas treatment" because they are already
defined in the tax code. Gas processing is everything that
happens from the well bore down and up and the typical gas
processing of pulling off gas liquids. Gas treatment is defined
as something above the point of production that is done to a gas
stream to remove carbon dioxide and water to make it marketable
and transportable in pipelines. The language, "but not
including liquefied natural gas or manufacturing plants", was
inserted to make it clear that an LNG plant or other
manufacturing plant would not be included in the list of
equipment that would qualify for this credit because that is all
downstream of gas treatment plants.
2:20:27 PM
CO-CHAIR NEUMAN requested an explanation of the term
manufacturing plant.
MS. DAVIS responded that the department included this term to
encompass such things as fertilizer plants. A manufacturing
plant is where gas molecules are modified into another format or
product, which is something that is clearly downstream of the
gas development and gas processing system.
CO-CHAIR NEUMAN surmised manufacturing plants would be added-
value processing facilities.
MS. DAVIS replied yes; that would be another way of
characterizing it in the sense that something additional was
done to the gas other than produce it, process it, and prepare
it for transport as gas.
2:21:35 PM
CO-CHAIR NEUMAN said he understands the inclusion of LNG plants
given the requirements of the Alaska Gasline Inducement Act
(AGIA). He proffered, however, that exploration and development
tax credits targeted toward manufacturing would enhance
exploration as well as added-value processing.
MS. DAVIS offered her understanding that HB 229 is designed to
facilitate and support gas discovery, gas development, and gas
production, while other bills pending before the legislature are
intended to encourage the value-added process, such as a
fertilizer plants or gas-to-liquids (GTL). She said it is the
committee's prerogative whether to broaden this bill.
2:23:17 PM
CO-CHAIR NEUMAN posited the committee must deal with the bills
that are before it because the fate of other bills is unknown.
He asked whether Ms. Davis would object to an amendment that
removes manufacturing plants from line 9 to Amendment 5 because
he feels it would be a great opportunity to spur exploration
which would also spur job creation in the state.
MS. DAVIS answered she is not in a position to reflect how the
administration would like to arrange the various bills, but the
department is willing to help and facilitate the will of the
body. If the will is to include manufacturing in HB 229, the
department would need to include that in its fiscal note and
would need to ensure the tax provisions function appropriately,
given the department would no longer be talking about a producer
because value-added processes would most likely be conducted by
third parties that buy the resource from producers.
CO-CHAIR NEUMAN said producers can own manufacturing plants.
REPRESENTATIVE OLSON pointed out that in the case of the Agrium
fertilizer plant and its predecessors, the producer was also the
owner of the plant.
2:25:58 PM
CO-CHAIR NEUMAN moved Amendment 1 to Amendment 5 to remove
"manufacturing plants" from line 9 of Amendment 5.
REPRESENTATIVE SEATON objected, saying that Amendment 5 is being
put forward to delineate where this production tax credit is
going to stimulate production. It would be inappropriate to
give a production tax credit on a manufacturing item because
that is downstream and could be either the producer or another
entity. He pointed out that "designed for field operations" is
also included in Amendment 5 because that is the same thing; a
gas producer could not receive credit for a power plant that
sells power to someone else. Use of the gas in field operations
is understandable because the electricity would be used for the
wells and in production, and it works into the definition of
property under a qualified capital investment.
2:28:45 PM
CO-CHAIR NEUMAN commented that he thinks it would be a great
thing to have electrical generation facilities in rural Alaska
be gas fired. Producers have been unable to sell the credits,
and the state needs to expand opportunities to do that because
right now the state is receiving nothing.
MS. DAVIS agreed it is appropriate for the legislature to find
ways to encourage and incentivize value-added industry in the
state. If the intent is to turn this into an upstream-type of
credit, then more needs to be done to the bill mechanically.
For example, Section 5 defines qualified capital investment,
which is the lead-in to the listing of the type of equipment.
One of the premises is that this equipment must be used in the
state for exploration and development of gas, and that is why
the focus has been on the field and the types of equipment and
processes that happen in the exploration and development phase
of gas development. Manufacturing cannot in any way be
considered part of exploration and development because it is
definitely post-production. Therefore, the language in
paragraph (1) of Section 5 would have to be changed so that the
Department of Revenue could administer something like this.
A roll call vote was taken. Representatives Olson and Neuman
voted in favor of Amendment 1 to Amendment 5. Representatives
Guttenberg, Kawasaki, Tuck, P. Wilson, Seaton, and Edgmon voted
against it. Therefore, Amendment 1 to Amendment 5 failed by a
vote of 2-6.
2:32:34 PM
REPRESENTATIVE SEATON inquired whether deleting Section 4 from
the bill would result in granting a "Cook Inlet provision" to
the entire state, including the North Slope.
MS. DAVIS explained that a previous amendment now contained in
the bill amends AS 43.20.043(f) by adding language. Amendment 5
would leave subsection AS 43.20.043(f) alone so it would read as
it currently reads and would contain the limitation that this
income tax credit does not apply to North Slope gas.
2:34:41 PM
REPRESENTATIVE SEATON moved Amendment 2 to Amendment 5 to delete
lines 1-2 of Amendment 5.
CO-CHAIR NEUMAN objected.
REPRESENTATIVE SEATON said removing Section 4 would allow this
credit to apply to the North Slope as well as Cook Inlet, which
was not his intent. He said he thinks the sponsor's intent is
that HB 229 specifically relate to south of the North Slope.
2:36:04 PM
MR. WRIGHT stated he reads the language differently, and that by
keeping AS 43.20.043(f) as currently written the North Slope
would not be included for the tax credit.
MS. DAVIS concurred with Mr. Wright. She explained that by
deleting Section 4 in its entirety, Version E would not amend AS
43.20.043(f) and (f) would remain as currently written so that
North Slope gas is excluded from the tax credit.
REPRESENTATIVE SEATON withdrew Amendment 2 to Amendment 5.
2:37:37 PM
REPRESENTATIVE TUCK asked whether the intent of the first two
lines of Amendment 5 is to delete all of Section 4, not just the
language proposed to be added to the end of AS 43.20.043(f).
MR. WRIGHT explained that Amendment 5 would eliminate Section 4
from the bill; it would not eliminate AS 43.20.043(f) and thus
that statute would remain in place. Given that the new language
on lines 22-24 of Version E are unnecessary, there is no need
for Section 4 to continue to be in the bill.
There being no objection, Amendment 5 was passed.
2:39:50 PM
CO-CHAIR NEUMAN urged members to submit proposed amendments to
the chair at least 24 hours prior to the meeting so members have
a chance to consider and understand them beforehand. He said
receiving substantial amendments at the start of a meeting, as
is happening today, creates difficulty for committee members.
REPRESENTATIVE SEATON pointed out that he himself only received
the amendment just before today's meeting. He moved to adopt
Amendment 6, labeled 26-LS0900\E.6, Bullock, 3/23/10, written as
follows [original punctuation provided]:
Page 3, following line 16:
Insert a new bill section to read:
"* Sec. 4. AS 43.20.043(e) is amended to read:
(e) A taxpayer entitled to a credit under this
section
(1) may not convey, assign, or transfer the
credit to another taxpayer or business entity unless
the conveyance, assignment, or transfer of the credit
is part of the conveyance, assignment, or transfer of
the taxpayer's business;
(2) forfeits the credit to which the
taxpayer is entitled during the tax year and any
carryover of it under (c) of this section, but does
not forfeit the portion of the credit that accrued in
a previous taxable year that may be carried over under
(c) of this section, if the taxpayer
(A) disposes of the qualified capital
investment;
(B) takes the qualified investment out of
service; or
(C) transfers the qualified investment out
of this state;
(3) may not include in any rate base for a
regulated facility submitted to a regulatory agency
charged with determining an appropriate tariff the
cost of any qualified capital investment or qualified
service that has been offset by receipt of a credit
under this chapter."
Renumber the following bill sections accordingly.
Page 5, line 2:
Delete "sec. 8"
Insert "sec. 9"
REPRESENTATIVE OLSON objected.
REPRESENTATIVE SEATON stated that Amendment 6 would provide that
the credit received from the state for a regulated facility or a
regulated transmission line would not go into the tariff base
that the consumer has to pay.
2:44:07 PM
CO-CHAIR NEUMAN inquired whether these transmission lines would
be downstream.
REPRESENTATIVE SEATON responded probably.
CO-CHAIR NEUMAN recounted that the committee just had a
discussion on whether to include downstream given that the bill
is for exploration credit.
MS. DAVIS said the gathering and transmission lines would be
part of exploration and development at the time that they are
being built and the credits requested. It is usually at a later
date, when adjacent fields begin to be developed, that parties
seek better economics by making arrangements to share
transmission and gathering lines that are solely owned by
someone else. At this juncture, the line owner would come to
the Regulatory Commission of Alaska (RCA) to seek common carrier
designation of the line and would advise the RCA of the building
costs. Any costs that were offset by the credit would not be
loaded into the base against which the tariff is derived.
2:46:16 PM
CO-CHAIR NEUMAN said the gas transferred through the lines would
be the gas that this credit applies to and the rest of it would
be downstream.
MS. DAVIS agreed that is correct for the construction costs
associated with building the gathering and transmission lines.
CO-CHAIR NEUMAN pointed out that earlier discussion was about
why downstream costs should not be included in the bill.
REPRESENTATIVE SEATON related that a sole-owner line on the
Kenai Peninsula will soon become a common carrier because the
owner is negotiating with other companies, and when this occurs
the RCA will regulate the line and put tariffs on it. So, the
question is whether at a later date, after the exploration
credits are applied, the credit received from the state for
building the line can be built into the tariff that customers
must pay. Amendment 6 would provide the same thing as under the
Alaska Gasline Inducement Act (AGIA), which is that any state
credits received by the owner cannot be built into the tariff.
2:48:08 PM
CO-CHAIR NEUMAN maintained his objection to Amendment 6.
MS. DAVIS, in response to Representative Guttenberg, explained
it is only the amount of cost that was offset by the tax credit
that cannot be loaded into the rate base. For example, if the
tax credit received was 25 percent and the total pipeline cost
was $1 million, then only $750,000 can be included in the rate
base for the tariff.
2:50:17 PM
REPRESENTATIVE P. WILSON understood Ms. Davis to be saying that
Amendment 6 would provide that the owner of a line that has
already received a credit could not add in the amount of the
credit.
MS. DAVIS answered correct.
MR. WRIGHT said the sponsor believes Amendment 6 is unnecessary
because this already cannot be done; once a tax credit has been
received it cannot be charged off at a later time.
REPRESENTATIVE SEATON added that when an entity is building a
gasline for its own use, it can receive the tax credit. If the
entity later wants to use the line as a regulated common
carrier, the question is whether that entity can submit the
total cost of the pipeline to the RCA or must exclude the amount
that the state paid. Amendment 6 would provide that the credit
cannot be included in the rate base, just as AGIA provides that
the $500 million paid by the state cannot be used for the rate
base of that pipeline. He said Amendment 6 is for clarity to
ensure there is no problem in the future.
2:52:40 PM
MS. DAVIS agreed that this language is contained in the Alaska
Gasline Inducement Act, as well as in HB 280 which relates to
gas storage. Therefore, including this language in HB 229 would
not violate what has been done in other bills. However, she
said she does not know whether the RCA would or would not allow
that credit to be reflected in the filing for the cost of
equipment for which the entity is seeking to set a tariff.
REPRESENTATIVE P. WILSON surmised Ms. Davis to be saying that
Amendment 6 would be okay.
MS. DAVIS responded yes, it would not do any harm and would
create clarity. She said she does not know whether the
amendment is absolutely necessary, but it does not do any harm
and is consistent with an existing statute and a proposed bill.
2:54:24 PM
CO-CHAIR NEUMAN maintained his objection.
A roll call vote was taken. Representatives Kawasaki, Tuck, P.
Wilson, Seaton, Edgmon, and Guttenberg voted in favor of
Amendment 6. Representatives Olson and Neuman voted against it.
Therefore, Amendment 6 passed by a vote of 6-2.
CO-CHAIR NEUMAN reiterated the importance of receiving proposed
amendments at least 24 hours in advance.
REPRESENTATIVE OLSON agreed, stating he has held up his own
bills when unable to do this.
REPRESENTATIVE SEATON responded that these were the questions he
raised in the previous hearing. While he could have proposed
the amendments as conceptual amendments in the previous hearing,
he had these amendments drafted by Legislative Legal and
Research Services.
CO-CHAIR NEUMAN again stressed the importance of providing
amendments ahead of time to ensure that members fully understand
what they do.
2:57:54 PM
REPRESENTATIVE SEATON moved to adopt Amendment 7, labeled 26-
LS0900\E.7, Bullock, 3/23/10, written as follows [original
punctuation provided]:
Page 3, following line 16:
Insert a new bill section to read:
"* Sec. 4. AS 43.20.043(e) is amended to read:
(e) A taxpayer entitled to a credit under this
section
(1) may not convey, assign, or transfer the
credit to another taxpayer or business entity unless
the conveyance, assignment, or transfer of the credit
is part of the conveyance, assignment, or transfer of
the taxpayer's business;
(2) forfeits the credit to which the
taxpayer is entitled during the tax year and any
carryover of it under (c) of this section, but does
not forfeit the portion of the credit that accrued in
a previous taxable year that may be carried over under
(c) of this section, if the taxpayer
(A) disposes of the qualified capital
investment;
(B) takes the qualified investment out of
service; or
(C) transfers the qualified investment out
of this state;
(3) shall submit to the Department of
Natural Resources all data that would be required to
be submitted under AS 43.55.025(f)(2) for a credit
under AS 43.55.025."
Renumber the following bill sections accordingly.
Page 5, line 2:
Delete "sec. 8"
Insert "sec. 9"
REPRESENTATIVE OLSON objected.
2:58:12 PM
REPRESENTATIVE SEATON said Amendment 7 would provide that if an
exploration credit is received the well data shall be made
available to the Department of Natural Resources (DNR), as is
the case across the rest of the state. He moved to adopt
[Conceptual] Amendment 1 to Amendment 7 to add "before applying
the credit against a tax liability under this chapter" after
"(3)". Thus, page 1, lines 16-17, of Amendment 7 would read:
(3) before applying the credit against a tax liability
under this chapter, shall submit to the Department of
Natural Resources all data that would be required to
be submitted under AS 43.55.025(f)(2) for a credit
under AS 43.55.025."
CO-CHAIR NEUMAN noted that a 3/24/2010 memorandum from Mr. Don
Bullock to Representative Seaton suggests Amendment 1 to
Amendment 7.
REPRESENTATIVE SEATON explained that the amendment he requested
from Legislative Legal and Research Services was that well data
be submitted before an entity took a tax credit. However, the
way Amendment 7 is currently written, it is unclear whether an
entity would have to submit the well data even for an expense
that could be allowable for a tax credit and this was not his
intent. His intent is only that the well data be submitted if
an entity applies for a tax credit. This way the state receives
something for the credit, which is the case for all of the
state's other exploration and development credits.
3:01:32 PM
REPRESENTATIVE P. WILSON suggested making Amendment 1 to
Amendment 7 conceptual because inserting this language right
after (3) does not make sense.
REPRESENTATIVE SEATON agreed to the suggestion. In response to
Co-Chair Neuman, he reiterated Conceptual Amendment 1 to
Amendment 7.
There being no objection, Conceptual Amendment 1 to Amendment 7
was passed.
3:03:57 PM
MR. WRIGHT stated that if Amendment 7 is passed then HB 229
might as well stay in the committee. The data that would be
required for submission is expensive to obtain and proprietary,
and therefore this amendment is a non-starter for the sponsor.
CO-CHAIR JOHNSON agreed that Amendment 7 is a deal-killer,
saying the intent of HB 229 is to incentivize exploration in a
very competitive market, and if an entity must open its books to
receive the state's help the data would become available to
competitors. He stressed his opposition to private companies
being forced to divulge their private information without
confidentiality.
3:05:32 PM
REPRESENTATIVE P. WILSON requested Ms. Davis to comment on
whether Amendment 7 would cause companies to not participate.
MS. DAVIS said the statutory reference in Amendment 7 is to the
exploration incentive credit portion of the production tax law,
and it is only to a specific part of the exploration incentive
credit, which is AS 43.55.025(f)(2). Under AS 43.55.025(f)(2),
DNR must be notified after completion of the seismic data
processing or completion of the well, and the producer must
provide DNR with its ancillary data and reports on the
exploration. Under AS 43.55.025(f)(1) - which is not included
in the amendment - a producer must give DNR advance opportunity
to say whether the exploration activity is good or bad. She
said she cannot speak to how companies react to the giving of
their data, but she can say that Cook Inlet is different than
the North Slope because the companies bump up to each other
elbow to elbow. She added that AS 43.55.025(f)(2) requires DNR
to hold the data confidential for 10 years and she would have to
let the companies offer their perspectives on whether that 10
years is sufficient.
3:08:41 PM
CO-CHAIR NEUMAN inquired whether it is standard policy for the
Department of Revenue to offer its opinions on amendments and
legislation.
MS. DAVIS replied she was not giving an opinion. In further
response, she said she was describing how AS 43.55.025(f)(2)
operates and she was being very clear to say that she could not
speak to whether individual companies would like this.
CO-CHAIR NEUMAN said he thought Ms. Davis was speaking for the
department.
3:09:28 PM
REPRESENTATIVE OLSON maintained his objection to Amendment 7 and
noted that since this and the previous amendment were only just
now dropped on the committee he doubts that the companies have
seen them. He inquired what the policy will be for amendments
for the remainder of the session.
CO-CHAIR NEUMAN responded that substantial amendments like these
will no longer be accepted without 24 hours notice so members
can familiarize themselves with what the amendments would do.
CO-CHAIR JOHNSON agreed.
MS. DAVIS, in response to Representative Tuck, said she does not
recall whether this language is in HB 280, but she does know it
is in current statute for the exploration incentive credit under
Alaska's Clear and Equitable Share (ACES).
3:11:23 PM
REPRESENTATIVE EDGMON said he is trying to get a better sense of
this issue given that the sponsor and the Department of Revenue
have said two different things.
MS. DAVIS responded that the Department of Revenue is not saying
anything about the industry.
CO-CHAIR JOHNSON requested that Ms. Carri Lockhart of Marathon
Oil Corporation be asked her opinion in this regard.
CARRI LOCKHART, Production Manager, Marathon Oil Corporation,
replied yes, Amendment 7 is a deal killer. She said it costs
millions of dollars to acquire, analyze, interpret, and process
the highly proprietary geophysical data. To give that
information away would cause Marathon Oil Corporation great
heartburn. The data would then make it into the public domain
which is an absolute non-starter for Marathon.
3:13:08 PM
REPRESENTATIVE P. WILSON said she will vote no on Amendment 7
because in the Cook Inlet the companies are stacked right next
to each other and do not want their information available to the
others.
CO-CHAIR JOHNSON called the question, then agreed to remove his
call so Representative Guttenberg could ask Ms. Lockhart a
question.
REPRESENTATIVE GUTTENBERG inquired whether Marathon thinks the
10-year period of confidentiality is too long or too short after
DNR receives the data. He further inquired whether Marathon
takes tax credits with similar provisions.
MS. LOCKHART said she views the 10 years as being entirely too
short because the life of Marathon's fields can be 50 years.
Multiple players are near and around Marathon in Cook Inlet.
"Corner shooters" try to encroach on Marathon's operations and
this data would only give them fuel to impede into Marathon's
operations.
3:15:53 PM
REPRESENTATIVE SEATON argued that Amendment 7 is not requiring a
company to "give" data to the state; rather the state is
"buying" data by paying 25 percent of the total cost. The state
should receive something in return for the credit, especially if
there are dry holes and the company withdraws from the unit.
Amendment 7 is exactly the same provision as in ACES for
exploratory credits, and the value of these credits is being
increased from 10 percent to 25 percent.
MS. LOCKHART stated that data under this provision is expansive,
so in addition to the logs from a well it would include other
data sets that a company has paid for well in advance of
anything the company would be doing in the future underneath
this tax credit.
3:17:26 PM
A roll call vote was taken. Representatives Tuck, Seaton,
Guttenberg, and Kawasaki voted in favor of Amendment 7, as
amended. Representatives P. Wilson, Olson, Edgmon, Johnson, and
Neuman voted against it. Therefore, Amendment 7, as amended,
failed by a vote of 4-5.
CO-CHAIR JOHNSON moved to report CSHB 229, Version 26-LS0900\E,
Bullock, 2/18/10, as amended, out of committee with individual
recommendations and the accompanying fiscal notes.
REPRESENTATIVE KAWASAKI objected.
3:18:58 PM
A roll call vote was taken. Representatives Olson, Guttenberg,
Tuck, Johnson, Neuman, P. Wilson, Seaton, and Edgmon voted in
favor of Version E, as amended. Representative Kawasaki voted
against it. Therefore, CSHB 229(RES) was reported out of the
House Resources Standing Committee by a vote of 8-1.
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