Legislature(2005 - 2006)CAPITOL 124

03/16/2006 12:30 PM RESOURCES

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12:40:42 PM Start
12:41:35 PM HB488
03:06:43 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
CO-CHAIR SAMUELS announced that the  only order of business would                                                               
be 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."                                                                    
12:51:25 PM                                                                                                                   
CO-CHAIR  SAMUELS  said the  committee  had  the draft  committee                                                               
substitute (CS)  for HB 488 last  night, and he has  been working                                                               
with  Robert Mintz,  the original  drafter  of the  bill for  the                                                               
administration,  and   John  Chenoweth,   the  drafter   for  the                                                               
legislature,  to  make  sure "the  rough  patches  were  smoothed                                                               
over."  He said some of the  rough patches were not yet fixed, so                                                               
he would like to adopt the CS and  then amend it.  There are five                                                               
amendments that the two drafters agree on, he stated.                                                                           
REPRESENTATIVE  SEATON moved  to adopt  the committee  substitute                                                               
(CS) for  HB 488, labeled  24-GH2052\Y, Chenoweth, 3/15/06,  as a                                                               
working document.   Hearing no  objections, version Y  was before                                                               
the committee.                                                                                                                  
ROBERT  MINTZ,  Assistant Attorney  General,  Oil,  Gas &  Mining                                                               
Section,  Civil Division,  Department  of Law,  said  he has  the                                                               
package of amendments.                                                                                                          
CO-CHAIR  RAMRAS   moved  to  adopt  Amendment   1,  labeled  24-                                                               
GH2052\Y.4, Chenoweth, 3/16/06,  as follows [original punctuation                                                               
     Page 21, lines 3 - 4:                                                                                                      
          Delete "any payment or credit"                                                                                        
          Insert "certain payments or credits received by                                                                       
     the  producer,  as  provided in  this  subsection.  If,                                                                    
     during a month or, under  (f) of this section, during a                                                                    
     calendar  year,   a  producer  receives  one   or  more                                                                    
     payments or  credits subject to this  subsection and if                                                                    
     either  the total  amount of  the  payments or  credits                                                                    
     exceeds   the   amount    of   the   producer's   lease                                                                    
     expenditures or  the producer does  not have  any lease                                                                    
     expenditures, the producer  shall nevertheless subtract                                                                    
     the payments or credits  from the lease expenditures or                                                                    
     from  zero, respectively,  and the  producer's adjusted                                                                    
     lease expenditures for that month  or calendar year are                                                                    
     a  negative  number.  The  producer  shall  apply  that                                                                    
     negative number  to the calculation  made under  (a) of                                                                    
     this section.  The payments or credits  that a producer                                                                    
     must subtract  from the producer's  lease expenditures,                                                                    
     or  from zero,  under this  subsection are  payments or                                                                    
     credits that"                                                                                                              
CO-CHAIR SAMUELS objected.                                                                                                      
MR. MINTZ said  Amendment 1 applies to page 21,  lines 3-4 of the                                                               
CS, and it relates to the  important aspect of the production tax                                                               
value of  oil and gas.   He  said that the  proposed profit-based                                                               
petroleum  production   tax  (PPT)  involves   subtracting  lease                                                               
expenditures  from  the  gross  value  of oil  at  the  point  of                                                               
production.   "In  order  to  carry through  the  concept of  net                                                               
expenditures  and to  avoid windfalls,  there's a  requirement in                                                               
subsection  (e)  of  AS  43.55.160  that  lease  expenditures  be                                                               
adjusted by subtracting certain  payments that the producer gets-                                                               
reimbursements, for example,  or if you have  a lease expenditure                                                               
that  resulted in  acquiring  an  asset, and  then  you sell  the                                                               
asset,  what you  receive for  that sale  would also  have to  be                                                               
deducted as an adjustment."                                                                                                     
MR. MINTZ said Amendment 1 addresses  a timing problem in the CS.                                                               
He said  it is partially addressed  at the bottom of  page 17 and                                                               
the top of  page 18 in the  CS.  There could be  a situation with                                                               
negative lease  expenditures that would  give rise to a  tax, but                                                               
the Department  of Law determined that  an additional explanation                                                               
is necessary,  he said.  The  amendment explains how it  could be                                                               
possible  to  have a  negative  lease  expenditure.   He  gave  a                                                               
hypothetical example of a company  doing exploration work in 2007                                                               
and said that:                                                                                                                  
     It cost  $10 million in lease  expenditures, that would                                                                    
     be deducted,  but that  causes a  net loss  which under                                                                    
     Section  024  can  be converted  into  a  carry-forward                                                                    
     credit  of $2  million--that's 20  percent.   Then that                                                                    
     can be  sold, yielding  up to  $2 million  in receipts.                                                                    
     But let's  say the next  year, 2008, an asset  that was                                                                    
     generated   as   a    result   of   those   exploration                                                                    
     expenditures, such  as seismic  data or  other valuable                                                                    
     data, let's  say that was  sold for $1 million.   Under                                                                    
     subsection   (e)  of   160,  that's   required  to   be                                                                    
     subtracted  from the  explorer's lease  expenditures as                                                                    
     an adjustment,  as I was  just describing;  however, it                                                                    
     may be that there are  no lease expenditures in 2008 to                                                                    
     deduct  them against.   That  would  basically cause  a                                                                    
     windfall.  So what this  amendment does, is even if you                                                                    
     have no lease expenditures  in a particular time period                                                                    
     or if your  lease expenditures are too  small to offset                                                                    
     the  adjustment,  you  still   have  to  subtract  that                                                                    
     payment that you get as an  adjustment.  And if you get                                                                    
     a negative number, so be  it.  The negative number will                                                                    
     be entered into the tax calculation.                                                                                       
12:57:11 PM                                                                                                                   
REPRESENTATIVE SEATON asked  if that means it  is carried forward                                                               
as  an expense  or generates  a  loss that  could be  taken as  a                                                               
12:57:32 PM                                                                                                                   
MR. MINTZ  said it is  the opposite of  that.  "What  it's saying                                                               
is, if  you get a  reimbursement or  a payment that  would reduce                                                               
your expenses,  it could  reduce it below  zero if  your expenses                                                               
are not great enough, and  basically that becomes a taxable value                                                               
under subsection  (a) of 160.   So  it would actually  generate a                                                               
12:58:05 PM                                                                                                                   
CO-CHAIR  SAMUELS  removed his  objection.    Hearing no  further                                                               
objections, Amendment 1 carried.                                                                                                
CO-CHAIR  RAMRAS   moved  Amendment  2,   labeled  24-GH2052\Y.5,                                                               
Chenoweth, 3/16/06, as follows [original punctuation provided]:                                                                 
     Page 24, lines 3 - 4:                                                                                                      
          Delete "may apply a tax credit against that                                                                           
     liability under this section."                                                                                             
          Insert "and, during the calendar year, has                                                                            
     incurred a qualified capital  expenditure, as that term                                                                    
     is defined in AS 43.55.024, may  apply a tax credit, in                                                                    
     an  amount that  does  not exceed  the  amount of  that                                                                    
     expenditure,   against   that  liability   under   this                                                                    
     section.  An unused  portion  of a  tax  credit may  be                                                                    
     applied  to the  extent  otherwise  allowed under  this                                                                    
     section  for  one  or  more   months  during  the  same                                                                    
     calendar year."                                                                                                            
     Page 24, lines 6 - 7:                                                                                                      
          Delete "before applications for any credits under                                                                     
     this chapter"                                                                                                              
          Insert "for any month"                                                                                                
     Page 24, line 23, following "qualified":                                                                                   
     Insert "capital"                                                                                                           
CO-CHAIR SAMUELS objected.                                                                                                      
MR.  MINTZ said  Amendment 2  is a  fix to  a provision  that was                                                               
added  by the  committee.   Referring  to page  24,  he said  the                                                               
committee's intention  was to replace  the $73  million allowance                                                               
with a  new credit  limited to  $10 million per  year.   He noted                                                               
that the credit was meant to  be triggered by a qualified capital                                                               
expenditure,  but, in  the drafting  that fundamental  aspect got                                                               
left out.   The first part of Amendment 2  makes that correction,                                                               
he said.   In order  to take that  tax credit  there has to  be a                                                               
qualified capital  expenditure during  the calendar year,  and it                                                               
cannot exceed the amount of the  expenditure.  The second part of                                                               
Amendment  2 corrects  a phrase  "that didn't  really work,"  and                                                               
states "the same thing that is  true for all the other credits in                                                               
the bill,  which is  you can  never use a  credit to  reduce your                                                               
actual  tax due  below zero."    He said  the third  part of  the                                                               
amendment inserts "capital" to correct a terminology omission.                                                                  
1:00:33 PM                                                                                                                    
REPRESENTATIVE SEATON asked about  the capital expenditure and if                                                               
the   change   was    to   differentiate   reinvestment   capital                                                               
expenditures from operational expenditures.                                                                                     
MR. MINTZ said  that is correct; a  qualified capital expenditure                                                               
is  actually  defined  in  Section  024  as  a  subset  of  lease                                                               
expenditures,  and the  subset consists  of things  of a  capital                                                               
nature.   He said the  only exception  is the cost  of geological                                                               
and geophysical exploration.                                                                                                    
1:01:33 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked  if  it  is  correct  to  say  that                                                               
purchasing  an additional  lease could  not be  used as  "part of                                                               
MR. MINTZ said that is  correct, because the direct cost excludes                                                               
acquisition costs of leases or other properties.                                                                                
1:02:10 PM                                                                                                                    
CO-CHAIR SAMUELS removed his objection.                                                                                         
REPRESENTATIVE  SEATON  objected  and  asked the  intent  of  not                                                               
allowing this  to be used  for lease  acquisitions.  He  said the                                                               
committee  was trying  to stimulate  exploration and  activity in                                                               
Alaska, and asked  the consequences of allowing  the inclusion of                                                               
lease acquisition costs.                                                                                                        
CO-CHAIR  SAMUELS suggested  voting on  the amendment  and adding                                                               
that later.                                                                                                                     
REPRESENTATIVE SEATON removed his  objection.  Hearing no further                                                               
objections, Amendment 2 carried.                                                                                                
CO-CHAIR  RAMRAS   moved  Amendment  3,   labeled  24-GH2052\Y.6,                                                               
Chenoweth, 3/16/06, as follows [original punctuation provided]:                                                                 
     Page 29, line 31, following "REGULATIONS":                                                                                 
          Delete "."                                                                                                            
         Insert "AND RETROACTIVITY OF REGULATIONS. (a)"                                                                         
     Page 30, following line 3:                                                                                                 
     Insert a new subsection to read:                                                                                           
     "(b)     Notwithstanding  any  contrary   provision  of                                                                    
     AS 44.62.240,  a regulation  adopted by  the Department                                                                    
     of Revenue  to implement, interpret, make  specific, or                                                                    
     otherwise carry out  the provisions of secs. 5,  6, 8 -                                                                    
     11, 13 - 15,  17 - 20, 22, and 25 - 41  of this Act may                                                                    
     apply  retroactively  as  of   April 1,  2006,  if  the                                                                    
     Department  of  Revenue  expressly  designates  in  the                                                                    
     regulation  that the  regulation applies  retroactively                                                                    
     to that date."                                                                                                             
CO-CHAIR SAMUELS objected.                                                                                                      
MR. MINTZ said Amendment 3  is a very important technical change.                                                               
[The CS]  would begin the new  PPT on April  1, 2006.  It  may or                                                               
may  not have  a retroactive  effect, but  the language  needs to                                                               
have  authorization  for  the  Department  of  Revenue  to  allow                                                               
retroactivity.   The PPT would apply  to oil and gas  produced on                                                               
or after that  date, but it takes months  for complex regulations                                                               
to be developed,  he stated.  Under the  Emergency Procedure Act,                                                               
there   is   a   general  restriction   on   making   regulations                                                               
retroactive, so in order to make  sure that the PPT is applicable                                                               
at  the right  time, this  amendment's authorization  language is                                                               
1:05:10 PM                                                                                                                    
CO-CHAIR  SAMUELS said  there will  be an  amendment to  move the                                                               
effective date of the  PPT to January 1, 2006.   He asked how the                                                               
amendment should reflect that.                                                                                                  
MR. MINTZ said it would need to be changed by the legislature.                                                                  
1:05:47 PM                                                                                                                    
CO-CHAIR  SAMUELS  removed his  objection.    Hearing no  further                                                               
objections, Amendment 3 carried.                                                                                                
CO-CHAIR  RAMRAS   moved  Amendment  4,   labeled  24-GH2052\Y.7,                                                               
Chenoweth, 3/16/06, as follows [original punctuation provided]:                                                                 
     Page 29, lines 5 - 6:                                                                                                      
          Delete "the sections of this Act that are not                                                                         
     effective April 1, 2006"                                                                                                   
          Insert "secs. 8 and 13 of this Act"                                                                                   
     Page 29, lines 14 - 15:                                                                                                    
          Delete "the sections of this Act that are not                                                                         
     effective April 1, 2006"                                                                                                   
          Insert "secs. 5 and 6 of this Act"                                                                                    
     Page 29, line 17, following "Act,":                                                                                        
          Insert "or AS 43.55.030(e), added by sec. 22 of                                                                       
     this Act,"                                                                                                                 
     Page 29, lines 18 - 19:                                                                                                    
          Delete "the sections of this Act that are not                                                                         
     effective April 1, 2006"                                                                                                   
     Insert "secs. 20 and 22 of this Act"                                                                                       
CO-CHAIR SAMUELS objected.                                                                                                      
1:06:31 PM                                                                                                                    
MR. MINTZ said  these are fairly technical  changes regarding the                                                               
transition provisions  of HB  488.  He  explained that  there are                                                               
two sets  of transition provisions.   The original  bill provided                                                               
that the  new provisions would start  on July 1, and  some of the                                                               
provisions were  calendar year numbers.   He said  the transition                                                               
provision said that  for the first six  months of implementation,                                                               
"those things"  will be divided in  half to prorate them  for six                                                               
months.   "Some of these changes  do the same thing,  but because                                                               
the CS would  start the new tax provisions in  effect on April 1,                                                               
we're talking about 9 months out  of 12, rather than 6 months out                                                               
of 12."                                                                                                                         
MR.  MINTZ said  the other  transition provisions  are about  how                                                               
taxpayers  will initially  file, because  it will  take time  for                                                               
producers  to respond  to the  new law.   It  would be  unfair to                                                               
penalize a  producer for underpaying  in April if the  law didn't                                                               
take effect until  May.  "Even if it [passed  by April], it would                                                               
be hard  to respond that quickly,"  he noted.  For  the first six                                                               
months after  the production tax  changes, the producer  can file                                                               
returns required under  federal law, and later  the producer will                                                               
have  to pay  the additional  tax and  file a  true-up statement.                                                               
These  provisions were  in  the  CS, but  the  references to  the                                                               
effective dates were not clear, he said.                                                                                        
1:09:48 PM                                                                                                                    
CO-CHAIR  SAMUELS  removed his  objection.    Hearing no  further                                                               
objections, Amendment 4 carried.                                                                                                
CO-CHAIR  RAMRAS   moved  Amendment  7,   labeled  24-GH2052\Y.9,                                                               
Chenoweth, 3/16/06, as follows [original punctuation provided]:                                                                 
     Page 4, line 9, following "for":                                                                                           
          Insert "all"                                                                                                          
     Page 5, line 31:                                                                                                           
          Delete "AS 43.55.011"                                                                                             
          Insert "AS 43.55.011(a)"                                                                                          
     Page 30, line 22:                                                                                                          
     Delete "24,"                                                                                                               
The committee took an at-ease from 1:10:58 PM to 1:12:59 PM.                                                                
CO-CHAIR SAMUELS objected.                                                                                                      
MR. MINTZ  said the basic  language that  has always been  in the                                                               
production tax  statute refers to levying  a tax for all  oil and                                                               
gas produced.   He added that  that is still in  section 011 (a),                                                               
which was  in the original  HB 488.  The  CS has new  elements of                                                               
the production  tax, and one  subsection has the  correct phrase,                                                               
"all oil  and gas," but the  second subsection does not  have the                                                               
word "all".                                                                                                                     
1:14:17 PM                                                                                                                    
MR. MINTZ said  the provisions go on to say  "except for the tax-                                                               
exempt  oil and  gas,"  which  is the  state  or federal  royalty                                                               
share, "but  it starts off  with the general statement  of taxing                                                               
all  oil and  gas."   He  said  the second  part  relates to  the                                                               
taxation of  private royalty oil and  gas.  "This relates  to the                                                               
fact that the  CS now has three different  elements of production                                                               
tax, whereas the  original bill only had a  single element, which                                                               
used to  be called  the 'net value  tax'."  The  CS calls  it the                                                               
'production  tax  value  tax'.    He said  Section  10,  Page  5,                                                               
provides a default methodology for  calculating a private royalty                                                               
share of  the tax.   He noted that when  the two elements  of the                                                               
tax were added, the reference to  43.55.011 became too broad.  So                                                               
line 31, page  5, is intended to  be the tax only  under 011 (a),                                                               
which is the  tax on production tax value or  what was previously                                                               
called net  value.  The  change on page  30, line 22,  relates to                                                               
which provisions  of the  act would  take effect  immediately and                                                               
which  would take  effect  on April  1.   He  said the  amendment                                                               
removes  Section  24  from what  would  take  effect  immediately                                                               
because   it  conforms   the  production   tax  statute   to  the                                                               
requirements   of   the   constitutional  budget   reserve   fund                                                               
amendment.    "There is  a  reference  in  that provision  to  AS                                                               
43.55.011 through  43.55.170, which  is basically  the production                                                               
tax statute.   Well,  170 is  a new  provision, which  won't take                                                               
effect until  April 1, and  therefore, this section of  the bill,                                                               
which  refers to  170,  it wouldn't  make sense  for  it to  take                                                               
effect before April 1.                                                                                                          
1:17:27 PM                                                                                                                    
REPRESENTATIVE SEATON referred  to inserting "all".   He asked if                                                               
the  definition of  "produce" still  omits resources  utilized in                                                               
the operations of the industry.                                                                                                 
MR. MINTZ said that was correct.                                                                                                
CO-CHAIR  SAMUELS  removed his  objection.    Hearing no  further                                                               
objections, Amendment 7 carried.                                                                                                
1:18:14 PM                                                                                                                    
REPRESENTATIVE  OLSON moved  Amendment  5,  as follows  [original                                                               
punctuation provided]:                                                                                                          
     Page 4, line 9:                                                                                                            
          delete "or gas" "and gas"                                                                                             
     Page 4, line 10                                                                                                            
          delete "and gas"                                                                                                      
     Page 4, line 12                                                                                                            
          delete "and gas"                                                                                                      
CO-CHAIR SAMUELS objected.                                                                                                      
REPRESENTATIVE  OLSON said  the  amendment removes  gas from  the                                                               
progressive portion of HB 488.                                                                                                  
CO-CHAIR SAMUELS said there was  testimony yesterday that pointed                                                               
out that a spike in oil  prices doesn't necessarily mean gas will                                                               
follow, "but you'd be raising the  tax on gas because of an event                                                               
that triggered a  spike in oil prices.  There  were some concerns                                                               
about that.  So the gas portion  of this bill, right now, if this                                                               
amendment  passes,  will  not  be  progressive."    He  said  the                                                               
surcharge will not apply to gas.                                                                                                
1:19:23 PM                                                                                                                    
REPRESENTATIVE CRAWFORD said  the bill treats gas  at 6,000 cubic                                                               
feet to one  barrel of oil, and  it is a disparity  of about nine                                                               
to one.   "Wouldn't it  be better to just  go ahead and  take gas                                                               
completely out of this?"  He read a rationale to that idea:                                                                     
     Not  enough information  has been  provided  as to  the                                                                    
     impact of this new tax  structure on current and future                                                                    
     gas production  in Cook Inlet  and on the  North Slope,                                                                    
     as well as how this will  relate to, or be impacted by,                                                                    
     the  gas pipeline.   Gas  has  historically been  taxed                                                                    
     differently, at different rates  and no information has                                                                    
     been provided as  to why it should now be  taxed in the                                                                    
     same way  or at the  same level.  Also,  no information                                                                    
     has been  provided that would explain  the implications                                                                    
     of  allowing  the  amalgamation of  both  oil  and  gas                                                                    
     expenditures on a statewide  basis and across deduction                                                                    
     and credit of oil expenditures  against the gas tax and                                                                    
     gas  expenditures  against  the  oil  tax.    Once  the                                                                    
     information  has been  provided  on  all these  fronts,                                                                    
     appropriate changes  can be made in  the gas production                                                                    
REPRESENTATIVE CRAWFORD said the state  could be opening a can of                                                               
worms  and  end  up  subsidizing production  facilities  for  gas                                                               
fields that the  state had no intention of doing,  and writing it                                                               
off of profits  against oil.  He said it  is a scary proposition,                                                               
and he  thinks there should  be an amendment  to take gas  out of                                                               
the bill.                                                                                                                       
CO-CHAIR SAMUELS  asked Representative Crawford if  he intends to                                                               
do that.                                                                                                                        
1:22:14 PM                                                                                                                    
REPRESENTATIVE CRAWFORD  said he  has been  trying to  write that                                                               
amendment, but it  is difficult.  "But  it can be done.   We have                                                               
taxed gas and  oil separately in the  past.  It is  just going to                                                               
take some work."                                                                                                                
1:22:45 PM                                                                                                                    
CO-CHAIR SAMUELS  suggested having  the debate tomorrow  when the                                                               
amendment is  ready.  He noted  that Amendment 5 is  a very small                                                               
bite out of that apple.                                                                                                         
REPRESENTATIVE CRAWFORD  said he wished  he knew what  was right.                                                               
He said  he appreciates the  work Co-Chair Samuels has  done, and                                                               
he  is  not equipped  to  go  forward with  the  bill  as it  is,                                                               
especially with gas included in it.   "I would prefer to just say                                                               
no."  He said he is still not  convinced that a net profit tax is                                                               
appropriate.   There is  weight behind  the progressivity  but it                                                               
doesn't go far  enough.  Taxing the gas  at 6 to 1 with  oil is a                                                               
mistake, he stated.                                                                                                             
1:25:39 PM                                                                                                                    
CO-CHAIR SAMUELS  said he  has no problems  with dealing  with it                                                               
CO-CHAIR RAMRAS  said he  is in favor  of progressivity  for both                                                               
oil and  gas, but  he will  support Amendment  5 because  of what                                                               
happened during  Hurricane Katrina when  gas spiked and  oil went                                                               
up  more slowly.   He  suggested  that the  legislature create  a                                                               
cleaner product for  progressivity for gas tied to  the Henry Hub                                                               
measurement.  If  progressivity is developed for gas,  it must be                                                               
tied to the appropriate indicator, he stated.                                                                                   
1:27:22 PM                                                                                                                    
REPRESENTATIVE GATTO  said he agrees.   He never thought  oil and                                                               
gas should be in the same bill,  just as coal shouldn't be in the                                                               
bill.  This  bill is already complicated, and  another bill could                                                               
be written for gas using HB 488 as a framework.                                                                                 
CO-CHAIR  SAMUELS said  there  are a  plethora  of problems  with                                                               
taking gas out  of the bill.   "The entire point of  the bill was                                                               
to go  take the royalty  away and go to  cost recovery.   And how                                                               
are  you going  to determine  the cost  recovery factions  of two                                                               
products coming  out of the same  hole in the ground?"  he asked.                                                               
"I  can guarantee,  whichever  one  was a  tax  advantage of  the                                                               
person who  drilled the hole  in the  ground is where  they would                                                               
shovel the cost  recovery."  It would take another  two months to                                                               
write a  gas bill, and it  would be hugely problematic  to try to                                                               
account for it.  He said  he agrees with the amendment because of                                                               
what [Mark]  Hanley said.  Some  other indicator is a  better way                                                               
to go, he said.                                                                                                                 
1:29:59 PM                                                                                                                    
REPRESENTATIVE  SEATON said  he wants  consultants to  provide an                                                               
analysis on progressivity  for gas.  He said he  will support the                                                               
amendment--not to remove progressivity for  gas but to get out of                                                               
tying gas to oil until there is an appropriate method for gas.                                                                  
1:30:52 PM                                                                                                                    
REPRESENTATIVE GATTO  asked about proportioning gas  and oil cost                                                               
recovery.  He  suggested using BTUs, and said there  will be ways                                                               
to deal with the cost recovery question.                                                                                        
REPRESENTATIVE CRAWFORD said the price  of BTUs are different for                                                               
oil and gas, so that would not solve the problem.                                                                               
CO-CHAIR  SAMUELS  removed his  objection.    Hearing no  further                                                               
objections, Amendment 5 carried.                                                                                                
REPRESENTATIVE KAPSNER moved  Amendment 6, labeled 24-GH2052\F.1,                                                               
Chenoweth, 3/15/06, as follows [original punctuation provided]:                                                                 
     Page 9, line 24:                                                                                                           
          Delete "April 1, 2006"                                                                                                
          Insert "January 1, 2006"                                                                                              
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          Insert "January 1, 2006"                                                                                              
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          Delete "April 1, 2006"                                                                                                
          Insert "January 1, 2006"                                                                                              
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          Delete "April 1, 2006"                                                                                                
     Insert "January 1, 2006"                                                                                                   
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          Delete "April 1, 2006"                                                                                                
          Insert "January 1, 2006"                                                                                              
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          Delete "April 1, 2006"                                                                                                
          Insert "January 1, 2006"                                                                                              
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          Delete "April 1, 2006"                                                                                                
          Insert "January 1, 2006"                                                                                              
     Page 21, line 23:                                                                                                          
          Delete "March 31, 2016"                                                                                               
          Insert "December 31, 2015"                                                                                            
     Page 25, line 1:                                                                                                           
          Delete "April 1, 2006"                                                                                                
          Insert "January 1, 2006"                                                                                              
     Page 25, lines 6 - 24:                                                                                                     
          Delete all material and insert:                                                                                       
          "TRANSITIONAL PROVISIONS. (a) For oil and gas                                                                         
     produced  before  January 1,  2006, the  provisions  of                                                                    
     AS 43.55, and regulations  adopted under AS 43.55, that                                                                    
     were in  effect before  January 1, 2006, and  that were                                                                    
     applicable  to the  oil and  gas continue  to apply  to                                                                    
     that oil and gas.                                                                                                          
          (b)  Notwithstanding any provision in this Act to                                                                     
     the contrary,                                                                                                              
               (1)  a report and payment of production tax                                                                      
     on oil and  gas due under AS 43.55, as  enacted by this                                                                    
     Act, for any  period before the effective  date of this                                                                    
     Act is due  on the last day of the  month following the                                                                    
     month in which  the effective date of  this Act occurs;                                                                    
               (2)  penalty provisions of AS 43.55.020(h),                                                                      
     added by sec.  13 of this Act,  and of AS 43.55.030(d),                                                                    
     amended by  sec. 17  of this Act,  apply to  taxes that                                                                    
     are due  and unpaid and  reports that are not  filed by                                                                    
     the date described in (1) of this subsection."                                                                             
     Page 26, lines 13 - 20:                                                                                                    
          Delete all material and insert:                                                                                       
         "* Sec. 42. The uncodified law of the State of                                                                       
     Alaska is amended by adding a new section to read:                                                                         
          RETROACTIVITY. Sections 5, 6, 8 - 11, 13, 14, 16                                                                      
     - 18, and 22 - 37 are retroactive to January 1, 2006,                                                                      
      and apply to oil and gas produced on and after that                                                                       
       * Sec. 43. This Act takes effect immediately under                                                                     
     AS 01.10.070(c)."                                                                                                          
CO-CHAIR SAMUELS objected.                                                                                                      
REPRESENTATIVE KAPSNER said  Amendment 6 retroactively implements                                                               
the PPT to January 1, and  she quoted consultant Pedro van Meurs,                                                               
who said:   "Whether you start the  date on January 1  or July 1,                                                               
really  has  no  impact  on the  competitiveness  of  the  system                                                               
because new  investors would  look at  new investments  and would                                                               
not even  have to  pay tax for  now for awhile."   Mr.  van Meurs                                                               
said  the two  dates are  equally attractive  to investors.   The                                                               
only  difference would  be six  months more  of revenues,  adding                                                               
$250 million to state coffers.                                                                                                  
1:33:45 PM                                                                                                                    
CO-CHAIR SAMUELS  maintained his  objection because he  would not                                                               
want the Internal  Revenue Service to tax him  retroactively.  He                                                               
said  he hates  to  go  back and  change  the  rules because  the                                                               
investors didn't plan on it.                                                                                                    
REPRESENTATIVE GATTO  said the bill  will be in effect  for 20-30                                                               
years, and the $250 million is a small piece of it.                                                                             
A roll  call vote  was taken.   Representatives  Elkins, Crawford                                                               
and  Kapsner voted  in  favor of  Amendment  6.   Representatives                                                               
Gatto, Olson,  Ramras, Samuels,  Seaton, and LeDoux voted against                                                               
it.  Therefore, Amendment 6 failed by a vote of 3-6.                                                                            
REPRESENTATIVE KAPSNER offered Amendment 8 as follows:                                                                          
      Delete sections relating to transitional investment                                                                       
CO-CHAIR SAMUELS objected.                                                                                                      
REPRESENTATIVE  KAPSNER said  in keeping  with the  philosophy of                                                               
not  wanting to  retroactively  implement any  laws, Amendment  8                                                               
deletes  all sections  of  transitional investment  expenditures.                                                               
She  said  if  the  committee's philosophy  on  retroactivity  is                                                               
negative with  regard to the  effective date, it  should maintain                                                               
that philosophy across the board.                                                                                               
1:37:46 PM                                                                                                                    
CO-CHAIR SAMUELS said it is "a  little bit of an apple and orange                                                               
argument."  He said he did  not believe in using investments made                                                               
five years  ago; an investment  five years  ago was not  based on                                                               
the high  oil prices.  "Should  we penalize them because  of high                                                               
oil prices?   And in effect that is  what we did in the  CS."  He                                                               
said the  state will be  the beneficiary.   He said he  talked to                                                               
all the  members and  spread out  the payment  from six  years to                                                               
seven years.  "We cut back quite  a bit of the expenditures."  He                                                               
said the state  can't say it is  taxing the oil at  a higher rate                                                               
but it has more oil to tax because of those investments.                                                                        
1:39:20 PM                                                                                                                    
CO-CHAIR RAMRAS said  he is against Amendment 8.   The transition                                                               
credits  amounted to  $5 billion,  and 20  percent "was  going to                                                               
come back  against the state  as a credit to  be used by  the oil                                                               
companies worth  about $1 billion."   He said the CS  reduced the                                                               
credit to  $3-400 million spread over  seven years.  Some  of the                                                               
oil companies  have testified  that it takes  ten years  to bring                                                               
the oil to market,  so he said it is reasonable  to apply a five-                                                               
year yardstick.   He said  because of the  price of oil,  the oil                                                               
companies  are  enjoying  a  significantly  greater  return  than                                                               
forecasted.  He  noted that oil price projections  were about $30                                                               
per  barrel five  years  ago.   He  believes  that those  capital                                                               
expenditures have borne  fruit, and many will  enjoy a reasonable                                                               
horizon of high  oil prices.  He opposes Amendment  8, because he                                                               
has  "stewarded  a   fair  program  recognizing  a   lot  of  the                                                               
transition credits for  which they have enjoyed  some benefit and                                                               
those capital costs that are still at risk in the market place."                                                                
1:41:49 PM                                                                                                                    
REPRESENTATIVE  CRAWFORD said  he represents  House District  21,                                                               
the  people of  South Muldoon,  and  they have  not been  treated                                                               
properly.   He said the  legislature dallied when it  should have                                                               
been redoing  the severance  tax years  ago.   It was  evident at                                                               
least two years  ago that oil taxes should have  been fixed.  The                                                               
industry collected  $3 billion in  profits, some of  which should                                                               
have gone to people of Alaska, he  stated.  It seems that if this                                                               
tax  bill can't  even be  retroactive  to January  1, "we're  not                                                               
going back to get their profits  that I don't believe they should                                                               
have gotten."   He said  it is up to  the legislature to  stay in                                                               
the  midrange around  the world  of total  government take  after                                                               
discounting  for transportation  and production  costs.   He said                                                               
the oil companies got far more  than they should have.  "This has                                                               
been   a  hugely   rewarding  deal   for   the  oil   companies."                                                               
Representative Kapsner is right, he noted.                                                                                      
1:44:07 PM                                                                                                                    
REPRESENTATIVE SEATON said  this is a troubling issue.   He said,                                                               
"those investments  were there and yet  we were under-collecting.                                                               
ELF was  not aggregated for a  good portion of that  time.  There                                                               
were a significant  amount of taxes left on the  table."  He said                                                               
he doesn't  think that future  capital expenditures will  be made                                                               
based  on past  capital credit.   Representative  Olson mentioned                                                               
that  investors are  going into  Libya in  spite of  nationalized                                                               
1:46:02 PM                                                                                                                    
REPRESENTATIVE GATTO said this bill  already has retroactivity in                                                               
that today is March  16 and the bill won't be  signed by April 1.                                                               
"It  is a  matter of  saying how  retroactive.   But since  we've                                                               
already picked a date, I think  it's fair to just leave that date                                                               
REPRESENTATIVE  LEDOUX  said  she struggled  with  Representative                                                               
Kapsner's  first  amendment regarding  the  start  date, and  she                                                               
couldn't  swallow that  amendment because  of the  retroactivity.                                                               
She said that if there will  not be a look-back for the effective                                                               
date, she will support this amendment.                                                                                          
1:47:27 PM                                                                                                                    
A  roll call  vote was  taken.   Representatives Seaton,  LeDoux,                                                               
Elkins,  Crawford and  Kapsner  voted in  favor  of Amendment  8.                                                               
Representatives Gatto,  Olson, Ramras  and Samuels  voted against                                                               
it.  Therefore, Amendment 8 passed by a vote of 5-4.                                                                            
1:48:24 PM                                                                                                                    
CO-CHAIR SAMUELS asked that Amendment  9 be held pending research                                                               
of its ramifications.                                                                                                           
1:49:18 PM                                                                                                                    
REPRESENTATIVE  KAPSNER   introduced  Amendment  10   as  follows                                                               
[original punctuation provided]:                                                                                                
     Page 31, line 1                                                                                                            
          Add the following:                                                                                                    
     "Sec. 49. AS 43.55. is amended to read:                                                                                    
          Sec.43.55.400. High energy cost offset fund.                                                                          
          (a) The high energy cost offset fund is                                                                               
     established  as a  separate fund  in the  general fund.                                                                    
     The fund consists of all money appropriated to it.                                                                         
          (b) The high energy cost offset fund shall be                                                                         
     invested by  the Department of  Revenue so as  to yield                                                                    
     competitive market rates, as  provided in AS 37.10.071.                                                                    
     Money in the  fund may be appropriated  to provide cost                                                                    
     offsets for high energy costs of consumers.                                                                                
          (c) Nothing in this section creates a dedication                                                                      
     of funds                                                                                                                   
CO-CHAIR SAMUELS objected.                                                                                                      
REPRESENTATIVE  KAPSNER said  the committee  recognizes that  the                                                               
consumers of  Alaska are  suffering under  high oil  prices while                                                               
the industry  and the  state enjoys the  benefits.   Amendment 10                                                               
would establish a  high energy cost offset fund,  funded when the                                                               
price of crude gets  to a certain amount.  "The  more you pay for                                                               
stove oil, the  more benefit you would receive."   It doesn't set                                                               
a price trigger, she explained.                                                                                                 
1:50:48 PM                                                                                                                    
REPRESENTATIVE  SEATON said  he  will not  support the  amendment                                                               
because it  is unrelated  to the tax  bill before  the committee.                                                               
He noted that the legislature  is establishing similar funds, and                                                               
they should be separate pieces of legislation.                                                                                  
1:51:24 PM                                                                                                                    
CO-CHAIR SAMUELS said  he agrees that the state  benefits, and it                                                               
is an easier  job to sit here  with high oil prices.   He said it                                                               
is tough to  pay $6 per gallon  for aviation fuel in  Cold Bay to                                                               
get  people to  a  village where  they pay  $6-7  per gallon  for                                                               
heating  fuel.    He  said  he  whole-heartedly  understands  the                                                               
problem, but he thinks HB 488 is  the wrong vehicle.  The bill is                                                               
already complicated.  He said  the resources committee could work                                                               
on  separate   legislation  that   wouldn't  be   so  politically                                                               
1:52:42 PM                                                                                                                    
REPRESENTATIVE  CRAWFORD said  he  agrees that  the amendment  is                                                               
politically treacherous,  but it  is a statement  the legislature                                                               
could make.  He  said it doesn't say what the cost  will be but a                                                               
statement  of  intent.    With  high oil  prices,  the  state  is                                                               
benefiting and  people are suffering.   "Now would be  the proper                                                               
time to make this statement."                                                                                                   
1:53:30 PM                                                                                                                    
CO-CHAIR RAMRAS said he will oppose  the amendment but will go on                                                               
record  of supporting  the  issue.   He  said  he  was amused  by                                                               
Anadarko   Petroleum   Corporation's  testimony   bemoaning   the                                                               
increasing cost of oil development  by complaining of high-energy                                                               
costs.    He said  he  has  seen  the decrease  in  discretionary                                                               
spending of  Fairbanks citizens  and the use  of credit  cards to                                                               
heat  their  homes.   High  oil  prices  will  do great  harm  to                                                               
Alaskans, especially  rural Alaskans.   He  said he  will address                                                               
this in another vehicle.                                                                                                        
A roll  call vote  was taken.   Representatives  LeDoux, Crawford                                                               
and  Kapsner voted  in favor  of Amendment  10.   Representatives                                                               
Gatto, Olson,  Ramras, Elkins, Seaton  and Samuels  voted against                                                               
it.  Therefore, Amendment 10 failed by a vote of 3-6.                                                                           
1:55:58 PM                                                                                                                    
REPRESENTATIVE CRAWFORD moved  conceptual Amendment 11, described                                                               
by him as follows [original punctuation provided]:                                                                              
     This amendment  would prevent a deduction  from taxable                                                                    
     income for the  clean-up of oil spills,  as in existing                                                                    
     law Sec. 43.55.150 (c)(1) on the severance tax.                                                                            
     The existing language  reads "the amount of  loss of or                                                                    
     damage to,  or of expense  incurred due to the  loss of                                                                    
     or damage  to, a  vessel used to  transport oil  if the                                                                    
     loss,  damage, or  expense  is  incurred in  connection                                                                    
     with a catastrophic oil discharge  from the vessel into                                                                    
     the marine or inland waters of the state".                                                                                 
     In addition, unless prohibited  elsewhere in this bill,                                                                    
     a provision should be added  preventing a taxpayer from                                                                    
     deducting the  cost of any oil-spill  related damage or                                                                    
     penalty payments to a governmental or private party.                                                                       
CO-CHAIR RAMRAS objected.                                                                                                       
REPRESENTATIVE CRAWFORD  said the  state should  not pay  for the                                                               
cost of  clean up  of a  spill, like the  Exxon Valdez  spill, or                                                               
that it should allow a deduction  against profits for the cost of                                                               
settlements.   He said  his amendment uses  the same  language of                                                               
existing statute.                                                                                                               
1:58:02 PM                                                                                                                    
CO-CHAIR SAMUELS asked if the  amendment technically fit into the                                                               
DAN DICKINSON, Consultant to the  Office of the Governor, said he                                                               
is confused.   He said that  after the Exxon Valdez  oil spill of                                                               
1989, the following  language "stepped in."   "In determining the                                                               
gross value of oil under (a),  the department may not allow, as a                                                               
reasonable  cost  of  transportation."   He  said,  "Our  current                                                               
statute  prohibits...we  may  not  allow  these  as  a  deduction                                                               
currently.   So I'm concerned.   I guess I am  simply confused as                                                               
to what this conceptual amendment is showing."                                                                                  
CO-CHAIR  SAMUELS  asked Mr.  Dickinson  if  he meant  that  what                                                               
Representative Crawford  wants is already in  law; spill expenses                                                               
are not deductible.                                                                                                             
MR. DICKINSON said,  "Unless the question is, if we  cannot do it                                                               
for purposes  of gross and...this conceptual  amendment will mean                                                               
we cannot either do it for purposes of net."                                                                                    
1:59:26 PM                                                                                                                    
REPRESENTATIVE CRAWFORD  said he doesn't  want spill costs  to be                                                               
written off against profits.                                                                                                    
MR. DICKINSON  stated, "I think  to clarify your question  is, we                                                               
already, those are already not  allowed in the calculation of the                                                               
gross.  And...so  the question would be if we  would transfer and                                                               
make sure this is  also not allowed for purposes of  the net.  It                                                               
would be a conceptual issue."                                                                                                   
2:00:00 PM                                                                                                                    
REPRESENTATIVE SEATON  asked about the  CS.  "Are we  amending or                                                               
deleting this  previous language  and, therefore,  do we  need to                                                               
have this in?"                                                                                                                  
MR. DICKINSON  said, "No,  this section would  not be  altered by                                                               
either  the bill  that the  administration submitted  or the  CS.                                                               
Currently this language stands unchanged in both."                                                                              
CO-CHAIR SAMUELS said  he still wants to know if  it is already a                                                               
law that  companies can't  deduct [the costs  of oil  spills] "in                                                               
any way, shape or form?"                                                                                                        
2:00:53 PM                                                                                                                    
MR.  DICKINSON said,  "That is  correct.   You cannot  use it  in                                                               
calculating the gross  value, and then, what we have  done, is we                                                               
said you  start with the gross  value, you subtract a  bunch more                                                               
things  to  come to  net.    I suppose  it  is  possible that  an                                                               
argument  could be  made that  these  costs, if  they were  lease                                                               
related,  could be  calculated  as part  of  that net  deduction.                                                               
Generally, I suppose, inland waters  of the state might include a                                                               
spill to a river, upstream on the lease."                                                                                       
2:01:24 PM                                                                                                                    
REPRESENTATIVE  GATTO   asked  if  this  is   the  Joe  Hazelwood                                                               
MR. DICKINSON said  he believes this was introduced  to deal with                                                               
the costs that were spent...                                                                                                    
REPRESENTATIVE GATTO  interjected and  asked if  any part  of the                                                               
oil cleanup  costs in 1989  applied to  net profits for  state or                                                               
federal taxes as a normal cost of doing business.                                                                               
2:01:57 PM                                                                                                                    
MR. DICKINSON said  the state was not calculating  profit at that                                                               
time.   "Because  of the  passage of  this piece  of legislation,                                                               
those   costs   were  generally   not   considered   a  cost   of                                                               
ROBYNN  WILSON, Director,  Tax Division,  Department of  Revenue,                                                               
said those expenses for spill  cleanup are a normal, ordinary and                                                               
necessary  business  expense  and  so  would  be  deductible  for                                                               
federal income taxes, "and, therefore,  because we piggy-back off                                                               
of federal rules, would have  been deducted then for state income                                                               
tax purposes."                                                                                                                  
2:02:55 PM                                                                                                                    
REPRESENTATIVE SEATON  asked if  the intent  of the  amendment is                                                               
that costs  incurred in spill  cleanup would not be  a deductible                                                               
expense under the PPT.                                                                                                          
REPRESENTATIVE CRAWFORD said  that is right, as well  as the cost                                                               
of  any damages  or settlement  against  the company.   "I  don't                                                               
believe we  should be, in any  way, allowing that as  a deduction                                                               
for doing business against the profits."                                                                                        
2:03:44 PM                                                                                                                    
REPRESENTATIVE SEATON  said he is  confused with the  addition of                                                               
the last sentence [of the  amendment], and suggested splitting it                                                               
into two amendments.   "One is that this would  not be considered                                                               
an  allowable deduction  for  the PPT,  and  the other...that  it                                                               
wouldn't be  able to be  used for  any other kind  of deduction."                                                               
He noted  that there  may be some  legal constraints  in changing                                                               
income tax language.                                                                                                            
2:04:28 PM                                                                                                                    
REPRESENTATIVE CRAWFORD said he would  be happy with limiting the                                                               
amendment to the  costs of oil spill cleanup  and awarded damages                                                               
under the PPT.                                                                                                                  
CO-CHAIR SAMUELS said, "So we  will go with calling the amendment                                                               
against the PPT for the costs  of any oil spill related damage or                                                               
penalty payments to a governmental  or private entity against the                                                               
PPT as Amendment 11a, which is on the table before us now."                                                                     
REPRESENTATIVE GATTO  said oil can  be spilled without  the fault                                                               
of the  producer, including acts  of terrorism and  vandalism and                                                               
normal wear  and tear.   He  said the recent  spill came  from an                                                               
undetectable pinhole.  "Is it  your intent, in this amendment, to                                                               
penalize  the companies  for conditions  for which  they have  no                                                               
2:05:50 PM                                                                                                                    
REPRESENTATIVE CRAWFORD said the intent  was to follow the law as                                                               
it is written now.  There  may be other passages that exempt acts                                                               
of god, but he  knows this is a law he  wants continued under the                                                               
PPT,  "that they  can't  deduct it."   There  may  be times  that                                                               
things could  happen, but maybe  the pinhole could've  been taken                                                               
care of  through routine maintenance.   He noted that  there have                                                               
been cutbacks on  corrosion control and x-raying  the pipeline to                                                               
determine the  fitness of the  walls, "because they're  trying to                                                               
reduce  expenses."    He  said  he has  friends  that  worked  on                                                               
corrosion  control, and  they have  been laid  off.   He said  he                                                               
doesn't know if that was part  of the reason the recent oil spill                                                               
happened, but  it could have  been.  He  said he doesn't  want to                                                               
speculate, but "a lot of this stuff is preventable."                                                                            
2:08:05 PM                                                                                                                    
REPRESENTATIVE  GATTO asked  about  piggyback  arrangements.   He                                                               
said  he  understands what  happens  on  the federal  income  tax                                                               
regarding  spill cleanup  being an  allowable expense,  "but then                                                               
you said you  were able to piggyback back to  the state, and that                                                               
seems to be the reverse direction."                                                                                             
MS.  WILSON  said  the calculation  of  state  corporate  taxable                                                               
income begins  with federal taxable  income, and it  follows with                                                               
certain state  modifications.  "That  means that if  something is                                                               
deducted on the  federal tax return, that's sort  of our starting                                                               
point.    We   adopt  most  of  the  Internal   Revenue  Code  by                                                               
REPRESENTATIVE GATTO deduced that  oil companies can take benefit                                                               
from the expenses of cleaning up oil.                                                                                           
MS. WILSON  said, "That  is correct,  and we  calculate corporate                                                               
income tax  based on worldwide  income apportioned to  Alaska, so                                                               
not only,  for example, oil  spills in  Alaska but oil  spills in                                                               
REPRESENTATIVE GATTO postulated that  the federal government does                                                               
not consider whether it was the oil company's fault or not.                                                                     
MS. WILSON  said that is  correct, but  she noted that  the third                                                               
paragraph  has   questions  about  penalties.     "Penalties  are                                                               
specifically not  allowed as  a deduction,  federally, if  it's a                                                               
penalty  for breaking  the law.   It  does not  exclude penalties                                                               
that may contractual."                                                                                                          
2:10:22 PM                                                                                                                    
REPRESENTATIVE GATTO  noted that  the $2  billion that  the state                                                               
might get  from Exxon Valdez  oil spill would not  be deductible.                                                               
"Is that a settlement or a penalty?"                                                                                            
MR. DICKINSON  said that  might depend, and  he doesn't  know the                                                               
legal  call.     He  said  judgments  to   individuals  might  be                                                               
2:10:51 PM                                                                                                                    
MS. WILSON  said it would  depend on  how damages would  be split                                                               
MR. DICKINSON said  page 20, lines 21 and 22,  of the CS "already                                                               
prohibits  any costs  arising from  fraud, willful  misconduct or                                                               
negligence...wouldn't cover  all spill costs,  but it  could deal                                                               
with  ones...in which  negligence were  a factor.   And  then the                                                               
next  line in  which  we essentially  repeat  the federal  notion                                                               
here: 'but the fines and penalties imposed by law'."                                                                            
2:11:39 PM                                                                                                                    
CO-CHAIR  SAMUELS said  Amendment  11a is  before the  committee,                                                               
"which would  conceptually state  that you  could not  deduct the                                                               
cost of any  oil spill related damage or penalty  payments to any                                                               
government of  private party.  [It]  would not allow that  off of                                                               
the PPT."                                                                                                                       
MR. DICKINSON  said that the  language referred to by  "the maker                                                               
of  the amendment"  is for  a  catastrophic oil  spill, which  is                                                               
defined in  statute.  He said  he believed that the  recent spill                                                               
would not be defined as catastrophic and would not qualify.                                                                     
CO-CHAIR SAMUELS  suggested getting  the language and  taking the                                                               
issue up tomorrow.  He said  he tends to agree with the amendment                                                               
and asked that the bill drafters be consulted.                                                                                  
2:12:42 PM                                                                                                                    
CO-CHAIR SAMUELS  said the  question is  if throwing  a rod  in a                                                               
truck is considered an oil spill.                                                                                               
REPRESENTATIVE CRAWFORD  said the  amendment refers to  a vessel,                                                               
so that could  not include throwing a  rod in a truck.   "I think                                                               
this is a fairly clear statement."                                                                                              
CO-CHAIR SAMUELS  said he understands,  and he would like  to see                                                               
it in writing.                                                                                                                  
REPRESENTATIVE CRAWFORD withdrew Amendment 11.                                                                                  
2:13:48 PM                                                                                                                    
REPRESENTATIVE GATTO  suggested he  find out if  a pipeline  is a                                                               
2:14:09 PM                                                                                                                    
REPRESENTATIVE SEATON moved  Amendment 12, labeled 24-GH2052\Y.8,                                                               
Chenoweth, 3/16/06, as follows [original punctuation provided]:                                                                 
     Page 4, line 16:                                                                                                           
          Delete "50"                                                                                                           
          Insert "45"                                                                                                           
     Page 4, line 18:                                                                                                           
          Delete "$50"                                                                                                          
          Insert "$45"                                                                                                          
     Page 4, line 19:                                                                                                           
          Delete "$150"                                                                                                         
          Insert "$145"                                                                                                         
CO-CHAIR SAMUELS objected.                                                                                                      
REPRESENTATIVE SEATON said the starting  point for the escalation                                                               
of the surcharge has been  discussed, and Amendment 12 moves that                                                               
point to $45 per  barrel.  He said decisions are  made at $40 per                                                               
barrel.   "Within  our bill,  we've got  West Texas  Intermediate                                                               
[WTI];  we looked  at a  $2.00 charge  on that.   We  also talked                                                               
about some way  to work on inflation,  and so if we  look at that                                                               
$3.00 difference between the $42  and now is being $3.00-worth of                                                               
inflation over  the course of  time here.   That would get  us to                                                               
$45.  This  would mean that between the time  we're at 20/20, and                                                               
the point  at which  we would reach  25 percent,  which was...the                                                               
other range  that we were looking  at for a start  throughout the                                                               
full  range, we  would be  at $60.   So  this corresponds  to $60                                                               
before we  reach the 25  percent rate.   So that's the  intent of                                                               
the amendment--to move this down $5.00."                                                                                        
CO-CHAIR SAMUELS maintained his objection.   He said he has a gut                                                               
feeling,  and he  doesn't believe  all  of the  numbers that  the                                                               
economists are providing.   He asked about  Alaska's economy over                                                               
the long  run.  He said  numbers are being thrown  around, and he                                                               
lies awake at night thinking about  the $100 million here and the                                                               
$100 million  there.  He  spoke of the lowest  common denominator                                                               
for oil companies, and "if something  on the bubble falls off, it                                                               
is  a tremendous  amount  of  money, which  all  of  us-and I  am                                                               
probably  the  worst  offender  at this-throwing  a  lot  of  big                                                               
numbers around that  get spent in my community  and in Fairbanks-                                                               
it  gets spread  in  every community."   He  added  that the  $50                                                               
amount would  end up  with more  than 20 percent  tax at  $60 per                                                               
barrel.   He said the  goal was to get  past "this bell  curve of                                                               
the decision  making process,  and nobody will  tell us  what the                                                               
number is."   He  fears a  damage to  the economy  if investments                                                               
aren't made.   He said  the legislature could turn  things around                                                               
by adjusting the tax rate, but "we  tried to get as far away from                                                               
the decision making matrix...in the $30s  and the $40s, and if we                                                               
shot a  little bit high, you  leave some money on  the table, but                                                               
you don't  damage the economy.   And to  me that's the  trade off                                                               
and the  balance and that  is the crux of  the entire bill."   He                                                               
noted that  Mr. Wenzel  of ConocoPhillips  Alaska, Inc.  said the                                                               
company can't leave  Alaska, but they can  reduce projects, which                                                               
will cause  a decline in  productivity--a little  at a time.   He                                                               
said the  number he came  up with was a  happy medium "to  try to                                                               
get away  from the decision-making,  and we got into  the mid-20s                                                               
at current oil prices."   He said it is a  tough call because the                                                               
decision matrix  might be higher than  he thinks it is.   He said                                                               
his concern is if production and  prices drop, "we've stuck it to                                                               
the Alaskan economy."                                                                                                           
2:20:43 PM                                                                                                                    
REPRESENTATIVE SEATON said  he agrees it is a balancing  act.  He                                                               
said economists have  said 20 percent or 25 percent,  and this CS                                                               
is  at 20  percent,  "and at  some  point we  have  to have  that                                                               
escalator  that gets  us there,  and this  doesn't get  us to  25                                                               
percent  until  we reach  $60  a  barrel."    He added  that  all                                                               
testimony  showed   that  investment   decisions  are   based  on                                                               
approximately $40 per  barrel, with $30 per barrel  being used as                                                               
"crunch  time".   "When  we're  looking at  $45  to  start a  0.3                                                               
percent  increase,  I  don't  think   that  that's  going  to  be                                                               
influencing those decisions."   He said the  legislature hired an                                                               
[ex]-Arco chief  economist for  his expertise  on the  matter who                                                               
gave   various   scenarios   from   $35  to   $50   per   barrel.                                                               
Representative Seaton  said he came up  with $40 per barrel  as a                                                               
good figure.                                                                                                                    
2:22:47 PM                                                                                                                    
CO-CHAIR  RAMRAS spoke  of charts  comparing  WTI with  ANS.   He                                                               
noted  that  HB 488  keys  off  of WTI  at  $50  per barrel,  and                                                               
historically ANS  has sold  at $2.31  less.   He said  that range                                                               
goes up to $3 or $4.00,  meaning that progressivity kicks in when                                                               
WTI  hits $50  per  barrel,  which means  that  Alaskan crude  is                                                               
generally priced  at $47.70.   He  said the  bill is  about three                                                               
things.   It is a tax  bill, and he is  happy it is based  on net                                                               
profits,  which   he  agrees  with,   and  it  is   layered  with                                                               
progressivity.   It  is time  to catch  up with  the rest  of the                                                               
globe.  He  said the bill is  also about getting more  oil in the                                                               
pipeline, and that is the most  important thing for him.  He said                                                               
it will  include additional production  in legacy fields,  and he                                                               
was told that the partners in  those fields have veto power, "and                                                               
that  means that  every  investment has  to  meet the  investment                                                               
profile  for all  three companies."    He noted  that a  six-well                                                               
program might have  oil in one out  of those six wells.   He said                                                               
there aren't  any Prudhoe  Bays left except  for the  natural gas                                                               
pipeline  and  the  Arctic National  Wildlife  Refuge,  and  Mary                                                               
Cantwell and her friends are  preventing drilling there.  He said                                                               
what  is left  is  an enormous  amount  of 25-500-million  barrel                                                               
fields, and many  are in the legacy fields,  which are controlled                                                               
by the  three large producers.   He said  it is important  to set                                                               
the table for  those three companies so they will  invest in that                                                               
oil.  He said he was interested  in the BP charts showing 50 more                                                               
years in  Alaska, beginning with  100 percent oil and  phasing to                                                               
nearly 100 percent natural gas.   He said he is interested in how                                                               
to get  the last  barrel of  oil.  His  priority is  getting more                                                               
oil, and the new tax is  his third highest priority.  He compared                                                               
HB 488 to the awards from the Olympics.                                                                                         
2:29:18 PM                                                                                                                    
CO-CHAIR RAMRAS  said he  opposes Amendment  12 because  "this is                                                               
the bronze medal  component of what we are trying  to do, and I'm                                                               
interested in scoring the gold and  silver first for the State of                                                               
Alaska, and the bronze is third for me."                                                                                        
2:29:43 PM                                                                                                                    
REPRESENTATIVE CRAWFORD said that was  a beautiful speech, but he                                                               
disagrees.  He  said this net profit tax is  putting all our eggs                                                               
in  the one  basket of  high oil  prices.   He said  he has  been                                                               
burned before, with  promises of blue skies.  He  said he is sure                                                               
there will be oil  prices in the mid $20s or lower.   In 1986 and                                                               
1989 battles,  legislators were trying  to get the  state through                                                               
hard times, so they  decided to give up money at  the high end to                                                               
protect  the  state  at  the  low   end.    "By  going  for  more                                                               
progressivity at  the high end and  still not taking care  of the                                                               
lower end,  I'm not sure  that that's the right  way to go."   He                                                               
asked what the  state would have to  give up on the  high end [of                                                               
oil prices]  if there  was more  protection at the  low end.   He                                                               
said he is  inclined to support the amendment, but  in light of a                                                               
future amendment  to create protection  at low oil prices,  he is                                                               
not sure this amendment is appropriate.   He opined that going to                                                               
a net  profits tax rather  than fixing  the severance tax  is the                                                               
problem.   A severance tax would  be more easily verifiable.   He                                                               
said movies  never make money,  including blockbusters  like "The                                                               
Titanic," and he  found that it is because of  a net profits tax.                                                               
He is  afraid of  going to a  PPT, and some  leases on  the North                                                               
Slope are net profit leases where  the state doesn't do nearly as                                                               
well as  on severance tax  leases.  "I am  not sure we  are doing                                                               
the  right   thing  by  going   for  another  $5  in   price  for                                                               
progressivity.  I  think that our foundation is rotten.   I think                                                               
this whole concept really is a  pig, and we're putting perfume on                                                               
the pig, and I think we're wrong."                                                                                              
2:34:34 PM                                                                                                                    
A roll  call vote  was taken.   Representatives  Seaton, Crawford                                                               
and  Kapsner voted  in favor  of Amendment  12.   Representatives                                                               
Gatto, Olson,  Ramras, Elkins, LeDoux  and Samuels  voted against                                                               
it.  Therefore, Amendment 12 failed by a vote of 3-6.                                                                           
The committee took an at-ease from 2:35 p.m. to 2:44 p.m.                                                                       
CO-CHAIR SAMUELS said  he sought to ensure that  all members were                                                               
aware of how the progressivity works  in the CS, and he asked Mr.                                                               
Dickinson to discuss it.                                                                                                        
MR. DICKINSON said  he will refer to the CS,  page 4, subsections                                                               
(f), (g), and (h),  and describe what they do.   He said the main                                                               
point  is that  the CS  adds an  extra tax  on gross,  unlike the                                                               
original HB 488.  The PPT will  be on the net after deducting all                                                               
costs.  The surcharge in (f), (g),  and (h) will be on the gross-                                                               
the same  thing the ELF tax  is levied on, which  is the wellhead                                                               
value of  oil.  He  said in subsection (f),  the tax is  equal to                                                               
0.3  percent  of the  gross  value  at  the point  of  production                                                               
multiplied by  the oil price  index.  "So  we get gross  value at                                                               
the point  of production, and  we multiply it times  this number.                                                               
The number's  going to be calculated,  as set out in  (g), as the                                                               
WTI, the price  of WTI minus 50,  times 0.3.  So  when oil prices                                                               
are $50 [per barrel], 50 - 50  equals zero, and this tax will not                                                               
kick in."   He  repeated that  the tax  will not  kick in  at any                                                               
price below  $50 per  barrel.   If the  price of  oil is  $51 per                                                               
barrel, there  would be an index  of 1, and multiplying  1 by 0.3                                                               
would equal a tax of 3/10 of  a percent on all taxable barrels at                                                               
their gross  value.   He explained that  taxable barrels  will be                                                               
everything except the  state and federal royalty share.   He used                                                               
an example  of $60 per  barrel.  He  subtracted $50, got  10, and                                                               
then  multiplied that  by  0.003, which  causes  an additional  3                                                               
percent tax on the wellhead gross value.                                                                                        
MR. DICKINSON  said that tax  will be added to  the PPT.   "If we                                                               
get up into  a situation where there's a crisis,  and we get into                                                               
the $100  or $150  range, a  tax on net  and a  tax on  gross are                                                               
essentially going  to be  on the  same base,  because...let's say                                                               
the costs are $10  per barrel on the North Slope.   So one of the                                                               
taxes will be  based on $150 and  the other one will  be based on                                                               
$140 dollars, so the difference will  not be huge.  As the prices                                                               
fall, you will see a bigger difference between net and gross."                                                                  
MR. DICKINSON said there are two  effects.  The surcharge will be                                                               
on a slightly higher value than the  net tax, so if prices are at                                                               
$60 per barrel and  there are $10 of costs, the  net tax would be                                                               
on a  $10 lower  price than  the gross  tax.   Also, this  tax is                                                               
specifically made  deductible for purposes  of the PPT,  he said.                                                               
It is almost  like an overriding royalty, he explained.   He said                                                               
it is stated on Page 17, line 24.                                                                                               
MR. DICKINSON  noted that  the tax  in (f), (g)  and (h)  will be                                                               
based on  wellhead value.  One  tax is deductible for  the other,                                                               
and  at a  20  percent tax  rate, "you  will  only be  receiving,                                                               
essentially, 80 percent  of the amount indicated here."   He said                                                               
the third  point is  that it is  based on WTI,  a marker  that is                                                               
acknowledged worldwide.   He said  there is graph that  plots WTI                                                               
versus ANS,  and it captures  all the  swings; when one  goes up,                                                               
the other goes up.  He said that has been a useful measure.                                                                     
2:52:23 PM                                                                                                                    
REPRESENTATIVE  SEATON spoke  of the  gross versus  the net  when                                                               
there  are high  prices,  "doesn't  that mean  that  we have  the                                                               
greatest  impact  at the  lower  prices?    In other  words,  the                                                               
differential  between gross  and net  is much  more at  the lower                                                               
price end."   "Aren't we  getting more impact at  just marginally                                                               
higher prices?"                                                                                                                 
MR. DICKINSON  said that if  prices went  to $150 per  barrel, at                                                               
that point  it caps  out at 30  percent.  So  a company  would be                                                               
paying 30  percent of the gross  on the surcharge, and  paying 20                                                               
percent  of the  net  under  the PPT.    Someone  might add  them                                                               
together and say  it would be a  50 percent tax, but  at $150, it                                                               
would  be fairly  accurate to  say it  is approaching  50 percent                                                               
because "what you're taking a  percentage of...let's say that WTI                                                               
is $150,  the ANS wellhead was  going to be $140,  and then after                                                               
deducting all costs you might be  down to $135.  They're going to                                                               
be very close together."                                                                                                        
REPRESENTATIVE  SEATON said,  "If  we have  a difference  between                                                               
$140 and $150, so  we go up a dollar.  The  impact of that dollar                                                               
is much less,  between net and gross, than it  is between $50 and                                                               
$51, because you've got...                                                                                                      
The committee took an at-ease from 2:55 p.m. to 3:05 p.m.                                                                       
CO-CHAIR SAMUELS  listed items  on the  agenda for  the following                                                               
day,  March 17,  2006,  including Amendment  9,  the deletion  of                                                               
certain portions  of section  27; Amendment  13, raising  the tax                                                               
from  20 to  25 [percent];  an amendment  on a  tax floor  at low                                                               
ends;  language on  the deductibility  of oil  spills; and  other                                                               
amendments that may surface.                                                                                                    
3:06:29 PM                                                                                                                    
REPRESENTATIVE CRAWFORD noted that the  idea of splitting gas and                                                               
oil in the bill will be considered.                                                                                             
[HB 488 was held over]                                                                                                          

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