Legislature(2005 - 2006)CAPITOL 124

03/17/2006 12:30 PM RESOURCES

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12:40:41 PM Start
12:40:57 PM HB488
02:00:48 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved CSHB 488(RES) Out of Committee
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
12:40:57 PM                                                                                                                   
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."                                                                    
[Before the  committee was the  committee substitute (CS)  for HB
488, version 24-GH2052\Y, Chenoweth, 3/15/06.]                                                                                  
12:41:12 PM                                                                                                                   
REPRESENTATIVE  KAPSNER moved  to adopt  Amendment 9,  as follows                                                               
[original punctuation provided]:                                                                                                
     Delete Sec 27, page 16, line 23 through page 17, line                                                                      
REPRESENTATIVE KAPSNER said  Amendment 9 deletes what  used to be                                                               
Section  20 in  the original  bill, and  for the  CS, it  deletes                                                               
Section  27.    Those  sections   added  new  subsections  to  AS                                                               
43.55.150, and  a number of  people thought the new  language was                                                               
not essential to the bill.   She noted that some people felt that                                                               
it was  Christmas tree language regarding  the royalty settlement                                                               
methodology.   She  said the  consultant  expressed concern  that                                                               
there would  be ways that  the state  could lose money  with this                                                               
section in the bill.  She said  it is not crucial to the proposed                                                               
profit-based petroleum production tax (PPT).                                                                                    
12:42:30 PM                                                                                                                   
DAN DICKINSON, Consultant to the  Office of the Governor, said he                                                               
is the former  director of the tax division in  the Department of                                                               
Revenue.    He said  Representative  Kapsner  is right  that  the                                                               
provision is not essential  to the PPT.  "It is  borne out of the                                                               
frustration  that I  felt as  an administrator  that we  have one                                                               
group  of very  skillful folks  sitting  on the  fifth floor  and                                                               
another group sitting on the  eighth floor of the Atwood Building                                                               
in Anchorage, and these dedicated  folks spend their time looking                                                               
at the exact same set of  transactions, one with a set of royalty                                                               
glasses on and one with a set of tax glasses on."                                                                               
MR.  DICKENSON said  the royalty  rules  and tax  rules are  very                                                               
similar;  they are  both  trying to  get to  the  actual cost  of                                                               
transportation  between the  market and  the point  of valuation.                                                               
He said differences  have emerged, "and so we have  folks who are                                                               
dedicated to pursuing  those two paths.  The reason  this bill is                                                               
in  here, is  it gives  the commissioner  the discretion  through                                                               
regulations  to  use other  means  of  valuation other  than  the                                                               
single standards set  out in the law. ...  The commissioner would                                                               
make sure that they all met the  tests that we have."  He said if                                                               
there is one  set of transactions already being  computed, and it                                                               
meets  the  quality standards  of  the  state,  "we felt  it  was                                                               
appropriate  to simply  do that  calculation once  as opposed  to                                                               
doing  it twice."    He  said that  with  unlimited resources,  a                                                               
second check would  be good, but it is useful  to "kill two birds                                                               
with one stone."                                                                                                                
12:44:40 PM                                                                                                                   
CO-CHAIR SAMUELS  surmised, "Your section  takes what we  use for                                                               
royalty and just uses the same value for tax."                                                                                  
MR. DICKINSON  said it  gives the  commissioner the  authority to                                                               
use  that second  royalty value.   The  commissioner could  write                                                               
regulations  incorporating   aspects  or   all  of   the  royalty                                                               
valuations, he stated.                                                                                                          
12:45:12 PM                                                                                                                   
REPRESENTATIVE GATTO  said on  page 16, line  25 states  that the                                                               
department   may  allow   the   producer  to   decide,  not   the                                                               
MR. DICKINSON said that is right.   "What we say here is that the                                                               
commissioner will  set up the  rules and then  presumably they'll                                                               
present an  election to the  taxpayer who can  then opt to  do it                                                               
under one or the other set."                                                                                                    
12:45:58 PM                                                                                                                   
REPRESENTATIVE  SEATON asked  for  an estimate  of the  financial                                                               
difference between the two sets of numbers.                                                                                     
MR. DICKINSON  said he  believed they  would be  very close.   He                                                               
said "the  problem in comparing them  is, and one of  the reasons                                                               
why we  had all  these rules  for the  commissioner is,  when the                                                               
royalty  settlement agreements  were  entered into  in the  early                                                               
1990s they  only covered existing leases.   So we've had  a bunch                                                               
of  production on  the North  Slope that  isn't covered  by them.                                                               
When you set your averages in,  you'd have to be careful that you                                                               
were comparing apples and oranges."  He said:                                                                                   
     I  think  they're  fundamentally,   if  I  can  quickly                                                                    
     identify  for you  the major  differences, one  of them                                                                    
     is, under  law for  tax under  020 (f)  we set  the tax                                                                    
     value either  at what the  oil and  gas is sold  for or                                                                    
     the  prevailing value.   Under  the royalty  settlement                                                                    
     agreements  that are  now  in  existence, the  starting                                                                    
     point is simply a spot  price-a fair value of the crude                                                                    
     as  defined  by  ...  national  markers.    That  is  a                                                                    
     difference.   Clearly, whenever you have  a 'higher of'                                                                    
     as we  have in the  tax statute, you're  probably going                                                                    
     to come  up with a higher  number than you do  when you                                                                    
     simply  have  one  value   applied  consistently.    My                                                                    
     argument to you  on that would be,  the differences are                                                                    
     not large,  and I believe  that the provisions  for 020                                                                    
     (f)   were  written   before  there   were  transparent                                                                    
     markers, and  I believe  that looking at  a transparent                                                                    
     marker and trying  to use that to  value petroleum when                                                                    
     it has landed on the West  Coast, makes a lot of sense.                                                                    
     That is one potential  difference.  If the commissioner                                                                    
     felt that  the marker was  not doing as it  could, that                                                                    
     could be  one of the  standards that he could  write in                                                                    
     and say,  'we will not  accept a royalty value  if that                                                                    
     marker's not  good.'  The  second difference has  to do                                                                    
     with vessels and  how the return on and of  a vessel is                                                                    
     captured.   A  vessel is  a long-lived  asset...you are                                                                    
     going to  use it for 20  years.  The mechanics  of that                                                                    
     are  different between  the two.   And  then the  third                                                                    
     difference, of course,  is when we have  to correct for                                                                    
     ... field  costs, [which]  are a  portion of  a royalty                                                                    
     settlement.   They are not part  of the tax.   We would                                                                    
     make  sure  that  they  did not  come  in  through  the                                                                    
     royalty settlement agreements.                                                                                             
12:48:37 PM                                                                                                                   
REPRESENTATIVE SEATON surmised that  the current system is taking                                                               
the higher  number, and  under the  new system, it  is up  to the                                                               
commissioner to let the producer choose.                                                                                        
MR.  DICKINSON said  that under  current  tax law,  020 (f),  the                                                               
department  may use  the  higher prevailing  value  or the  sales                                                               
price; it  is not  required to.   The  regulations create  a safe                                                               
harbor so if  the price that it  is sold for is only  a few cents                                                               
less than the  marker, the adjustment won't be made.   "If it was                                                               
$2 less,  clearly we  would go in  and substitute  the prevailing                                                               
value for that  transaction.  So that is how  020 (f) works under                                                               
current statute.   What would be  replaced is a system  where, if                                                               
we  decided to  allow--if  the commissioner  decided to  allow--a                                                               
royalty valuation all the way down  to destination, at least as I                                                               
envision it--it  clearly could be other  things--the commissioner                                                               
would say  'as long  as that royalty  settlement agreement  is in                                                               
place you may elect to use either  that or this set of tax rules,                                                               
you  cannot switch  back and  forth  month to  month, you  can't,                                                               
every month,  see which one  is the higher  and use that.'   Now,                                                               
that's  not in  here.   Clearly  the  commissioner could  decide,                                                               
'we'll have it be every month'.   I can't imagine that happening.                                                               
But what we  tried to do is  set out the broad  outlines, and the                                                               
commissioner, by regulation, would establish the methodologies."                                                                
12:50:32 PM                                                                                                                   
REPRESENTATIVE   SEATON  said   he  wants   an  estimated   value                                                               
difference  between the  two that  are  under the  commissioner's                                                               
authority.  It  is per producer, which could  create a disparity,                                                               
and  he said  he doesn't  want to  put the  commissioner in  that                                                               
MR. DICKINSON  said he  doesn't have  the numbers.   He  said the                                                               
purpose  of giving  that  discretion to  the  commissioner is  to                                                               
allow him  or her  to follow  the market  and to  follow changing                                                               
Department  of Natural  Resources settlements.   He  said, "There                                                               
are  re-opener  processes   in  those  so  that   things  can  be                                                               
renegotiated.    If parties  can't  renegotiate,  they go  to  an                                                               
arbitration."   The  Department of  Law has  been clear  that the                                                               
taxpayer can't decide  what to pay.  "Our notion  was, if there's                                                               
a method  of calculating wellhead  value that's already  in place                                                               
and already makes sense, why have a parallel system?"                                                                           
12:52:24 PM                                                                                                                   
CO-CHAIR SAMUELS  said he  maintains his objection.   He  said he                                                               
can't pretend  that he knows more  than people who do  this for a                                                               
MR. DICKINSON said this will not affect the royalty value.                                                                      
12:52:55 PM                                                                                                                   
REPRESENTATIVE GATTO  asked if  it is  better to  have it  set in                                                               
MR.  DICKINSON  said  that  is  a  constant  tension.    He  said                                                               
conditions  change and  he  tried to  strike  the right  balance.                                                               
"Clearly, the  kinds of decisions  that a commissioner  can make,                                                               
just simply in  terms of how much resources go  to auditing, what                                                               
you do with audits once  you've gotten them, whether you're going                                                               
to settle those  audits or pursue them to the  bitter end through                                                               
all the  court systems.   Those kinds  of decisions  probably are                                                               
going to have  greater importance in the final  analysis than the                                                               
direction that is here in Section 27."                                                                                          
12:54:45 PM                                                                                                                   
REPRESENTATIVE KAPSNER asked if  Mr. Dickinson said the provision                                                               
is not fundamental to HB 488 and doesn't have to be in it.                                                                      
MR.  DICKINSON said,  "The  fundamental  economic of  encouraging                                                               
exploration and  then getting a  piece of the high  side...is not                                                               
affected by this."                                                                                                              
12:55:22 PM                                                                                                                   
REPRESENTATIVE SEATON said if this is defeated, he still wants                                                                  
the calculations.                                                                                                               
12:55:47 PM                                                                                                                   
A  roll  call  vote  was taken.    Representatives  Crawford  and                                                               
Kapsner voted  in favor of  Amendment 9.   Representatives Gatto,                                                               
Olson, Ramras,  Samuels, Seaton, Elkins and  LeDoux voted against                                                               
it.  Therefore, Amendment 9 failed by a vote of 2-7.                                                                            
12:57:26 PM                                                                                                                   
REPRESENTATIVE SEATON moved Amendment 14, 24-GH2052\Y.12,                                                                       
Chenoweth, 3/17/06, as follows [original punctuation provided]:                                                                 
     Page 18, line 31, through page 19, line 1:                                                                                 
          Delete "April 1, 2006"                                                                                                
          Insert "January 1, 2006"                                                                                              
    Page    28,    line   10,    following    "TRANSITIONAL                                                                     
          Insert    "(a)   Notwithstanding    any   contrary                                                                    
     provision  of AS 43.55.024(a),  enacted by  sec. 14  of                                                                    
     this  Act,  a producer  or  explorer  may apply  for  a                                                                    
     credit under AS 43.55.024 based  on a qualified capital                                                                    
     expenditure incurred on or after January 1, 2006."                                                                         
     Reletter the following subsections accordingly.                                                                            
     Page 29, line 21:                                                                                                          
          Delete "(f)(1)"                                                                                                       
          Insert "(g)(1)"                                                                                                       
     Page 29, line 23:                                                                                                          
          Delete "(f)(2)"                                                                                                       
          Insert "(g)(2)"                                                                                                       
     Page 29, line 25:                                                                                                          
          Delete "(f)(1)"                                                                                                       
          Insert "(g)(1)"                                                                                                       
     Page 29, line 26:                                                                                                          
          Delete "(g)(1)"                                                                                                       
          Insert "(h)(1)"                                                                                                       
     Page 30, following line 16:                                                                                                
     Insert a new bill section to read:                                                                                         
        "*  Sec. 46.  The  uncodified law  of  the State  of                                                                
     Alaska is amended by adding a new section to read:                                                                         
          RETROACTIVITY OF CERTAIN EXPENDITURES USED TO                                                                         
     SUPPORT PRODUCTION  TAX CREDIT CLAIM  AND DETERMINATION                                                                    
     OF   PRODUCTION    TAX   VALUE   OF   OIL    AND   GAS.                                                                    
     AS 43.55.160(c)(1),  enacted by  sec. 28  of this  Act,                                                                    
     applies  to   allow  a  producer  to   claim  as  lease                                                                    
     expenditures certain expenditures  incurred on or after                                                                    
     January 1,  2006,  and  before the  effective  date  of                                                                    
     AS 43.55.160, added  by sec. 28  of this Act,  and sec.                                                                    
     43(a) of  this Act applies  to authorize a  producer or                                                                    
     explorer  to apply  for  a  credit under  AS 43.55.024,                                                                    
     enacted by  sec. 14 of  this Act, based on  a qualified                                                                    
     capital  expenditure incurred  on  or after  January 1,                                                                    
     2006, and  before the  effective date  of AS 43.55.024,                                                                    
     enacted by  sec. 14  of this Act.  To the  extent these                                                                    
     provisions  give legal  effect to  prior conduct,  they                                                                    
     are retroactive to January 1, 2006."                                                                                       
     Renumber the following bill sections accordingly.                                                                          
     Page 30, line 19:                                                                                                          
          Delete "sec. 48"                                                                                                      
          Insert "sec. 49"                                                                                                      
     Page 30, line 22:                                                                                                          
          Delete "46"                                                                                                           
          Insert "47"                                                                                                           
     Page 30, line 24:                                                                                                          
          Delete "sec. 47"                                                                                                      
          Insert "sec. 48"                                                                                                      
CO-CHAIR SAMUELS objected.                                                                                                      
REPRESENTATIVE SEATON  said Amendment 14 allows  the deduction of                                                               
expenses and the generation of  credits based on a calendar year.                                                               
He  said, "It  allows the  entire calendar  year from  January 1,                                                               
2006 to be used for those expenses and deductions."                                                                             
12:57:30 PM                                                                                                                   
CO-CHAIR SAMUELS removed his objection.  Hearing no further                                                                     
objections, Amendment 14 carried.                                                                                               
12:58:13 PM                                                                                                                   
REPRESENTATIVE   SEATON  moved   Amendment  15,   24-GH2052\Y.13,                                                               
Chenoweth, 3/17/06, as follows [original punctuation provided]:                                                                 
     Page 4, line 8:                                                                                                            
          Delete "(g) of"                                                                                                       
     Page 4, lines 13 - 19:                                                                                                     
          Delete all material.                                                                                                  
          Insert   "index    as   determined    under   this                                                                    
     subsection.  The oil  price index  for a  month is  the                                                                    
     number equal  to the average  United States  Gulf Coast                                                                    
     price  determined under  (h) of  this section  for that                                                                    
     month of  West Texas Intermediate crude  oil in dollars                                                                    
     per barrel,  less 50. If  the average  price determined                                                                    
     under  (h) of  this section  is not  more than  $50 per                                                                    
     barrel, the oil price index is zero.                                                                                       
               (g)  Notwithstanding calculation of the rate                                                                     
     of tax under (f) of  this section, if the average price                                                                    
     determined under (h)  of this section is  at least $110                                                                    
     per barrel, the  rate of tax under (f)  of this section                                                                    
     is 37.5 percent."                                                                                                          
CO-CHAIR SAMUELS objected.                                                                                                      
REPRESENTATIVE  SEATON said  Amendment  15 tries  to  get to  the                                                               
intent that at very high oil  prices there will be an equal split                                                               
between the  state and the  producers.  The  crux is in  lines 11                                                               
through 13, he  noted.  He said the way  the surtax is calculated                                                               
is deductible  against the PPT,  so it  will equal 80  percent of                                                               
the increasing  percentage rate.   To  get to  50 percent  of the                                                               
net, "we  actually have the  total percentage going to  37.5, and                                                               
that equals  30 percent of  the net.  So  the 20 percent  plus 30                                                               
percent means  the state  will get half  and the  producers would                                                               
get half.  And  this takes place at $110 a  barrel, so this would                                                               
leave in  the existing 3/10  of 1 percent per  dollar escalating,                                                               
starting  at $50.   And  would  not affect  the deductibility  of                                                               
those from the  PPT but would start at 110  and immediately go to                                                               
the equal split of net."                                                                                                        
12:59:47 PM                                                                                                                   
REPRESENTATIVE  KAPSNER said  the amendment  should say  lines 14                                                               
through 19.                                                                                                                     
REPRESENTATIVE SEATON  said this is a  conceptual amendment based                                                               
on  Version Y,  as well  as the  previous amendment,  because the                                                               
committee has been amending Version Y.                                                                                          
CO-CHAIR SAMUELS said the drafter will fix that.                                                                                
REPRESENTATIVE KAPSNER said,  "If we delete line 13,  it will cut                                                               
out a section."                                                                                                                 
CO-CHAIR SAMUELS said the drafter will take care of that.                                                                       
CO-CHAIR  SAMUELS  removed his  objection.    Hearing no  further                                                               
objections, Amendment 15 carried.                                                                                               
1:00:59 PM                                                                                                                    
REPRESENTATIVE  CRAWFORD  moved   Amendment  16,  24-GH2052\Y.14,                                                               
Chenoweth, 3/17/06, as follows [original punctuation provided]:                                                                 
     Page 4, following line 31:                                                                                                 
          Insert a new subsection to read:                                                                                      
          "(i) Notwithstanding any other provision of this                                                                      
     chapter, except  as to oil  or gas described in  (e) of                                                                    
     this section,  tax credits that are  authorized against                                                                    
     the  tax   due  under  this  section   by  this  title,                                                                    
     AS 38.05.180,  and  AS 41.09  may  not  be  applied  to                                                                    
     reduce the producer's total tax  due under this section                                                                    
     on oil and gas produced  during a calendar year to less                                                                    
     than six  percent of  the production  tax value  of the                                                                    
     taxable oil and  gas produced by the  producer from all                                                                    
     leases or properties  in the state, based  on the gross                                                                    
     value of  the oil  and gas at  the point  of production                                                                    
     and   determined  without   reference  to   adjustments                                                                    
     authorized    by    AS 43.55.160.   In    making    the                                                                    
     determination   required   by  this   subsection,   the                                                                    
     department  shall exclude  oil  and  gas produced,  the                                                                    
     ownership or right to which is exempt from taxation."                                                                      
REPRESENTATIVE  CRAWFORD  said he  tried  to  make the  amendment                                                               
several times, and he has  problems getting exactly what he wants                                                               
because there is such a difference  between a severance tax and a                                                               
net profits  tax.   He said  his intent is  to create  safety and                                                               
protection to  the state at low  oil prices.  He  wants a minimum                                                               
floor or a  minimum tax of 6 percent so  the state has protection                                                               
when it needs it  the most.  He said from 1986  to 1989 the state                                                               
was in  a serious  bind, and  went to  the Economic  Limit Factor                                                               
system (ELF),  but it didn't  fix the  problem when oil  is below                                                               
$20 to $30  per barrel.  Mr. Dickinson said  this amendment still                                                               
doesn't get us  there, so he wants the  amendment to conceptually                                                               
state that there is a 6 percent floor.                                                                                          
CO-CHAIR SAMUELS asked if that will be on gross values.                                                                         
REPRESENTATIVE CRAWFORD said  it would be the gross  value at the                                                               
point of production.                                                                                                            
1:03:35 PM                                                                                                                    
CO-CHAIR  RAMRAS   said  he  bought   some  restaurants   out  of                                                               
bankruptcy.  The  most onerous part of the problem  was the lease                                                               
contained a percentage rent provision.   There was a minimal rent                                                               
due,  or the  building owner  would  need to  participate in  the                                                               
income when it exceeded 7.5 percent  of sales.  The shopping mall                                                               
got  the minimum  when times  were bad  and got  more money  when                                                               
times were good.  He said  he has a fundamental objection to one-                                                               
way transactions.   He said  "this committee has been  mindful of                                                               
its responsibility  to participate  to a significant  extent when                                                               
times are good,  and sharing windfalls that are  generated by the                                                               
oil and gas  industry."  He said  he wants to make  sure that the                                                               
committee doesn't break the partnership  by excluding the state's                                                               
participation when  times are bad.   At $22.50, BP said  it loses                                                               
money on a barrel of oil,  which is partially the tariff from the                                                               
Trans-Alaska  Pipeline System  that BP  owns.   If  the state  is                                                               
going to share in the high prices,  it needs to share risk at low                                                               
oil prices.                                                                                                                     
1:06:36 PM                                                                                                                    
CO-CHAIR  SAMUELS said  he echoes  that.   When  prices drop  the                                                               
state will take risks.   He said the key is to  not spend all the                                                               
money the  state makes when prices  are high.  He  said the state                                                               
is moving to a system that will  take the royalty off the top, so                                                               
it will  still have  that and the  corporate income  taxes, which                                                               
will also  deteriorate at  low prices.   A  floor on  taxes would                                                               
mean  that if  cost recovery  doesn't generate  any profits,  the                                                               
industry will  still be taxed.   "I  understand the problem  of a                                                               
future legislature...but  if we're  going take  some of  the high                                                               
end, we can't take  the high end and then take  the low end also.                                                               
He said  he asked economists about  a floor on the  tax, and what                                                               
would be  the trade off at  the high end  over the long run.   He                                                               
said  several answers,  but none  picked  a figure,  "but it  was                                                               
problematic.   One  of  the  answers that  came  back  was at  70                                                               
actually.   If you stopped the  progressivity at 70 then  put the                                                               
floor in.  To  me, I think that I would rather  take some more of                                                               
the risks rather than put in the floor."                                                                                        
1:09:10 PM                                                                                                                    
REPRESENTATIVE  CRAWFORD said  we have  to look  at the  past and                                                               
know  that we  are going  to run  into a  problem.   He said  the                                                               
legislature doesn't do a good job  of saving money when the state                                                               
is  flush.   Legislatures will  be looking  back and  saying what                                                               
were they  thinking?  "If we  don't put protection for  the state                                                               
in at the low end, we will rue the day."                                                                                        
CO-CHAIR  SAMUELS  said  he appreciates  Representative  Crawford                                                               
bringing this  issue forward.   He said  the committee  never got                                                               
into  the  substance  of  the  risk and  reward.    He  said  the                                                               
legislature needs to look at it as the bill moves forward.                                                                      
1:10:51 PM                                                                                                                    
A  roll  call  vote  was taken.    Representatives  Crawford  and                                                               
Kapsner voted in  favor of Amendment 16.   Representatives Gatto,                                                               
Olson, Ramras,  Samuels, Seaton, Elkins and  LeDoux voted against                                                               
it.  Therefore, Amendment 16 failed by a vote of 2-7.                                                                           
CO-CHAIR  SAMUELS  said  he  will  raise  these  issues  for  the                                                               
1:11:50 PM                                                                                                                    
CO-CHAIR  RAMRAS  noted  Representative Kapsner's  issue  on  the                                                               
energy fund.  He said were oil  to hit the $110 price, the people                                                               
of Alaska would be in trouble.                                                                                                  
1:12:24 PM                                                                                                                    
REPRESENTATIVE CRAWFORD moved Conceptual  Amendment 17 as follows                                                               
[original punctuation provided]:                                                                                                
       Delete inclusion of gas in the new production tax;                                                                       
     retain current tax on gas.                                                                                                 
REPRESENTATIVE  CRAWFORD  said  oil  and  gas  are  two  separate                                                               
animals,  and  leaving  gas  in the  bill  will  severely  damage                                                               
Alaska's  competitiveness.    He  said he  doesn't  know  if  the                                                               
legislature will get to the next  step, which was promised by the                                                               
administration.   He said he  was told  that it would  arrive and                                                               
make everything  clear, "and  I haven't seen  anything yet."   He                                                               
said he  is skeptical  about what  is coming and  when.   He said                                                               
when he  is told not  to worry,  that is the  time to worry.   It                                                               
will be  a difficult amendment  to write,  but he wants  to leave                                                               
gas in the current tax system.                                                                                                  
1:14:47 PM                                                                                                                    
CO-CHAIR  SAMUELS said  there have  been many  discussions.   The                                                               
basic  concept  of  cost  recovery  becomes  extremely  difficult                                                               
because  gas and  oil  come from  the  same hole.    "How do  you                                                               
allocate the  costs between  the two  without getting  gamed?" he                                                               
asked.   He said some  gas is reinjected,  and how does  on value                                                               
that?   He  said another  amendment, Amendment  19, will  address                                                               
some of Representative Crawford's concern.                                                                                      
1:16:06 PM                                                                                                                    
A  roll  call  vote  was taken.    Representatives  Crawford  and                                                               
Kapsner voted in  favor of Amendment 17.   Representatives Gatto,                                                               
Olson, Ramras,  Samuels, Seaton, Elkins and  LeDoux voted against                                                               
it.  Therefore, Amendment 17 failed by a vote of 2-7.                                                                           
1:16:56 PM                                                                                                                    
CO-CHAIR  SAMUELS said  Amendment 18  was discussed  yesterday in                                                               
the form of Amendment 11a.                                                                                                      
REPRESENTATIVE  CRAWFORD  moved   Amendment  18,  24-GH2052\Y.10,                                                               
Chenoweth, 3/16/06, as follows [original punctuation provided]:                                                                 
     Page 19, line 7, following "AS 38.05.132":                                                                                 
          Insert ", and do not include, in connection with                                                                      
     a catastrophic oil discharge into  the marine or inland                                                                    
     water  of  the  state,  the containment  and  clean  up                                                                    
     expenses  incurred  by  the producer,  the  incremental                                                                    
     expenses  of  transportation  of  oil due  to  loss  or                                                                    
     damage  incurred by  the producer,  and any  damages or                                                                    
     penalties imposed on the producer"                                                                                         
CO-CHAIR SAMUELS objected.                                                                                                      
REPRESENTATIVE CRAWFORD said he  doesn't believe the state should                                                               
subsidize, in  any way, a  catastrophic oil spill similar  to the                                                               
Exxon Valdez.   The language leaves lots of room  for smaller oil                                                               
spills; this if for a big one, he  said.  The state should not be                                                               
subsidizing the oil industry's mistakes, he stated.                                                                             
1:18:13 PM                                                                                                                    
CO-CHAIR SAMUELS asked  about companies that invest  in oil spill                                                               
cleanup booms, boats  and other contingency equipment.   "Are you                                                               
suggesting that we don't allow them  to be written off?"  He also                                                               
asked  about the  definition of  catastrophic.   The instance  of                                                               
someone shooting  a hole in  the pipe was  not the fault  of TAPS                                                               
owners, he  said, but there are  those expenses.  He  assumes the                                                               
owners should be able to recoup their cost from that cleanup.                                                                   
REPRESENTATIVE  CRAWFORD said  it  is not  his  intent to  change                                                               
current law, but just to make sure  it is include in the new form                                                               
of taxation  being discussed now.   He said it wasn't  his intent                                                               
to say a company couldn't charge  off expenses for acts of god or                                                               
a shot to the pipeline.  He  told the drafter of Amendment 18 not                                                               
to change the current law.                                                                                                      
1:20:18 PM                                                                                                                    
CO-CHAIR  SAMUELS  asked how  the  amendment  relates to  another                                                               
Exxon  Valdez  oil  spill.    He said  he  tends  to  agree  with                                                               
Representative Crawford, but the devil is in the details.                                                                       
1:20:58 PM                                                                                                                    
MR. DICKINSON  said, "The way  that we currently  administer, and                                                               
again  this  will be  downstream,  is  Clean  Seas or  a  similar                                                               
organization would  be an allowable  deduction.  In  other words,                                                               
what you spend to be ready...clearly  it was not intended to make                                                               
that  more expensive."    He  said, "Where  we  have gotten  into                                                               
issues is  how those co-ops  work when  payments are made  in and                                                               
when receipts come  back.  So there have been  some audit issues,                                                               
but the fundamental  notion here is those co-ops,  the funding of                                                               
them, is  a deductible  expense."   For Alyeska  Pipeline Service                                                               
Company, "those costs  will then get bundled into  the tariff for                                                               
future  years.    The  things that  Alyeska  does  currently  for                                                               
prevention or for mitigation...will be part of the tariff."                                                                     
1:22:05 PM                                                                                                                    
CO-CHAIR SAMUELS  surmised that if  someone shoots a hole  in the                                                               
pipeline,   the  tariff   goes  up,   causing  a   rise  in   the                                                               
transportation costs.                                                                                                           
MR. DICKINSON  said that is  how the  situation is set  up, "that                                                               
your actual costs  will become part of the tariff  adjustment.  I                                                               
cannot speak for the specifics if  there's; a shipper has to come                                                               
in and  ask for that.   Or a carrier has  to come in and  ask for                                                               
those  costs  to  be  brought  in.   Those  can  be  reviewed  by                                                               
regulatory  bodies,  but,  in  general,   I  can't  imagine  them                                                               
disallowing an actual cost."                                                                                                    
1:22:41 PM                                                                                                                    
CO-CHAIR SAMUELS asked about  another Exxon Valdez-type incident,                                                               
and how that relates to Alyeska  and the deduction of costs under                                                               
the amendment.                                                                                                                  
MR. DICKINSON  said, "My recollection  is that there  were issues                                                               
about  whether  this  was  in  the...whose  bailiwick  the  spill                                                               
occurred in, and  I'm not going to speak to  that because I'm not                                                               
sure.   But, in general,  if it is a  downstream cost and  it's a                                                               
catastrophic oil  spill, which  I believe  is 100,000  barrels or                                                               
more, this would  say you could not deduct  those for calculating                                                               
your gross,  and now this would  extend it to say  you cannot use                                                               
it for calculating your net as well."                                                                                           
1:23:37 PM                                                                                                                    
REPRESENTATIVE GATTO asked if a  catastrophic spill related to an                                                               
earthquake or terrorism would be treated the same.                                                                              
MR. DICKINSON  said yes, and  it could  include a spill  that was                                                               
less than  100,000 barrels but determined  catastrophic under the                                                               
discretion of the governor.                                                                                                     
1:24:17 PM                                                                                                                    
REPRESENTATIVE  SEATON noted  that  it is  in  marine and  inland                                                               
waters only.                                                                                                                    
MR. DICKINSON that is correct, but  inland water of the state can                                                               
be expansive.                                                                                                                   
1:24:47 PM                                                                                                                    
CO-CHAIR  SAMUELS  removed his  objection.    Hearing no  further                                                               
objections, Amendment 18 carried.                                                                                               
1:24:59 PM                                                                                                                    
CO-CHAIR RAMRAS  moved Amendment 19, 24G-2,  3/17/06, 12:05 P.M.,                                                               
which reads as follows [original punctuation provided]:                                                                         
     Page 4, following line 31:                                                                                                 
          Insert the following material:                                                                                        
          "(i)  In addition to the taxes levied under (a),                                                                      
     (e), and (f) of this  section, for each month for which                                                                    
     the  gas  price  index  determined under  (j)  of  this                                                                    
     section is greater than zero,  there is levied upon the                                                                    
     producer of gas a tax  for all gas produced during that                                                                    
     month from  each lease or  property in the  state, less                                                                    
     any gas the ownership or  right to which is exempt from                                                                    
     taxation. The tax is equal  to two percent of the gross                                                                    
     value at the point of  production of the gas multiplied                                                                    
     by the gas price index  as determined under (j) of this                                                                    
          (j)  The gas price index for a month is the                                                                           
     number  equal  to  the  average  Henry  Hub  gas  price                                                                    
     determined under (k) of this  section for that month in                                                                    
     dollars per million British  thermal units, less eight,                                                                    
     except that  if the average price  determined under (k)                                                                    
     of this section is                                                                                                         
               (1)  not more than $8 per million British                                                                        
     thermal units, the gas price index is zero; and                                                                            
               (2)  more than $23 per million British                                                                           
     thermal units, the gas price index is 15.                                                                                  
          (k)  For purposes of (i) and (j) of this section,                                                                     
     the department may calculate the  average price or may,                                                                    
     by regulation, specify the method  by which the average                                                                    
     price  shall be  calculated  with reference  to one  or                                                                    
     more published  sources of price  information.   If, in                                                                    
     the department's  judgment, reliable  published sources                                                                    
     of  Henry Hub  gas price  information cease,  or appear                                                                    
     likely to  soon cease, to  be available, or if,  in the                                                                    
     department's judgment, the Henry  Hub gas price ceases,                                                                    
     or  appears likely  to  soon cease,  to  be a  reliable                                                                    
     indicator  of  the  general price  level  of  gas,  the                                                                    
     department shall,  by regulation, specify  a substitute                                                                    
     formula  for   computing  the  gas  price   index.  The                                                                    
     substitute  formula specified  by the  department under                                                                    
     this subsection  must bear, as nearly  as is reasonably                                                                    
     possible, the  same relationship  to the  general price                                                                    
     level of gas as did the Henry Hub gas price."                                                                              
     Page 6, line 26:                                                                                                           
          Delete "and (f)"                                                                                                      
          Insert ", (f), and (i)"                                                                                               
     Page 6, line 31:                                                                                                           
          Delete "and (f)"                                                                                                      
          Insert "(f), and (i)"                                                                                                 
     Page 17, line 24, following "AS 43.55.011(f)":                                                                             
          Insert "and (i)"                                                                                                      
     Page 29, line 12:                                                                                                          
          Delete "and (f)"                                                                                                      
          Insert ", (f), and (i)"                                                                                               
CO-CHAIR SAMUELS objected.                                                                                                      
1:25:16 PM                                                                                                                    
CO-CHAIR RAMRAS  said yesterday the  committee made  an excellent                                                               
decision  to separate  the progressivity  of  oil from  gas.   He                                                               
spoke  of recent  changes in  gas  and oil  prices.   He said  he                                                               
consulted  with  Pedro  van  Meurs  to  get  a  formula  for  the                                                               
progressivity  of natural  gas  tied to  market  conditions.   He                                                               
distributed the formula,  and said the amendment  adopts the same                                                               
type of  progressivity adopted for  oil prices, but  at different                                                               
numbers.    Alaska  may  have  natural  gas  for  sale  in  large                                                               
quantities in  the next 15 years.   He said the  stress price for                                                               
gas  has been  noted as  being  $3.50 per  million BTUs  [British                                                               
Thermal Unit],  and now natural  gas is  in the low  $7.00 range,                                                               
and after Hurricane Katrina the price  went well over $15.00.  He                                                               
selected $8.00  per million  BTU and  tied it  to the  Henry Hub,                                                               
which  is a  standard for  natural gas  prices.   He removed  the                                                               
dollar  increment and  converted it  into  a number  to create  a                                                               
formula, he  stated.   So it is  the Henry Hub  minus $8.00.   He                                                               
said  this would  increase, by  2 percent  for every  dollar from                                                               
$8.00 through $9.00, requiring to  reach the next dollar prior to                                                               
the trigger.   The ratio is generally one to  six between oil and                                                               
gas, he said.   "So a $1.00  move in the price of  1 million BTUs                                                               
of gas  would be the equivalent  of $6.00 in the  movement of the                                                               
price of a barrel of oil."                                                                                                      
1:30:53 PM                                                                                                                    
CO-CHAIR RAMRAS said for every  dollar increase, there would be a                                                               
multiplier of 2 percent until  achieving a 30 percent tax, "which                                                               
would kick in at $23 per million  BTUs.  That would get us to the                                                               
50 percent equivalent  that would have been in  the equivalent at                                                               
$150  per barrel."   He  said Representative  Seaton may  want to                                                               
look at  it.  He thinks  it protects the state,  giving the House                                                               
Finance Committee  the opportunity  to explore  the ramifications                                                               
of a progressivity formula for natural gas.                                                                                     
1:32:20 PM                                                                                                                    
CO-CHAIR SAMUELS  asked if it would  operate the same way  as oil                                                               
except the trigger point is $8.00 Henry Hub.                                                                                    
CO-CHAIR RAMRAS  said yes; the  tax paid on the  progressivity of                                                               
natural gas would become a deductible expense against the PPT.                                                                  
1:32:46 PM                                                                                                                    
REPRESENTATIVE OLSON  asked if  line 14  should read  "less than"                                                               
instead of "not more than".                                                                                                     
1:33:20 PM                                                                                                                    
MR. MINTZ said he followed the  same format as the prior bill; it                                                               
comes out the same.                                                                                                             
1:34:11 PM                                                                                                                    
REPRESENTATIVE SEATON asked  if prices are stated in  BTUs or MCF                                                               
[million cubic feet].                                                                                                           
MR. MINTZ  said the  Henry Hub  prices are related  to BTUs.   He                                                               
said  he  was  initially  concerned because  the  production  tax                                                               
statutes measure gas  in cubic feet, but Henry Hub  price is only                                                               
used for  the index,  and the  index only  affects the  tax rate;                                                               
therefore, there is no problem in having two different units.                                                                   
The committee took an at-ease from 1:35:21 PM to 1:43:57 PM.                                                                
CO-CHAIR RAMRAS said he feels more strongly about Amendment 19.                                                                 
1:44:21 PM                                                                                                                    
CO-CHAIR  SAMUELS  removed his  objection.    Hearing no  further                                                               
objections, Amendment passed.                                                                                                   
1:44:51 PM                                                                                                                    
CO-CHAIR RAMRAS  moved Amendment 20, 24G-2,  3/17/06, 11:58 P.M.,                                                               
which reads as follows [original punctuation provided]:                                                                         
     Page 24, line 9:                                                                                                           
          Delete "$10,000,000"                                                                                                  
          Insert "$12,000,000"                                                                                                  
     Page 24, line 10:                                                                                                          
          Delete "$2,500,000"                                                                                                   
          Insert "$3,000,000"                                                                                                   
     Page 28, line 28:                                                                                                          
          Delete ""$10,000,000""                                                                                                
          Insert ""$12,000,000""                                                                                                
     Page 28, line 29:                                                                                                          
          Delete ""$7,500,000"                                                                                                  
          Insert ""$9,000,000""                                                                                                 
CO-CHAIR SAMUELS objected.                                                                                                      
CO-CHAIR RAMRAS  said he is  grateful to the committee  and happy                                                               
with the  bill, but he is  troubled by heavy oil,  Cook Inlet and                                                               
other issues not  addressed by the committee.  He  said, "We were                                                               
so careful to incentivize the explorers,  and that in many of the                                                               
improvements  that   we  crafted  to  the   governor's  piece  of                                                               
legislation, I'm  afraid that we  may have taken a  backward step                                                               
with  the  explorers."   He  said  Amendment  20 adds  "a  couple                                                               
million dollars  per full year  and then some  fractional amounts                                                               
for 2006 and 2016 to the  credit, the tax credit that is produced                                                               
annually."   He  said  he recognizes  it  benefits producers  and                                                               
explorers, but it  sends the right signals  to Anadarko Petroleum                                                               
Corporation and  Pioneer.   It moves the  annual credit  from $10                                                               
million up to $12,000 per year, he explained.                                                                                   
1:46:29 PM                                                                                                                    
CO-CHAIR SAMUELS said  this is in reference to the  change to the                                                               
$73 million allowance.                                                                                                          
REPRESENTATIVE SEATON asked, "So this  takes an equivalence of an                                                               
allowance on what amount?"                                                                                                      
CO-CHAIR  RAMRAS said  it would  be equivalent  to a  $60 million                                                               
credit  down from  the $73  million  that was  in the  governor's                                                               
bill, and  would get the explorers  back to a better  place.  "It                                                               
puts a smile on the explorers faces; a $2 million-a-year smile."                                                                
1:47:47 PM                                                                                                                    
REPRESENTATIVE  SEATON noted  that  this credit  is available  to                                                               
every producer.                                                                                                                 
CO-CHAIR  RAMRAS  said,  for  better   or  for  worse,  everybody                                                               
benefits equally.                                                                                                               
CO-CHAIR  SAMUELS  said  it  is  non-transferable  and  can't  be                                                               
carried forward.                                                                                                                
REPRESENTATIVE GATTO asked what is special about the year 2016.                                                                 
CO-CHAIR  SAMUELS  said   there  is  a  10-year   sunset  on  the                                                               
provision, and  the amount represents  the fraction of  the final                                                               
1:48:48 PM                                                                                                                    
CO-CHAIR  SAMUELS  removed his  objection.    Hearing no  further                                                               
objections, Amendment 20 passed.                                                                                                
1:49:02 PM                                                                                                                    
REPRESENTATIVE   SEATON   moved   Amendment   21,   which,   from                                                               
handwritten notes read:                                                                                                         
     Page 1, line 16                                                                                                            
          Delete 23                                                                                                             
          Insert 18                                                                                                             
     Page 1, line 17                                                                                                            
          Delete 15                                                                                                             
          Insert 18.75                                                                                                          
CO-CHAIR SAMUELS objected.                                                                                                      
REPRESENTATIVE  SEATON   said  Amendment  21  "is   basically  an                                                               
amendment to Amendment  19 that we just  passed, and...it mirrors                                                               
what we  did for oil in  the progressivity.  It  changes the line                                                               
from 23  to 18, which  was the  equivalent of the  110-barrel, in                                                               
BTU amounts  per oil.   And  it changes the  next line;  that the                                                               
index at  15...since it's deductible,  to the 18.75,  which gives                                                               
the equal split."                                                                                                               
CO-CHAIR  SAMUELS  removed his  objection.    Hearing no  further                                                               
objections, Amendment 21 passed.                                                                                                
1:50:14 PM                                                                                                                    
REPRESENTATIVE KAPSNER  said she didn't move  Amendment 13, which                                                               
would have taken the tax and credit  ratio up to 25/20.  She said                                                               
she  drafted  the  amendment  to  recognize  the  many  hours  of                                                               
testimony from economists  who said that a 25/20  ratio would not                                                               
deter investment, and it would bring  in $600 million more to the                                                               
state per year  when oil is at $60 a  barrel.  But Representative                                                               
Seaton's  Amendment 15  brings the  tax rate  up to  37.5 percent                                                               
when the price  of oil is $110  per barrel.  She said  that was a                                                               
good concession, and she didn't  have the votes for her amendment                                                               
1:52:26 PM                                                                                                                    
REPRESENTATIVE  GATTO  moved  to   report  HB  488,  version  24-                                                               
GH2052\Y, Chenoweth,  3/15/06, as amended, out  of committee with                                                               
individual recommendations and the accompanying fiscal notes.                                                                   
1:52:46 PM                                                                                                                    
CO-CHAIR SAMUELS objected.                                                                                                      
1:52:51 PM                                                                                                                    
REPRESENTATIVE  CRAWFORD said  his  past comments  show where  he                                                               
stands; he  doesn't agree  with the taxation  system.   He didn't                                                               
agree with the fact that the  governor negotiated an oil tax with                                                               
the oil industry.   He said he didn't think  the governor had the                                                               
authority to do so, "if fact  he had explicit instructions not to                                                               
negotiate oil taxes in the context  of a gas pipeline."  He noted                                                               
that the  Chair has explained that  HB488 is separate, "but  in a                                                               
few weeks  we will understand  all the  other pieces when  we see                                                               
the gas contract."   He said he hasn't seen  the other pieces and                                                               
he does not understand the whole  picture.  He doesn't agree with                                                               
a net  profit based tax because  it is not easily  verifiable and                                                               
sets the  state up for  years of litigation.   He noted  that the                                                               
state  went  through years  of  litigation  when  it set  up  the                                                               
severance tax, and it is  still going through court battles after                                                               
all these  years.  The efforts  that the committee are  making is                                                               
simply putting  perfume or lipstick on  a pig, and it  is still a                                                               
pig.  "I  just don't agree with going away  from something easily                                                               
verifiable."   He said the world-renowned  consultants promoted a                                                               
progressive  severance tax  because  it is  so  much more  easily                                                               
verifiable, and that would have been the  way to go.  He said the                                                               
committee is doing the best job  it can, given the parameters the                                                               
governor  gave them,  "but I  am opposed  to it  and will  remain                                                               
opposed to it."                                                                                                                 
1:56:27 PM                                                                                                                    
CO-CHAIR  SAMUELS  said  he regrets  that  the  committee  didn't                                                               
address incentivizing heavy  oil.  He said he  doesn't agree with                                                               
everything in the  CS, but he tried  to find a balance.   It is a                                                               
long process,  and he  shares Representative  Crawford's concerns                                                               
regarding cost  allocation.  He  will present those  concerns and                                                               
will make sure the bill is tightened  up as it moved forward.  He                                                               
said the  state needs to  focus on a  long-term fiscal plan.   He                                                               
thanked his staff.                                                                                                              
1:58:46 PM                                                                                                                    
CO-CHAIR SAMUELS removed his objection.                                                                                         
1:58:53 PM                                                                                                                    
A  roll  call vote  was  taken.   Representatives  Gatto,  Olson,                                                               
Ramras, Samuels,  Seaton, Kapsner, and  Elkins voted in  favor of                                                               
CSHB 488,  version 24-GH2052\Y,  Chenoweth, 3/15/06,  as amended,                                                               
and Representative  Crawford voted  against it.   Therefore, CSHB
488(RES) passed out of the  House Resources Standing Committee by                                                               
a vote of  7 to 1.  [Representative LeDoux  was on teleconference                                                               
and therefore not allowed to vote.]                                                                                             

Document Name Date/Time Subjects