Legislature(2013 - 2014)BARNES 124
04/01/2014 04:30 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 138 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
4:37:02 PM
CO-CHAIR FEIGE announced that the only order of business is CS
FOR SENATE BILL NO. 138(FIN) am, "An Act relating to the
purposes, powers, and duties of the Alaska Gasline Development
Corporation; relating to an in-state natural gas pipeline, an
Alaska liquefied natural gas project, and associated funds;
requiring state agencies and other entities to expedite reviews
and actions related to natural gas pipelines and projects;
relating to the authorities and duties of the commissioner of
natural resources relating to a North Slope natural gas project,
oil and gas and gas only leases, and royalty gas and other gas
received by the state including gas received as payment for the
production tax on gas; relating to the tax on oil and gas
production, on oil production, and on gas production; relating
to the duties of the commissioner of revenue relating to a North
Slope natural gas project and gas received as payment for tax;
relating to confidential information and public record status of
information provided to or in the custody of the Department of
Natural Resources and the Department of Revenue; relating to
apportionment factors of the Alaska Net Income Tax Act; amending
the definition of gross value at the 'point of production' for
gas for purposes of the oil and gas production tax; clarifying
that the exploration incentive credit, the oil or gas producer
education credit, and the film production tax credit may not be
taken against the gas production tax paid in gas; relating to
the oil or gas producer education credit; requesting the
governor to establish an interim advisory board to advise the
governor on municipal involvement in a North Slope natural gas
project; relating to the development of a plan by the Alaska
Energy Authority for developing infrastructure to deliver
affordable energy to areas of the state that will not have
direct access to a North Slope natural gas pipeline and a
recommendation of a funding source for energy infrastructure
development; establishing the Alaska affordable energy fund;
requiring the commissioner of revenue to develop a plan and
suggest legislation for municipalities, regional corporations,
and residents of the state to acquire ownership interests in a
North Slope natural gas pipeline project; making conforming
amendments; and providing for an effective date."
4:37:27 PM
MIKE NAVARRE, Mayor, Kenai Peninsula Borough, stated his
commitment to work with the governor and the legislature to
advance a successful natural gas project that protected the long
term interest of the state, the communities, and the residents.
He expressed concern for the potential impacts to municipal and
state revenues, both local and state tax bases, resulting from
the confidential negotiations only broadly outlined in the Heads
of Agreement (HOA) and the proposed enabling legislation. He
pointed out that municipal governments relied on state revenue
for education, roads, and revenue sharing programs. He declared
that, although the proposed bill was a significant departure
from existing tax policy and structure, the borough wanted to
avoid any adversarial position with the administration on
legislation resulting from confidential negotiations. He
expressed support for the newly created advisory board, even
though the community role, specifically for negotiations, was
unclear. He referenced the criteria in the HOA which detailed
that the administration and the signers for the HOA would
support legislation resulting from the negotiations, even though
the advisory board had made no commitments for support. He said
that the Kenai Peninsula Borough had promoted limits for changes
to the existing tax structure on oil. He stated that the vision
was complex and very different from the status quo, with
accompanying pressure to advance a natural gas project. He
acknowledged the difficulty for understanding complex issues in
a short period of time. He expressed his desire to highlight
the areas of concern for his borough, and to ensure these were
addressed.
4:40:52 PM
CO-CHAIR FEIGE stated that the committee would value the input
from the municipalities.
REPRESENTATIVE SEATON asked about the principles and policies
supported by the Kenai Peninsula Borough.
MAYOR NAVARRE replied that he was waiting to meet with the
advisory committee in order to see what structure was envisioned
by the administration and the producers. He referenced an
earlier advisory group for the Stranded Gas Development Act
(SGDA) which had compiled recommendations. He declared support
as long as there were no negative impacts compared to the taxing
structure under existing oil and gas legislation. He allowed
that part of the structure had to recognize where the assets
were sited, with an allocation plan based in part on this to
recognize the impacts to specific areas. He noted there was
also an overriding concern for state revenues.
REPRESENTATIVE SEATON asked if there was concern for the effects
of a big project, including an increase in taxes, after the
borough had already absorbed the impacts of industrial
development.
MAYOR NAVARRE acknowledged that this was an even greater concern
for areas that would not have the assets sited in their
communities, and cited the need for impact payments in lieu of a
short term tax structure.
REPRESENTATIVE TARR directed attention to the creation of the
interim advisory board in the proposed bill, and asked for
suggestions to language that "would make the mayors more
comfortable."
MAYOR NAVARRE replied that an alignment of interest and
consensus for the relationship between the state and the
municipalities was as important as an alignment between the
producers and the state. He expressed concern for a conflict
between a business relationship and a sovereign relationship
that favored the state over the local governments. He suggested
a possible need for a Memorandum of Understanding among the
heads of municipal governments to further define its role and
ways to advance its recommendations.
CO-CHAIR SADDLER asked about the comparative importance for
money the municipalities could use as they see fit, or for
specific needs funded directly.
MAYOR NAVARRE replied that, as all the municipalities had
different taxing structures, it could lead to unnecessary
details when specific needs were identified and detailed. He
suggested it was of greater importance to identify the overall
general impacts, and allow the communities to make the
determinations.
CO-CHAIR SADDLER asked for a listing of the largest needs,
including infrastructure, social services, or government
services.
MAYOR NAVARRE replied that this would differ between the ramp up
for construction, and then the impact during and after
construction. He declared there would be a need for roads,
harbors, and social services, including fire and emergency
services. He relayed that the Kenai Peninsula Borough currently
had some capacity in the schools, which would be impacted
depending on the population increase.
4:48:44 PM
REPRESENTATIVE SEATON asked to follow up on an earlier question
by Representative Tarr, specific to the proposed bill. He
pointed out that the proposed bill offered the only opportunity
for the committee to put limits on the amount of discretion. He
opined that waiting until after further negotiations would not
allow for any changes. He suggested that any general provisions
for essential structure be submitted immediately while the bill
was still under consideration.
MAYOR NAVARRE responded that the municipalities had difficulty
writing its own amendments to the proposed legislation, as they
did not have access to Legislative Legal Services. He suggested
that Payment in Lieu of Taxes (PILT) could address some of the
municipal concerns, although its implementation could still be
subject to legislation. He opined that the advisory committee
or an MOU could better define the structure of a PILT.
CO-CHAIR SADDLER asked about the current property tax structure
in the Kenai Peninsula Borough.
MAYOR NAVARRE replied that the tax value for the current year
was approximately $7.6 billion for the entire borough. He said
that a $20 million facility sited on the Kenai Peninsula would
have a significant impact. In response to Co-Chair Saddler, he
said that the general government mill rate was 4.5 mills,
however there were service areas that had a separate tax base.
He offered an example for Nikiski which he opined to be about 12
mills, with a bit higher rate in Homer.
4:52:50 PM
REPRESENTATIVE P. WILSON asked about the borough sales tax.
MAYOR NAVARRE replied that the sales tax was 3 percent with a 9
month holiday for taxes on non-prepared foods. He stated that
this revenue was dedicated to the schools.
REPRESENTATIVE SEATON asked for clarification that this was the
mill rate for the borough, with an additional sales tax in the
cities, about 7.5 percent.
MAYOR NAVARRE reported that Homer had a 7.5 percent sales tax,
while Soldotna and Kenai had a 6 percent sales tax.
REPRESENTATIVE OLSON pointed out that there was a $500 cap.
REPRESENTATIVE SEATON reported that this was per sale.
MAYOR NAVARRE commented that this discussion highlighted the
differences between local tax bases in various communities, and
the difficulty for fitting them together.
CO-CHAIR FEIGE reported that there was no property tax in Delta
Junction.
REPRESENTATIVE TARR asked for comments on the development of a
plan for municipalities, regional corporations, and residents to
participate in the ownership, included in the proposed bill.
MAYOR NAVARRE suggested that, as the proposed bill was already
complex enough, he was not sure of the security for an
investment.
4:56:19 PM
CHARLOTTE BROWER, Mayor, North Slope Borough, said that large
projects similar to this could set a positive course for the
future, but that it was necessary to be prepared for the impact.
She offered an example of the Trans-Alaska Pipeline System
(TAPS), which brought billions of dollars in revenue, as well as
a demand for public and social services, infrastructure, and
education. She declared that the proposed bill and the HOA
needed to define "consultation." She pointed out that the
process for enabling contracts would be a ratification vote by
the legislature. If the local municipal taxing authority was to
be modified to provide fiscal certainty, then the boroughs
needed to have a meaningful part in the initial process. She
questioned whether the enabling contract would be used to re-
classify current taxable properties under AS 43.56. She allowed
that it was unclear whether this was a concern, as it was not
defined in the proposed bill. She declared that it was
necessary for municipal governments to defend the current tax
status. She reminded the committee that she had previously
spoken in support of a fair and equitable revenue sharing
program for the proceeds from oil and gas development on the
outer continental shelf. She declared the need for resources to
"keep up with infrastructure requirements, expand emergency
response and search and rescue capabilities, and work to
maintain healthy communities and a healthy eco-system." The
basic discussion for impacts from oil and gas development was
similar for on-shore and off-shore. She pointed out that the
local governments were responsible for providing basic essential
services, schools, emergency response, public safety, health,
and social services. She reported that, as municipal boroughs
relied on the authority to levy property taxes to generate the
necessary revenue for these public services, there was concern
when there was discussion for exemption from property taxes for
a project of this magnitude. She offered her belief that
municipal taxes were not an issue for the margin of
profitability to these large projects. She expressed her
support for a natural gas pipeline when the local municipal
governments had the authority to levy taxes to provide the
necessary services.
5:03:53 PM
REPRESENTATIVE SEATON asked for clarification that Mayor Brower
wanted existing oil and gas facilities and infrastructure left
in its current method of taxation and not included in the
proposed bill.
MAYOR BROWER expressed her agreement.
CO-CHAIR SADDLER asked about the current property tax structure
and valuations in the North Slope Borough.
MAYOR BROWER replied that 95 percent of the current valuation
for $19.7 billion was state assessed. There was a current 18.5
mill rate for operations and maintenance. In response to a
further question from Co-Chair Saddler, she added that each city
government was allowed to have taxation, although there was a
PILT of about $5 million every 5 years for each village in the
North Slope Borough on behalf of the city governments. She
reported that the North Slope Borough was responsible for all
the services with the exception of recreation and cemeteries.
She reported that the PILT was for sales and use taxes, as only
the borough had property tax, and not the cities.
5:07:32 PM
DAVID COBB, Mayor, City of Valdez, reported that the HOA laid
the framework for the future negotiation of fiscal terms for an
LNG project, and included enactment of the enabling legislation.
It stated that the State of Alaska and the North Slope producers
would negotiate a payment in lieu of taxes (PILT), which would
eliminate property taxes during the operating life of the
project. The agreement would also provide for the producers to
pay pre-negotiated impact fees during construction rather than
property taxes as required by Alaska law, stating that this
would reduce valuation disputes between the parties, and ensure
a healthy, long term oil business. He expressed concern that
the yet to be negotiated gas line terms might expand to alter
property taxes paid on existing infrastructure. He expressed
support for the inclusion of municipalities on the commission,
and shared that, although he had been told there was no
intention to change the taxation regime on the existing
infrastructure, these non-binding assurances were "something
less than comforting." He relayed that the Stranded Gas
Development Act contract was the only time that producers had
reached consensus for fiscal terms on a gas line, and he pointed
out that it had required PILT payments on new gas infrastructure
and existing oil infrastructure. He noted that the HOA only
pursued another study, and he opined that it was unrealistic to
not believe that history would repeat itself and the producers
would ask for changes to the existing tax structures. He
reported that it was appropriate for the City of Valdez to
receive more than 90 percent of its operating revenue from the
existing property tax structure, due to the demands on the
infrastructure and services. He declared that significant
reductions to this revenue would have a catastrophic impact on
its ability to meet those service needs and to meet existing
bond obligations. He listed the goals of the city: protection
of property taxes on existing oil and gas property with
legislation declaring this clear intent; Alaska municipalities
must be able to analyze all the details of the project plan
before proper measurement to the impact of construction on the
community, and each municipality needed to discuss, negotiate,
and agree to terms that directly affect these impacts on
municipal budgets; and, although property tax concessions for
new infrastructure may be appropriate to facilitate project
development, it is necessary for the local municipality to
assess and define the local impacts and economics for a
determination to the extent an LNG project should pay property
taxes less than other property owners, so a PILT can be properly
analyzed. He declared that it was necessary for meaningful
participation by the municipalities. He expressed an
understanding for the complexity of any task with more
involvement, but it was important to have meaningful,
participatory government. He offered his belief that a
confidential, open ended process by the producers similar to the
Stranded Gas Development Act would result in extreme financial
consequences to the municipalities, and that it was necessary to
address these concerns immediately.
REPRESENTATIVE SEATON asked about any amendments proposed by the
municipalities.
MAYOR COBB offered his understanding that Mayor Navarre had
these amendments.
CO-CHAIR SADDLER asked for clarification that project fiscal
terms needed to be analyzed before the PILT could be determined.
He asked if the local impact needs were independent of the
project fiscal terms, or should the PILT be determined by the
amount available from the project.
MAYOR COBB responded that they were independent of the project
and the communities' needs would be for new roads, new schools,
new water and sewer, and other things directly impacted by the
project.
CO-CHAIR SADDLER asked for clarification that the municipalities
would have to understand the project fiscals or the physical
impact on the community, before an appropriate PILT rate could
be negotiated.
MAYOR COBB replied that it was necessary to know the fiscal
impact on the communities.
REPRESENTATIVE P. WILSON asked Mayor Cobb if the cities
themselves would prefer to do the negotiations.
MAYOR COBB clarified that the cities had to have a role, and be
a participant along with the State of Alaska, during the
negotiations, instead of the state negotiating on behalf of the
municipalities.
CO-CHAIR FEIGE asked for Mayor Cobb's reaction regarding the
administrative order for an interim advisory board.
MAYOR COBB replied that this order should be expanded, as it was
vague and did not clarify what would happen.
CO-CHAIR SADDLER asked about the current property tax structure
and valuations in the City of Valdez.
MAYOR COBB, in response, explained that the property tax was 20
mils, and it was almost all from the Oil and Gas industry,
except for a small residual. He declared that the valuation was
about $3 billion in Valdez, and that there was not any sales tax
or other source of income.
CO-CHAIR SADDLER asked if there was a residential property tax.
MAYOR COBB confirmed that homeowners did pay a property tax of
20 mills.
5:20:39 PM
LUKE HOPKINS, Mayor, Fairbanks North Star Borough, relayed that
one concern was for the existing taxes on oil and gas structure,
noting that he did not have complete assurance from the comments
by the governor that the existing oil and taxes would not be
modified. He stated that he did not receive a clear definition
and understanding for fiscal certainty during discussions with
the producers. He reflected on participation as part of the
municipal advisory group for the Stranded Gas Development Act,
and that most of this resulted in a statement of concerns, and
not in legislation. He declared that fiscal certainty was based
on standards of flow and not on the municipality property tax
structure in AS 43.56. He expressed his concern with the PILT
structure, as it had been described in the administrative order
and other information presented by the governor. He said he
dealt with PILT agreements, and that the structure of the
financing was always discussed. He offered his concern that it
was necessary to agree on a PILT, instead of just advising, and
that agreement for the amount of the PILT should be put in
proposed SB 138. He declared that "it was incredibly important"
for the parties to agree on the PILT. He stated that a verbal
assurance was not strong enough. He referenced the earlier bond
commitments and the ability to re-pay them as revenue streams
decreased, which could transfer a heavy burden onto the tax
payers with changes to the existing oil and gas structure. He
pointed out that, as the municipal advisory group under the
Stranded Gas Development Act had developed the impacts from
construction of a gas line, it was necessary to discuss the
projected construction and impacts information prior to any
determinations for aid. He urged the committee to amend SB 138
and insert language that addresses consent to a PILT.
5:29:54 PM
CO-CHAIR SADDLER asked how Mayor Hopkins would like to see a
PILT and impact aid structured.
MAYOR HOPKINS asked if he was referencing a dollar amount or a
structure to arrive at a value.
CO-CHAIR SADDLER replied "both."
MAYOR HOPKINS explained that the impact aid should be a value
determined by the impact to schools and other services from the
amount of construction. He opined that it would be possible to
get a rough estimate for this, and also recognize the ongoing
impacts. He reported that going to a PILT required a property
tax value, or some value assessed by a neutral party, and then
work on an agreement which was less than this. He expressed his
understanding for the opportunities presented by a gas pipeline
for the state. He suggested that a structure for a PILT would
begin with a financial value however, it would be necessary to
share the internal information. He stated that this had to be a
negotiated and consented to value.
CO-CHAIR SADDLER asked if there was any limit to the life of a
PILT.
MAYOR HOPKINS explained that the PILT agreements that he had
negotiated had a "reopener" where it was possible to sit down
and review the numbers. This allowed them to address any
changes and consider changes to property taxes and cost of
living adjustments.
REPRESENTATIVE P. WILSON asked about the mill rate.
MAYOR HOPKINS, in response to Representative P. Wilson, said
that the borough had an 11.2 mill rate, with no personal
property or sales tax.
REPRESENTATIVE P. WILSON asked for clarification to what the
mill rate was applied.
MAYOR HOPKINS replied that it was on real property, but not on
cars, boats, or airplanes.
5:35:48 PM
CO-CHAIR SADDLER asked for the total assessed valuation of the
Fairbanks North Star Borough.
MAYOR HOPKINS replied that the net taxable value was about $7.8
billion.
CO-CHAIR SADDLER asked about the value of the Alaska gas line
project to the borough, exclusive of property taxes and PILT
impact aid.
MAYOR HOPKINS replied that the project was incredibly valuable
for its overarching economic benefits. He noted that it would
bring lower cost energy to the community, as a large diameter
gas line had been shown to bring the lowest cost of natural gas
to Alaskans. For Fairbanks, he opined that it would recharge
the economic structure and it would offer businesses a lower
cost to help spur economic growth. He stated that it was a
complicated issue for the economic return to the state.
5:38:26 PM
REPRESENTATIVE SEATON asked if the mill rate was combined for
the city and the borough.
MAYOR HOPKINS replied that the 11.2 mill rate was for the
borough, which had to fund local contributions for the schools,
and did not include either the mill rate for the City of
Fairbanks or the City of North Pole. He noted that 6.5 - 6.8
mills was directed to the schools, with the remainder directed
to general government.
REPRESENTATIVE SEATON asked about the mill rate for the City of
Fairbanks.
MAYOR HOPKINS explained that the City of Fairbanks had a 4.9
mill cap, in addition to the borough taxes, and that the city
had had several failed proposals for a sales tax. He reported
that the City of North Pole had a 3 percent sales tax on certain
items, with caps, and a 2 or 3 mill rate on real property.
5:40:31 PM
REPRESENTATIVE P. WILSON asked Mayor Cobb for clarification
about the 20 mill rate on oil and gas.
MAYOR COBB explained that 90 percent of the City of Valdez tax
base revenue was generated through that tax, although a small
percentage was paid by non-oil and gas property. He declared
that everyone paid the 20 mill rate.
5:42:04 PM
MAYOR NAVARRE stated that an earlier problem had been for
defining the placement of the proposed amendments in order to
accomplish the goals. He reported that the amendments were
currently being drafted by Legislative Legal Services, and would
be introduced to the committee as soon as possible by the
legislator sponsoring those amendments. He pointed out that
municipalities preferred to advocate for themselves during
negotiations, as there would be natural conflicts during any
negotiations by the state on behalf of the municipalities. He
noted that these conflicts could affect bonding abilities and
future state funding for the municipalities.
REPRESENTATIVE SEATON reflected on an earlier statement by the
administration which had compared the upcoming project to a road
into the Red Dog Mine, which was paying a mid-20s mill rate. He
asked Mayor Navarre for his reflections on this PILT.
MAYOR NAVARRE opined that there were benefits for this structure
over a long period of time, as it was a stable revenue source
with gradual inflation proofing, along with other tax components
necessary for the tax base to meet the needs of the community.
REPRESENTATIVE SEATON asked whether the PILT structure, although
not necessarily cheaper than the 20 mill rate, would be
constructed in a less volatile manner.
MAYOR NAVARRE agreed that this "would be something that we would
embrace" as it could offer the impact money up front, as well as
a stable tax payment over the life of the project. He pointed
out that not all the communities favored a PILT, but would
instead prefer a valuation to be taxed at the mill rate. He
offered his belief that a PILT structure could work, as it would
quadruple the overall tax base, without a similar level of
impact to the community.
CO-CHAIR SADDLER asked for a description to the optimal impact
aid system.
MAYOR NAVARRE offered that his preference would be based on the
value of the asset over time, and not see any erosion of the tax
base, which would be more beneficial for his community and the
borough.
CO-CHAIR SADDLER asked if he would also prefer the re-opener
clauses.
MAYOR NAVARRE expressed his agreement, opining that everyone
would benefit from those clauses, as both the government and the
businesses wanted fiscal certainty.
5:48:54 PM
W. TODD MILLER, Baker & Miller, PLLC, directed attention to his
letter addressing the antitrust issues for the LNG project in
the proposed bill. [Included in members' packets] He noted
that, although an anti-trust analysis could often be quite
complicated, in this case, it was not because the creation and
operation of joint ventures was now common and this was designed
and intended to be pro-competitive with substantial benefits to
consumers. He opined that there was not much risk with creation
of this joint venture. He suggested that any issues would
center on the operation of the venture, which was also addressed
in the enclosed letter. He directed attention to the HOA, which
discussed the pro-expansion principles. He noted that this
venture, with a pro-competitive approach, contained substantial
protection for the consumer, as it avoided the "hold-up" problem
created by a group wanting to lessen capacity and restrict
output. He directed attention to prior litigation in Canada for
operational issues between commercial entities, noting on page 6
the Alaska Gasline Port Authority v. ExxonMobil Corp case, in
which there was concern that the producers were failing to
supply gas. He opined that the assumption was for the state and
producer interests to be aligned for the creation and operation
of this venture. He directed attention to the state action
doctrine which provided additional protection for any action by
the state should there be concerns from an anti-trust
perspective, as the legislature was taking action in the
interest of the citizens of Alaska. This was a judicially
created doctrine which allowed the state to create immunity as
it was allowed to legislate and displace anti-trust laws in
instances similar to this. He noted that the state could
clarify that it intends for the operation to supersede any anti-
trust remedies, as it would add additional protection to the
state.
CO-CHAIR SADDLER asked for any cases regarding the state action
doctrine, whereby a state wished they had this and did not, so
he could get a sense for its importance.
MR. MILLER replied that there were instances where private
actions had been brought against municipalities, but he could
not point to any specifics.
5:56:01 PM
REPRESENTATIVE HAWKER, referring to the bottom of page 5 of the
aforementioned letter, read: "The State of Alaska could make
clear that whatever its other goals and the anti-trust risks of
Alaska LNG venture may be, that it intends that its legislation
and the subsequent operation of AGDC and AGDCS to displace the
role of competition in the development and marketing of Alaska's
North Slope natural gas." He asked if this had identified the
nature of the proposed project. He pointed to the generic anti-
trust rules concerning operations and the formation of a joint
venture, and expressed his agreement that this had already been
widely examined by the courts. He directed attention to the top
of page 4, and the specifics of the proposed joint venture,
"Reviewing the terms of the proposed joint venture among the
state and producers." He asked about the supposition for the
joint venture "as we understand it, will be the producer of the
LNG gas for export and the seller of the natural gas to the
utilities serving customers in Alaska." He asked whether this
referenced the joint venture between the State of Alaska and
TransCanada, or in the context of the overall venture between
the producers, the State of Alaska, TransCanada, and all the
involved parties.
MR. MILLER explained that the proposed bill did not include a
lot of discussion about operations for any venture. He noted
that those ideas relied on the MOU and HOA. He directed
attention to the aforementioned letter, and in response to
Representative Hawker, he stated that "from a joint venture
stand point, I think it's fairest to say it's the broader
venture, that we're not sort of parsing it, and there's no real
need to parse it down to the level of small venture versus large
venture." He declared that this was a broader, joint venture
concept, and the individual specific responsibilities were not
quite as important.
REPRESENTATIVE HAWKER expressed his agreement with the
interpretation. He directed attention to the reference for the
joint venture as "it" which amalgamated the parties: the three
producers, and the smaller joint venture between the State of
Alaska and TransCanada. He offered his belief for the concept
of the larger venture, "the pipe within a pipe," which was not a
single venture, but instead allowed each of the partners to
establish its own prices, terms for operation, and shipping. He
asked if this altered the perception of this venture.
MR. MILLER replied that the information was helpful; however, it
would not change the basic conclusion that the venture agreement
did not create substantial anti-trust risk. To the extent that
each party retained a certain freedom for pricing, it would be
necessary to recognize the joint venture with elements of
competition. He warned that the individual competition element
could not be artificially restrained.
6:04:49 PM
REPRESENTATIVE HAWKER directed attention to the next sentence
regarding prices of delivery for the gas, which would be
submitted to FERC for review and approval. He pointed out that
the pipe within a pipe concept allowed that each of the producer
parties would not be subject to price regulations, as they were
an NGA Section 3 activity which removed them from these
regulations. He offered his belief that there was not any
intent from the State of Alaska to limit or constrict
competition among anyone in this process.
MR. MILLER expressed his agreement and noted that it did not
change the basic conclusion. He noted that it was important to
continue to compete in "your pipe within the pipe kind of
world."
REPRESENTATIVE HAWKER moved on to the conclusion of the
aforementioned letter, which talked "about things we could do."
He acknowledged the state action doctrine, which specifically
allowed a state to withdraw a sector of the economy from the
competitive forces of the market place. He offered his opinion
as a legislator that they were not attempting to do this, but
were crafting the venture in such a manner to facilitate the
continuation of the competition, with the same outcome for no
anti-trust consideration as they were not operating as one or in
collusion. He declared that this legislation did not intend to
displace the role of competition in the development and
marketing of the North Slope gas. He directed attention to
footnote 4, page 5, which clarified that there was not the
intent to displace competition. He noted that the role of AGDC
was to promote and assist the State of Alaska in maximizing the
benefit to Alaskans; whereas, the producers had the different
mission to maximize profit to its shareholders. He expressed
his agreement that, as there was not a lot of anti-trust risk,
it would not be necessary for the follow up suggestions by Mr.
Miller.
MR. MILLER commented that the idea was embodied in the first
sentence, which stated that there was not significant anti-trust
risk generated by the joint venture creation or operation. He
noted that they had only offered some practical guidance should
the legislature feel that need, but he acknowledged that it may
not be necessary with the explanations by Representative Hawker.
6:11:45 PM
REPRESENTATIVE TARR relayed that a consultant had suggested that
one way to strengthen the state's position was to require that
the agreement to market gas include that the state gas be
marketed at the same price as the producer's gas. She asked if
the State of Alaska could include this language without facing
an anti-trust situation.
MR. MILLER replied that it was not clear that having such an
agreement would be an anti-trust violation, although it would be
good to have more information for the language of the provision.
He offered his belief that there was not an issue for the state
to have a "most favored nation" provision for marketing the
state's gas, as there was not any discussion for the price of
the gas. He suggested that this would be a distribution
contract.
6:14:16 PM
CHUCK SCHUETZE, Manley & Brautigam, referred to his letter
[included in members' packets] which focused on SB 138 and
listed three qualifying grounds for federal income tax
exemption. He offered his belief that the least restrictive
qualification was as a political subdivision with implied
statutory immunity for tax purposes. He relayed that the test
looked primarily for substantial sovereign powers that, in this
case, AGDC would have. He offered an anecdote for a tax court
case in 1944 which was often cited by the IRS to set the
standard for necessary qualification. He listed the three
necessary sovereign powers: the power to tax, the power of
eminent domain, and the power to police, which he defined as
broader than perceived, as it included regulatory powers. He
cited a similarity to provisions in AS 31.25 and in the proposed
bill, which offered AGDC the power of eminent domain and the
power to adopt regulations for carrying out the purposes of AS
31.25. He noted that these would include regulations for
governing the operation of the project. Referencing the
aforementioned tax court case, he pointed out that it was only
necessary to have two of the three sovereign powers. He
directed attention to another revenue ruling, AS 73.563, which
required state agencies to assist in an enterprise by exercising
sovereign powers on behalf of that enterprise. He pointed out
that the proposed bill contained a clause which allowed the
Department of Revenue (DOR) and the Department of Natural
Resources (DNR) to adopt regulations, on behalf of AGDC, to
implement the proposed bill. He noted that DNR was also
authorized to adopt reasonable regulations necessary to carry
out the chapter, and to grant AGDC a right of way lease for the
gas pipeline corridor at no appraisal or rental cost. He opined
that these buttressed the power of eminent domain.
6:20:51 PM
MR. SCHUETZE moved on to discuss the issues of qualifications
for the power. He directed attention to AS 31.25.240, which
implied that AGDC was not a political subdivision as its
obligations were not debts of the state or a political
subdivision. Reflecting on AS 31.25.010, he noted that AGDC was
an instrumentality for tax purposes other than a political
subdivision, which he had discussed in the aforementioned
letter. He strongly recommended a ruling request before moving
forward for an assurance from the IRS that the project would not
be subject to federal taxation. He recommended statutory
changes and suggested organizing AGDC as a public corporation
under AS 31.25.010. He stated that the next most useful grounds
for tax exemption qualification were to be an integral part of
the state, with a key test for whether the state had control
over AGDC. He reported that the state had control of its board
of directors, as those members were appointed by the governor
and subject to confirmation by the legislature. He pointed out
that the state also made substantial financial commitments to
AGDC. He added that managing the finances, the revenue, and the
rulings was also an important determination. He directed
attention to the term sheet for the MOU, which listed that the
obligations were supported by "the full faith and credit of the
state."
6:24:23 PM
MR. SCHUETZE expressed concern that there was some discretion
for the IRS to either ignore corporate separation under the
structure of AS 31.25.010, which stated that AGDC was a separate
corporate entity, or require qualification under Section 115 of
the Internal Revenue Code. He said that the statutory test
Section 115 to qualify for exemption was straightforward and it
was necessary to show that the income of AGDC was derived from
the exercise of an essential government function, and that
income was accrued to the state, or its political subdivisions.
He summed up the first two categories: AGDC appeared to be an
essential governmental function as it made money for the state,
according to the sense of the private letter rulings, although
it had been suggested that it was almost impossible to find a
reasoned description for essential governmental functions;
accrual to the state seemed to be satisfied, although there was
some lack of clarity in the language of the statute which
described how money would be distributed from AGDC to an
appropriate fund. He suggested that further defining this to be
a state fund would be helpful. He relayed that an additional
standard declared that there could not be any private benefit,
noting that the AGDC funds went to the state. He opined that
the state investment in the pipeline made the project more
feasible for private parties, which could be considered more
than an incidental benefit. He reported that the rulings which
denied exemption had found the benefits to be directed primarily
to private parties.
6:28:59 PM
MR. SCHUETZE discussed the difference between the house and the
senate versions of the bills. He noted that the proposed house
bill contemplated that the interest in the project would be
owned through a subsidiary of AGDC, which could direct the
interest in the pipeline to be examined under Section 115, and
he opined that it would be a cleaner ruling request for AGDC to
own the interest in the pipeline directly as it had eminent
domain power and substantial police powers. This would give a
stronger argument for implied statutory immunity.
6:30:48 PM
REPRESENTATIVE SEATON asked whether, if the state conducted an
expansion and the volume times the cost went down, then the
private benefit would accrue to all the parties. However, if
the price was higher, and no expense accrues to the producers,
would this become a private benefit upon expansion.
MR. SCHUETZE replied that he could not give a definite answer
because of the relative lack of authority to the question. He
stated that a private letter ruling was seldom negative, as they
were usually withdrawn if the tax payer was told a ruling would
not be issued.
REPRESENTATIVE SEATON opined that this was the only issue in
which there was a direction of potential private benefit in the
project.
6:33:16 PM
REPRESENTATIVE HAWKER asked for clarification to one statement
which he suggested was inaccurate. He directed attention to
Section 61 of the proposed bill, which described the authority
of the transition regulations for DOR and DNR to adopt
regulations implementing the proposed act. He noted that Mr.
Schuetze referenced that this was a collaborative effort with
AGDC, while, in fact, AGDC had completely separate statutory
regulatory authority. He said this drafting language was a
convention used at the state which gave departments the
authority to draft regulations today that involve legislation
that will take effect in the future. He declared that it had
nothing to do with a directed collaborative relationship with
AGDC. He stated that, although there was a current requirement
in statute, along with an intent for the state agencies to
collaborate with the AGDC needs and activities, this issue for
the regulations was not relevant to this.
MR. SCHUETZE offered his belief that Section 61 was not
significant for a ruling.
REPRESENTATIVE HAWKER directed attention to page 6 of the
aforementioned letter from Mr. Schuetze, and addressed the
suggestion that AGDC was not a political subdivision of the
state. He said that the record of testimony in the creation of
AGDC would show that it was contemplated that AGDC would not be
issuing general obligation debt, as its only debt authority was
to issue revenue debt. He pointed out that revenue debt was not
a debt of the state, but instead a debt of the project. He
asked if this necessitated a change of wording for the proposed
bill.
6:38:13 PM
MR. SCHUETZE explained that he tried to make the facts as
compelling as possible to the extent of his control of the
situation. He stated that it would be best if the proposed bill
stated that AGDC was regarded as a political subdivision for tax
purposes, as any statement that suggested that it was not a
political subdivision did raise an issue.
REPRESENTATIVE HAWKER referenced earlier testimony from
Department of Law regarding terms used in drafting legislation,
and he pointed to language in the letter from Mr. Schuetze that
used language almost inherently prefaced "for tax purposes." He
stated that, although the state drafting language could be
interpreted differently than the language used by the Internal
Revenue Service, it could have the same final results for a tax
exempt entity.
MR. SCHUETZE offered his belief that this was correct.
REPRESENTATIVE HAWKER asked for clarification that Mr. Schuetze
suggested securing a private letter ruling as soon as possible.
He asked if it would be better to know the exact facts and
circumstances for that ruling, specifically whether or not AGDC
would participate in this large venture project or would operate
as a back-up project, rather than pursuing a private letter
ruling which may not apply to the final role of AGDC.
MR. SCHUETZE expressed his agreement to file the private letter
ruling request after there were definitive documents.
REPRESENTATIVE HAWKER stated that there was an appropriate time
and place, which may not be immediate upon reflection of the
whole project.
MR. SCHUETZE said that the letter had primarily focused on the
ruling request being made much later into the project. He
pointed out that the IRS could change its ruling position at any
time. He noted that the IRS would issue guidelines in their
first revenue procedure of the year for what they would accept
and rule on.
REPRESENTATIVE HAWKER expressed his agreement that the request
for a private letter ruling did not necessarily mean one would
be forthcoming.
6:44:09 PM
REPRESENTATIVE TARR asked if it mattered whether AGDC had a role
in two different projects, when a request was made for a private
letter ruling for one project.
MR. SCHUETZE replied that he had focused on this particular
project for the large natural gas pipeline, and he did not focus
on any separate project. He pointed out that it was never a bad
idea to get multiple rulings on specific items.
6:45:26 PM
REPRESENTATIVE TARR asked about the removal of the requirement
that any subsidiary corporation for AGDC had to be a non-profit
corporation, which the administration had explained would allow
the best possible corporate structure for its role in the
project. She asked if it would be a "cleaner way to go" just to
use AGDC. She asked if this more permissive language for
subsidiary structure in the proposed bill would be more
threatening in any consideration of AGDC for tax purposes.
MR. SCHUETZE explained that both published rulings and private
letter rulings had "check the box" regulations which both tax
payers and business transactions relied on for structuring
Limited Liability Corporations (LLC) with certain tax
characteristics such as partnerships and wholly owned entities.
He offered his belief that a wholly owned AGDC subsidiary would
most likely be treated as part of AGDC, per AS 77.01, even
though recent private letter rulings had not addressed this
section of the code, but had instead focused on the
aforementioned three tests. He opined that the extra authority
was not a detraction.
REPRESENTATIVE TARR asked if benefits to individual Alaskans
would be a violation to the private benefit restriction.
MR. SCHUETZE asked for clarification.
REPRESENTATIVE TARR asked if there was a corporate structure
that would allow a private benefit and not disqualify it from
the standard of a public corporation.
MR. SCHUETZE explained that "conceivably you could set up an
entity where AGDC is in-part owned by the state and in-part
owned by private parties. That would clearly be a private
benefit." Some of the revenue generated would go to the state
and some to the private parties, although that was not the
intent of the proposed bill or the current statute. He stated
that the language of the proposed bill was designed to benefit
all Alaskans, in various ways, with no impermissible private
benefit for Internal Revenue Code Section 115 ruling purposes.
He said the key to qualification under this section was to
document and show that there was not a more than incidental
private benefit, and was primarily designed to benefit the
state.
6:51:37 PM
REPRESENTATIVE HAWKER referred to Section 6 of the Alaska
Statehood Act, which directed the state to develop its resources
to the benefit of the expansion and development of its
communities. He asked if this would have an overriding
influence on any questions regarding taxation.
MR. SCHUETZE replied that this section of the Alaska Statehood
Act "would very much help in seeking a ruling request to help
document that this was intended to be for a public purpose."
REPRESENTATIVE HAWKER stated that there was a very clear purpose
outlined in this section of the Alaska Statehood Act.
6:53:38 PM
REPRESENTATIVE SEATON referenced private investment and the
ability to develop a fund to finance an investment. He opined
that there would not be any problem with a municipality making
this investment, but he asked if investment by individual
Alaskans would also be allowed.
MR. SCHUETZE offered his understanding that individual Alaskans,
as well as municipalities, could invest in the project, although
they would not be investing in AGDC itself. He suggested that a
subsidiary could create possible issues.
REPRESENTATIVE SEATON asked if this investment could simply be a
funding source.
MR. SCHUETZE replied that the IRS had determined that income
from a company which owned the interest in the project could not
go to private parties. He suggested clarification in the
proposed bill. He did not see ownership by others in the
overall project as problematic, as long as the individuals had
their own direct interest in the project.
REPRESENTATIVE SEATON opined that a return on investment in the
project did not create any problems.
MR. SCHUETZE replied that an investment by AGDC, the producers,
and the pool of individual investors into the project would
enhance the case by the state for no incidental private benefit,
as the investment came from outside AGDC.
6:57:17 PM
REPRESENTATIVE TARR referred to page 54, line 26, of the
proposed bill, and replied that the language read participate in
the ownership of a North Slope natural gas pipeline, rather than
an investor of a joint venture. She asked if that language was
problematic, and whether the purchase of stock for an ownership
interest in a North Slope natural gas pipeline was still part of
the overall benefit to all Alaskans.
REPRESENTATIVE HAWKER explained that the referenced section was
a direction to the state to develop a report that considered
those options, and was not based on the premise that such a
condition was viable or practical.
[CSSB 138(FIN) am was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES AKLNG Antitrust Analysis 4.1.14.pdf |
HRES 4/1/2014 4:30:00 PM |
SB 138 |
| HRES AKLNG Corporate Tax Implications 4.1.14.pdf |
HRES 4/1/2014 4:30:00 PM |
SB 138 |
| HRES Persily comments on Roger Marks Questions 3.31.14.pdf |
HRES 4/1/2014 4:30:00 PM |
SB 138 |
| HRES NSB SB138 testimony 4.1.14 - HRES.pdf |
HRES 4/1/2014 4:30:00 PM |
SB 138 |
| HRES Mayor Dave Cobb - Valdez SB 138 4.1.14.pdf |
HRES 4/1/2014 4:30:00 PM |
SB 138 |