Legislature(2013 - 2014)

04/04/2013 12:01 AM RES


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12:00:23 AM Start
12:03:34 AM SB21
02:09:58 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
[This is a continuation of the  April 3, 2013, meeting during the                                                               
course of the  discussion of Amendment 31, the text  for which is                                                               
provided at the end of this document.]                                                                                          
                                                                                                                                
12:00:23 AM                                                                                                                   
                                                                                                                                
MATTHEW  FONDER,   Director,  Anchorage  Office,   Tax  Division,                                                               
Department   of  Revenue   (DOR),  agreed   with  Ms.   Pollard's                                                               
testimony,  although  he  said  he would  have  to  research  the                                                               
question to provide an answer with 100 percent confidence.                                                                      
                                                                                                                                
CO-CHAIR  SADDLER asked  what the  actual fiscal  impact of  this                                                               
would be.                                                                                                                       
                                                                                                                                
MICHAEL PAWLOWSKI, Oil & Gas  Development Project Manager, Office                                                               
of  the Commissioner,  Department  of Revenue  (DOR), replied  he                                                               
does not  believe DOR has  a "fiscal impact  understanding around                                                               
this  particular provision."    The central  issue  is about  the                                                               
treatment of transportation costs for  a taxpayer that is also an                                                               
owner and an affiliated shipper on  a pipeline.  An example would                                                               
be when  one of  the taxpayers  owns a piece  of the  pipeline or                                                               
transportation  system used  for shipping  the oil;  this is  the                                                               
issue in the current law.                                                                                                       
                                                                                                                                
CO-CHAIR  SADDLER  recalled  the contentiousness  of  the  Trans-                                                               
Alaska Pipeline System (TAPS) tariff case.                                                                                      
                                                                                                                                
REPRESENTATIVE TUCK  noted there  has been  no testimony  on this                                                               
issue  and  over several  years  no  concerns have  been  raised;                                                               
therefore, he said he would vote against the amendment.                                                                         
                                                                                                                                
REPRESENTATIVE  TARR asked  under  what  circumstances the  state                                                               
would be able to collect taxes if an adjustment was warranted.                                                                  
                                                                                                                                
12:03:34 AM                                                                                                                   
                                                                                                                                
SUSAN  POLLARD, Assistant  Attorney  General, Oil,  Gas &  Mining                                                               
Section,  Civil Division  (Juneau), Department  of Law,  restated                                                               
Representative Tarr's  question:  If  a tariff is  later adjusted                                                               
and then the  transportation costs change, can  the state collect                                                               
the adjusted amount?  She said the answer is yes.                                                                               
                                                                                                                                
LENNIE DEES, Audit Master, Production  Audit Group, Tax Division,                                                               
Department of Revenue  (DOR), further explained that  if a tariff                                                               
changes  after  a  taxpayer  has   filed,  as  authorized  by  AS                                                               
43.55.075,  the taxpayer  is required  to  refile if  there is  a                                                               
change  in the  tax  due, which  is a  common  occurrence when  a                                                               
tariff  has been  disputed before  the Federal  Energy Regulatory                                                               
Commission (FERC)  or the Regulatory Commission  of Alaska (RCA).                                                               
A ruling from  either commission to lower the  tariff will impact                                                               
the taxable value  of the oil.  He described  the current process                                                               
of  calculation  under  ACES,  and  advised  that  an  effect  of                                                               
Amendment 31 would be a decrease in the amount of taxes.                                                                        
                                                                                                                                
CO-CHAIR FEIGE  asked whether reasonable costs  of transportation                                                               
have typically been lower or higher.                                                                                            
                                                                                                                                
MR. DEES clarified that the  taxpayer deducts the lower of actual                                                               
or  reasonable costs;  if the  reasonable cost  of transportation                                                               
calculated by DOR  is lower than actual cost,  taxpayers are only                                                               
allowed to  deduct the  reasonable cost.   This only  occurs with                                                               
taxpayers  that have  affiliated  carriers.   As  referred to  by                                                               
Representative  Hawker,  prior  to ACES,  three  conditions  were                                                               
required to  be true  for reasonable  costs of  transportation to                                                               
apply; however, under ACES only one  condition has to be true.  A                                                               
number of  taxpayers in Alaska  have ownership in  pipelines, and                                                               
are  required  to meet  the  "reasonable  cost of  transportation                                                               
test."                                                                                                                          
                                                                                                                                
12:07:41 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON  directed attention  to Amendment  31, page                                                               
2, line 5, which directs  that transportation costs will be fixed                                                               
by what is on file, instead  of what has been adjudicated as just                                                               
and reasonable by RCA or another  agency.  He surmised this means                                                               
if a  company is shipping  on its own  pipeline, it can  "jack up                                                               
the rate in the pipeline" and  pay the rate, thereby reducing the                                                               
value  of the  oil  and lowering  taxes.   Or,  if  one owns  the                                                               
tankers, instead of  paying what another would  pay for shipping,                                                               
the  owner  could pay  more  and  subtract the  higher  "supposed                                                               
value."   This would artificially create  a higher transportation                                                               
cost.  Representative Seaton recalled  this is the situation that                                                               
cost the state about $6 billion  in the settlement of TAPS tariff                                                               
litigation.  He  said allowing companies to have  higher rates on                                                               
file for affiliates, allows them to  value their oil lower at the                                                               
wellhead.  He said he would vote against adopting the amendment.                                                                
                                                                                                                                
12:10:14 AM                                                                                                                   
                                                                                                                                
CO-CHAIR FEIGE agreed that owners  of the pipeline could increase                                                               
their actual costs; the amendment  says that the reasonable costs                                                               
of transportation are  actual costs, except when  the parties are                                                               
affiliated,  or   when  the  contract  is   not  an  arm's-length                                                               
transaction.   For  example, BP  Exploration Alaska  Inc. has  an                                                               
ownership  share  in  the  pipeline, and  if  shipping  its  oil,                                                               
reasonable costs would rule, as opposed to actual costs.                                                                        
                                                                                                                                
REPRESENTATIVE HAWKER  said he did not  believe the circumstances                                                               
as previously described are accurate,  and invited testimony from                                                               
an expert witness to explain  the industry's perspective on - and                                                               
rationale for - the amendment.                                                                                                  
                                                                                                                                
12:12:24 AM                                                                                                                   
                                                                                                                                
MARIE EVANS,  Tax Counsel, ConocoPhillips Alaska,  Inc., recalled                                                               
a long-standing practice  that existed in law  under the Economic                                                               
Limit  Factor   (ELF)  [enacted   in  1977]  and   the  Petroleum                                                               
Production Tax (PPT) bill [enacted  in August 2006] changed under                                                               
Alaska's Clear  and Equitable Share  (ACES) [enacted  in November                                                               
2007].  At the time of  the ELF and PPT statutes, the requirement                                                               
to refile was  in regulation, but was moved  from regulation into                                                               
AS 43.55.075.   If a  company were to  "jack up the  tariff," the                                                               
state  and shippers  have the  right  to protest  the rates,  and                                                               
after  the rates  are  settled or  adjudicated,  the taxpayer  is                                                               
required to  refile taxes.  Interest  is paid from the  date due,                                                               
even though the litigation process may  be very long.   Ms. Evans                                                               
urged the committee  to keep in mind that  this situation creates                                                               
uncertainty at  the time taxes are  filed.  As a  taxpayer, there                                                               
is no  choice other than  to deduct what  is paid and,  if prices                                                               
are  changed, refile  relative  to the  refund  from the  carrier                                                               
companies  to the  shippers.   Also,  although  DOR was  diligent                                                               
during  the  regulation process,  the  regulations  are long  and                                                               
extremely  difficult  to  understand,   which  leaves  the  final                                                               
interpretation  open to  DOR's discretion.   She  concluded that,                                                               
ideally, a  self-assessed tax should  be known and  calculable by                                                               
the taxpayer at the time it is due.                                                                                             
                                                                                                                                
12:17:14 AM                                                                                                                   
                                                                                                                                
CO-CHAIR FEIGE asked whether Ms.  Evans worked for ConocoPhillips                                                               
Alaska under the previous set of statutes.                                                                                      
                                                                                                                                
MS. EVANS said she came to  work for ConocoPhillips Alaska as in-                                                               
house counsel  after ACES  passed, thus  her experience  with the                                                               
previous tax  policy was  gleaned while working  on appeals.   In                                                               
further response to Co-Chair Feige,  she opined that adopting the                                                               
amendment will result  in less challenge and  more certainty when                                                               
the tax is calculated.                                                                                                          
                                                                                                                                
REPRESENTATIVE  HAWKER expressed  his  concern that  the bill  is                                                               
asking taxpayers  to file taxes  - that  are subject to  audits -                                                               
following regulations  "nobody quite understands."    He restated                                                               
that prior  to ACES there  was a  mechanism in place  that worked                                                               
for  everyone;  this  amendment replaces  that  mechanism.    The                                                               
amount that  a taxpayer actually  pays is a reasonable  amount to                                                               
pay  for   a  transportation  deduction,  and   pointed  out  the                                                               
exception that certain circumstances will  lead to a rate that is                                                               
on file with a regulatory body,  and that is subject to change by                                                               
a regulatory body.                                                                                                              
                                                                                                                                
12:19:47 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON  urged the  committee to consider  that the                                                               
language deleted is "adjudicated as  just and reasonable," and is                                                               
being replaced with  "what you pay yourself."   He suggested more                                                               
testimony is needed  from legislative attorneys to  advise on tax                                                               
liability  and calculations,  and  also to  advise  on the  prior                                                               
litigation that  showed that higher  charges, in order  to reduce                                                               
gross value at the point of production, occurred.                                                                               
                                                                                                                                
REPRESENTATIVE     HAWKER    questioned     the    aforementioned                                                               
characterization of the issues surrounding the tax settlement.                                                                  
                                                                                                                                
REPRESENTATIVE TARR maintained her  objection, and said her staff                                                               
estimates  that  the cost  of  the  amendment  may be  over  $150                                                               
million per year.  She requested  DOR to comment on the potential                                                               
fiscal impact.                                                                                                                  
                                                                                                                                
MR.  PAWLOWSKI   indicated  that   without  knowing   the  actual                                                               
calculations  around  the  particular  tax rate  and  per  barrel                                                               
allowances in the bill, he was hesitant to respond.                                                                             
                                                                                                                                
12:22:35 AM                                                                                                                   
                                                                                                                                
DAN  STICKLE, Assistant  Chief Economist,  Anchorage Office,  Tax                                                               
Division,  Department of  Revenue  (DOR), said  to calculate  the                                                               
fiscal  impact he  needed to  know  the potential  change in  the                                                               
tariff.                                                                                                                         
                                                                                                                                
REPRESENTATIVE  TARR, in  response  to Co-Chair  Feige, said  her                                                               
estimate was based  on information from her staff.   She said she                                                               
is requesting  this information  because it  would be  helpful to                                                               
have some  idea of  the impact  in order  to protect  the state's                                                               
interests.                                                                                                                      
                                                                                                                                
MR. STICKLE,  referring to Representative Tarr's  estimate, said,                                                               
"My gut feeling  is that's probably on the high  end of the range                                                               
that we would arrive at if we did do a detailed analysis."                                                                      
                                                                                                                                
MR. PAWLOWSKI asked  whether the Tax Division  in Anchorage knows                                                               
what  is  currently  deemed  as  reasonable  transportation  cost                                                               
versus actual transportation cost.                                                                                              
                                                                                                                                
MR. FONDER  said his division  is unable  to run numbers  at this                                                               
time because the  employees who work with the  reasonable cost of                                                               
transportation are not present and  would need additional time to                                                               
delve into this issue.                                                                                                          
                                                                                                                                
12:24:33 AM                                                                                                                   
                                                                                                                                
A  roll call  vote  was taken.    Representatives Hawker,  Olson,                                                               
Johnson,   and   Feige   voted  in   favor   of   Amendment   31.                                                               
Representatives Tuck, Seaton, Tarr,  P. Wilson, and Saddler voted                                                               
against it.  Therefore, Amendment 31 failed by a vote of 4-5.                                                                   
                                                                                                                                
12:26:25 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE HAWKER moved to adopt  Amendment 32 [text provided                                                               
at the end of this document].                                                                                                   
                                                                                                                                
REPRESENTATIVE TARR objected.                                                                                                   
                                                                                                                                
REPRESENTATIVE  TUCK asked  whether Amendment  32 was  drafted by                                                               
Legislative Legal and Research Services.                                                                                        
                                                                                                                                
REPRESENTATIVE  HAWKER  said  the   structure  of  the  amendment                                                               
drafted   by  Legislative   Legal  and   Research  Services   was                                                               
unsatisfactory;  therefore, Amendment  32 is  presented with  the                                                               
same  language,   but  "the  organization  of   the  language  is                                                               
different."    He asked  for  Amendment  32  to be  considered  a                                                               
conceptual amendment  and said the  purpose of the change  in the                                                               
structure of  the amendment is  to ensure that  this [subsection]                                                               
of statute is placed as  [subsection] (a) instead of [subsection]                                                               
(m).                                                                                                                            
                                                                                                                                
REPRESENTATIVE  TARR   stated  that   during  this   session  the                                                               
committee has  been following a  policy that all  amendments must                                                               
come  from  Legislative Legal  and  Research  Services.   On  two                                                               
occasions she  offered amendments that  were not accepted  by the                                                               
committee  for this  reason.   At this  critical time,  she urged                                                               
that the rule not be broken.                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  recalled he offered an  amendment to correct                                                               
a small drafting  error which was denied for the  same reason and                                                               
he  was directed  to offer  an amendment  to the  amendment.   He                                                               
urged that the committee not accept this conceptual amendment.                                                                  
                                                                                                                                
REPRESENTATIVE HAWKER said New Amendment 32 is forthcoming.                                                                     
                                                                                                                                
12:29:03 AM                                                                                                                   
                                                                                                                                
The committee took an at-ease from 12:29 a.m. to 12:41 a.m.                                                                     
                                                                                                                                
12:41:25 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  HAWKER  withdrew Amendment  32  as  offered.   He                                                               
moved  to   adopt  New  Amendment  32,   labeled  28-GS1647\K.34,                                                               
Nauman/Bullock,  4/3/13,  [text  provided  at  the  end  of  this                                                               
document].                                                                                                                      
                                                                                                                                
REPRESENTATIVE TUCK objected.                                                                                                   
                                                                                                                                
12:42:10 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  HAWKER   moved  to  adopt  Amendment   1  to  New                                                               
Amendment 32.   He explained  the purpose  of Amendment 1  to New                                                               
Amendment 32  is to  replace New Amendment  32 with  the document                                                               
that was provided to committee members labeled Amendment 32.                                                                    
                                                                                                                                
REPRESENTATIVE TUCK objected.                                                                                                   
                                                                                                                                
REPRESENTATIVE HAWKER  expressed his preference for  the language                                                               
in  Amendment 32  because it  preserves the  sequential order  of                                                               
statute, it is more legible  and understandable, and it is easier                                                               
to interpret.   The substance of the language in  Amendment 32 is                                                               
identical to the language in New Amendment 32.                                                                                  
                                                                                                                                
REPRESENTATIVE TUCK  maintained his objection, saying  there have                                                               
been  amendments  drafted  by   Legislative  Legal  and  Research                                                               
Services  that  had  simple  mistakes,   but  attempts  to  offer                                                               
amendments  to  correct  the  mistakes  were  denied.    He  said                                                               
Amendment 1 to New  Amendment 32 is a way to  get around what has                                                               
been  denied to  other  committee members.   Representative  Tuck                                                               
asked  for comments  from Representative  Johnson,  chair of  the                                                               
House Rules Standing Committee.                                                                                                 
                                                                                                                                
REPRESENTATIVE  JOHNSON  asked  whether Representative  Tuck  was                                                               
requested   to  amend   his  amendment   at  the   time  of   the                                                               
aforementioned incident.                                                                                                        
                                                                                                                                
12:44:49 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE TUCK  relayed that  after the introduction  of his                                                               
amendment  was  denied,  he  suggested  amending  the  amendment.                                                               
However, his suggestion was also denied.                                                                                        
                                                                                                                                
REPRESENTATIVE JOHNSON  said the procedure to  amend an amendment                                                               
is proper, and the decision to  accept or deny an amendment rests                                                               
with each individual committee chair.                                                                                           
                                                                                                                                
REPRESENTATIVE  SEATON drew  attention to  Amendment 32,  page 1,                                                               
line 7, with a  date of March 31, 2006, and  to New Amendment 32,                                                               
page 1, line 10, with a date  of January 1, 2014, and pointed out                                                               
that the amendments were described as identical.                                                                                
                                                                                                                                
REPRESENTATIVE HAWKER  acknowledged the January 1,  2014, date in                                                               
the document  drafted by Legislative Legal  and Research Services                                                               
is incorrect.                                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON  said there is  also a title change  in the                                                               
document drafted by Legislative  Legal and Research Services, and                                                               
questioned whether there are other substantive changes.                                                                         
                                                                                                                                
REPRESENTATIVE HAWKER said no.                                                                                                  
                                                                                                                                
REPRESENTATIVE TARR  asked whether the  chair has ruled  that the                                                               
previous requirements of "24-hours"  and that all amendments must                                                               
be  drafted by  Legislative Legal  and Research  Services are  no                                                               
longer in place.                                                                                                                
                                                                                                                                
CO-CHAIR  FEIGE  noted  the original  amendment  was  drafted  by                                                               
Legislative  Legal and  Research  Services, and  the sponsor  has                                                               
offered  an  amendment   to  the  amendment.     This  is  proper                                                               
procedure, he said.                                                                                                             
                                                                                                                                
REPRESENTATIVE TUCK  maintained his objection, pointing  out that                                                               
the amendment was drafted on 4/3/13.   To comply with the 24-hour                                                               
rule, the amendment would have had to be drafted on 4/2/13.                                                                     
                                                                                                                                
CO-CHAIR  FEIGE  explained  that   all  of  the  amendments  were                                                               
returned  to  Legislative  Legal  and  Research  Services  to  be                                                               
conformed to the committee substitute, Version K.                                                                               
                                                                                                                                
12:48:03 AM                                                                                                                   
                                                                                                                                
A  roll call  vote was  taken.   Representatives Johnson,  Olson,                                                               
Seaton, P. Wilson,  Hawker, Saddler, and Feige voted  in favor of                                                               
Amendment 1 to  New Amendment 32.  Representatives  Tarr and Tuck                                                               
voted against  it.   Therefore, Amendment 1  to New  Amendment 32                                                               
was adopted by a vote of 7-2.                                                                                                   
                                                                                                                                
12:48:50 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  HAWKER  explained  that   New  Amendment  32,  as                                                               
amended, addresses  the issue  of joint  interest billings.   The                                                               
amendment  would  restore  language  in AS  43.55.165,  on  lease                                                               
expenditures, to  what the language was  for [subparagraphs] (A),                                                               
(B), (C),  and (D),  prior to the  passage of ACES.   "So  we are                                                               
simply  going back  to language  that was  established to  define                                                               
lease expenditures when the original  PPT legislation passed," he                                                               
said.   One of the significant  changes, for example, is  that on                                                               
page  1, line  12,  the language  from PPT  is  restored to  "the                                                               
department shall consider, among  other factors," instead of "may                                                               
consider," which  was the language  under ACES.  He  advised that                                                               
the changes  preface allowable lease expenditures  to include the                                                               
ordinary   and  necessary   costs  upstream   of  the   point  of                                                               
production,  and  this relates  to  the  language that  says  the                                                               
department   "shall  consider,   among  other   factors,  typical                                                               
industry  practices and  standards  in the  state that  determine                                                               
costs."   He directed attention  to [subsection] (c), on  page 2,                                                               
beginning at line 17, and paraphrased as follows:                                                                               
                                                                                                                                
     if the  department finds that the  pertinent provisions                                                                    
     of  a unit  operating  agreement  or similar  operating                                                                    
     agreement   are  substantially   consistent  with   the                                                                    
     department's determinations and  standards under (a) of                                                                    
     this  section   concerning  whether  costs   are  lease                                                                    
     expenditures, the  department may authorize  or require                                                                    
     a  producer,  subject  to conditions  prescribed  under                                                                    
     regulations  adopted by  the  department,  to treat  as                                                                    
     that portion of its lease expenditures ...                                                                                 
                                                                                                                                
                                                                                                                                
12:51:34 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  HAWKER continued  to explain  that the  amendment                                                               
will enable companies  to utilize costs that are  incurred by the                                                               
operator and that  are billed from one to another,  or that would                                                               
be billed.   As  an aside,  he characterized  the costs  that are                                                               
billed  from  one  operator  to   another  as  a  reasonable  and                                                               
fundamental determination  of the costs  of operating in  the oil                                                               
fields.  Directing attention to Section  37 of the bill, which is                                                               
adding (d)  back into statute, on  page 3, beginning at  line 15,                                                               
he paraphrased as follows:                                                                                                      
                                                                                                                                
     ... if  the department  makes the finding  described in                                                                    
     (c) of  this section with  respect to a  unit operating                                                                    
     agreement  or  similar   operating  agreement  and,  in                                                                    
     addition,  finds that  at  least  one working  interest                                                                    
     party to  the agreement, other than  the operator, with                                                                    
     substantial incentive and  ability to effectively audit                                                                    
     billings, under  the agreement  in fact  is effectively                                                                    
     auditing billings  under the agreement,  the department                                                                    
     may  authorize  or  require   a  producer,  subject  to                                                                    
     conditions prescribed under  regulations adopted by the                                                                    
     department,   to  treat as  that portion  of its  lease                                                                    
     expenditures for a calendar year  applicable to oil and                                                                    
     gas  produced from  a lease  or property  in the  state                                                                    
     only ...                                                                                                                   
                                                                                                                                
12:54:45 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  HAWKER   further  explained  that   the  language                                                               
applies  if   the  department  finds  that   the  unit  operating                                                               
agreements  are substantially  consistent  with the  department's                                                               
determinations  and standards,  and further  determines that  one                                                               
party who  is not the  operator, but  that has the  incentive and                                                               
ability to  audit the billings, is  doing so.  He  clarified that                                                               
the  agency  must  find that  the  agreements  are  substantially                                                               
similar, and  then that the  audit process underway  is effective                                                               
and in  place.  If  the aforementioned two requirements  are met,                                                               
the department may  adopt regulations to treat - as  a portion of                                                               
a party's  lease expenditures  in a calendar  year -  those costs                                                               
that are billed in the  working interest agreements.  He reminded                                                               
the   committee  that   working  interest   agreements  are   the                                                               
foundation of  how the industry on  the North Slopes works:   two                                                               
or  three   producers  operate  together,  with   one  running  a                                                               
particular development and  billing its partners.   He said these                                                               
billings are audited,  and there can be no  collusion between the                                                               
parties,  because these  billings  are the  manner  by which  the                                                               
industry  defines and  details the  sharing of  the expenses  for                                                               
operating the fields.  In fact,  the amendment puts back in place                                                               
the ability of the department  to utilize the audits and consider                                                               
them among typical industry practices;  this is done by replacing                                                               
"may" with  "shall."  He  restated that  the language is  not new                                                               
and  was  legally  crafted  and   existed  in  the  original  PPT                                                               
legislation.   Furthermore, the joint interest  billings are used                                                               
by the oil  and gas industry to file federal  income tax returns,                                                               
thus  this information  is also  audited  internally, subject  to                                                               
audit by the Internal Revenue  Service (IRS), and is certified by                                                               
senior management of the companies.   If the companies agree that                                                               
these are the  correct costs of operating, he  suggested that the                                                               
legislature is overstepping  its authority if the  state writes a                                                               
regulation that  does not allow the  state to use the  costs as a                                                               
basis  to  audit producer  tax  returns.   Representative  Hawker                                                               
noted testimony by  the oil and gas  industry seeking consistent,                                                               
one-time  filing,  without  multiple  sets  of  books  driven  by                                                               
department  regulations that  are not  relevant.   He opined  the                                                               
department has been unable to  complete audits in a timely manner                                                               
because it does  not rely upon the work of  other auditors as was                                                               
done  under PPT.    Restoring the  prefacing  language back  into                                                               
statute on  what constitutes a  lease expenditure  as established                                                               
in the PPT legislation before  ACES will tell the department that                                                               
it  is  required   to  use  operating  agreements   -  under  the                                                               
conditions allowed  - as  guidance for  what is  typical industry                                                               
practice for ordinary  and necessary costs upstream  of the point                                                               
of production.                                                                                                                  
                                                                                                                                
1:01:21 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER continued,  saying when  ACES passed,  the                                                               
department's  interpretation  was  that  it  would  not  use  the                                                               
billings, and  that was  a change  that created  a great  deal of                                                               
confusion, multiple bookkeeping, and  inconsistency.  The present                                                               
language  does not  capture typical  industry practice,  or allow                                                               
appropriate  deductions of  ordinary  and necessary  costs by  an                                                               
operator.   He stressed New  Amendment 32,  as amended, is  not a                                                               
nullification of  present regulations, but does  require a review                                                               
of  present regulations  for consistency,  and a  recognition and                                                               
greater acceptance of joint interest  billings as a standard upon                                                               
which  to  look  at  costs  of  production  in  an  easier,  more                                                               
efficient,  and  more  effective  way  for  all  of  the  parties                                                               
involved.  The  amendment puts back in place the  language in the                                                               
original PPT legislation, which would  be effective from the date                                                               
of the original PPT legislation.                                                                                                
                                                                                                                                
1:03:32 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON ascertained that the  current procedure                                                               
is for the  department to audit the operator and  each party, but                                                               
with  the passage  of this  amendment, the  department will  only                                                               
audit the operator.                                                                                                             
                                                                                                                                
REPRESENTATIVE  HAWKER stated  that joint  interest billings  are                                                               
agreed to  and audited amongst  the participants.   The amendment                                                               
would  allow  the department  to  decide  that  if the  audit  is                                                               
properly executed by a party that  is not the operator, the audit                                                               
can be  accepted as  a basis  of the oil  and gas  production tax                                                               
return.                                                                                                                         
                                                                                                                                
CO-CHAIR SADDLER  asked the Tax  Division for the  advantages and                                                               
disadvantages of the current system.                                                                                            
                                                                                                                                
1:06:08 AM                                                                                                                    
                                                                                                                                
JOHN LARSEN,  Audit Master, Anchorage Office,  Tax Division, DOR,                                                               
addressed the  statement that  the department's  regulations have                                                               
no  bearing   on  how  industry  functions,   and  the  statement                                                               
regarding  the  lease  expenditure   statute.    The  legislature                                                               
repealed  AS  43.55.165  (c)  and  (d) as  of  7/1/07,  thus  the                                                               
department  wrote  a  set  of  regulations  for  determining  the                                                               
reasonable costs  of allowable lease expenditures.   In addition,                                                               
regulations were necessary in the  case of a single operator with                                                               
no third party auditing of the  agreement.  Turning to the use of                                                               
typical industry practices, his  professional opinion is that the                                                               
regulations do  account for ordinary  and necessary costs  of oil                                                               
field  operations for  exploration, development,  and production.                                                               
As the regulations were being  developed, the department analyzed                                                               
and  compared  unit  operating   agreements,  because  the  joint                                                               
interest billing is the invoice for  the shared cost, which is an                                                               
industry standard.  He pointed  out that the department sought to                                                               
look not only at standard  industry practices in Alaska, but also                                                               
relied   on  interpretations   by   the   Council  of   Petroleum                                                               
Accountants  Societies  (COPAS),  a  nationwide  organization  of                                                               
companies  throughout   the  industry.     The   organization  is                                                               
dedicated to  the promulgation of  fair accounting  standards for                                                               
all  companies.    Specifically, a  COPAS  model-form  accounting                                                               
procedure  was used  as  a  baseline for  the  regulations.   Mr.                                                               
Larsen said  the department also  used the Department  of Natural                                                               
Resources (DNR),  Division of Oil  & Gas (DOG), net  profit share                                                               
lease (NPSL)  regulations.  He  offered to prepare a  matrix that                                                               
demonstrates  the symmetry  between the  department's regulations                                                               
and COPAS standards.   One of the goals of  the department was to                                                               
establish  a single  standard  of  lease expenditure  regulations                                                               
that  could  be  applied  throughout   the  state.    Turning  to                                                               
Representative Hawker's  comment on IRS filings,  he acknowledged                                                               
that there  are IRS standards;  however, he pointed out,  the IRS                                                               
audits for income tax and not for oil and gas production taxes.                                                                 
                                                                                                                                
MR.  LARSEN   advised  that  joint  venture   audits,  which  are                                                               
performed by  the companies,  are audits in  the interest  of the                                                               
company, not  in the interest of  the state, and if  the state is                                                               
bound  by  the  joint  interest  agreement, it  is  bound  to  an                                                               
agreement of which it is not a party.                                                                                           
                                                                                                                                
1:13:01 AM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER restated his question.                                                                                         
                                                                                                                                
MR. LARSEN  said one advantage  of using the  state's regulations                                                               
is that  a single standard  is established throughout  the state.                                                               
He said  he would give more  thought to the disadvantages  of the                                                               
current  system.   One advantage  to the  system proposed  by the                                                               
amendment is  the convenience of  using joint  interest billings;                                                               
however,  he  reiterated,  the  auditors  are  auditing  for  the                                                               
interest  of  their  companies.     He  further  opined  the  IRS                                                               
determines allowable  costs for income tax,  not production audit                                                               
tax, and there is quite a difference.                                                                                           
                                                                                                                                
1:15:33 AM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE asked  whether the division will be  able to audit                                                               
as effectively  on behalf of the  state, if New Amendment  32, as                                                               
amended, is adopted.                                                                                                            
                                                                                                                                
MR.  LARSEN replied  no,  because the  audit  authority is  being                                                               
removed  from the  department  and  placed in  the  hands of  the                                                               
parties of interest.                                                                                                            
                                                                                                                                
CO-CHAIR  FEIGE  understood  the   amendment  provides  that  the                                                               
department would be able to audit  the books of the operator of a                                                               
particular   development  and   determine   which  expenses   are                                                               
allowable, which would pass to the other leaseholders.                                                                          
                                                                                                                                
1:17:03 AM                                                                                                                    
                                                                                                                                
MR. DEES said that is one  of the approaches the department could                                                               
take in the case of  joint venture operating agreements; however,                                                               
there  has been  resistance from  the partners  to this  approach                                                               
because each  individual company  is being assessed  a production                                                               
tax  based on  its own  filing.   Therefore, a  company may  be a                                                               
partner in  several joint ventures,  and also have  activities in                                                               
stand-alone  operations.   The department  looks at  each company                                                               
individually  in  order  to maintain  confidentiality  during  an                                                               
audit.   Changing  to  net tax  in a  situation  where there  are                                                               
taxpayers  that are  not operators  presents  challenges, as  the                                                               
details  are on  the  joint  interest billings.    He opined  the                                                               
amendment does  not change current procedures  because department                                                               
regulations do  consider several operating agreements  within the                                                               
state.    Furthermore,  using   the  department's  standards  for                                                               
allowable  lease expenditures  is  to maintain  the  same set  of                                                               
standards for  each taxpayer  for consistency.   For  example, in                                                               
statute,  certain expenditures  are  not  allowable, even  though                                                               
they  are  shared  costs  billed  between  partners  in  a  joint                                                               
operating  agreement,  such  as  those defined  in  AS  43.55.165                                                               
[subsection] (e).  Mr. Dees  concluded that the approach taken by                                                               
the department best serves the statute as written.                                                                              
                                                                                                                                
1:20:37 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE asked  whether the  department would  be able  to                                                               
process audits more efficiently if the amendment is adopted.                                                                    
                                                                                                                                
MR. DEES  pointed out that  lease expenditures are just  one part                                                               
of the activities  perused in an audit;  other activities audited                                                               
are  revenues and  transportation  costs.   He acknowledged  that                                                               
this approach  may accelerate the  lease expenditure part  of the                                                               
audit.                                                                                                                          
                                                                                                                                
REPRESENTATIVE  HAWKER disagreed  with the  implication that  the                                                               
amendment  will "allow  unallowable expenditures."   He  said the                                                               
amendment changes  in statute "the department  may consider among                                                               
other factors,"  and drew attention  to the amendment on  page 1,                                                               
line 12, which read:                                                                                                            
                                                                                                                                
     department shall consider, among other factors,                                                                            
      (1) the typical industry practices and standards in                                                                       
      the state that determine the costs, other than items                                                                      
     listed in (e) of this section, ...                                                                                         
                                                                                                                                
1:23:47 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER explained  that [subsection]  (e) includes                                                               
the disallowed costs.    He then turned attention  to page 3, and                                                               
said the  language directs  the department  to review  and ensure                                                               
that there  is at least one  working interest owner party  to the                                                               
agreement, thus  there is no  issue regarding a  single operator.                                                               
On page 3, beginning at line 18, he paraphrased as follows:                                                                     
                                                                                                                                
     ...   other  than   the   operator,  with   substantial                                                                    
     incentive and  ability to effectively  audit and  is in                                                                    
     fact   effectively   auditing   ...  subject   to   ...                                                                    
     regulations adopted  by the department, ...  other than                                                                    
     items listed in (e) of this section                                                                                        
                                                                                                                                
REPRESENTATIVE HAWKER urged that  the department should implement                                                               
the standards  the legislature has  determined - rather  than its                                                               
own set of standards -  on what are allowable lease expenditures.                                                               
He restated that the mechanism  worked well before it was changed                                                               
under  ACES without  scrutiny, and  said, "We  didn't contemplate                                                               
that  we  would  be  in fact,  the  legislature,  abrogating  our                                                               
policy-making role  to regulators in the  Department of Revenue."                                                               
Although  still   leaving  a  great   deal  of  power   with  the                                                               
department,  the amendment  directs that  the "working  billings"                                                               
will be  used as a  place to begin an  audit, and that  they will                                                               
not  be  discounted.    On  page 2,  beginning  on  line  17,  he                                                               
paraphrased as follows:                                                                                                         
                                                                                                                                
     ...  if   the  department  finds  that   the  pertinent                                                                    
     provisions  of a  unit operating  agreement or  similar                                                                    
     operating agreement  are substantially  consistent with                                                                    
     the  department's  determinations and  standards  under                                                                    
     (a) of this section  concerning whether costs are lease                                                                    
     expenditures, ...                                                                                                          
                                                                                                                                
1:26:28 AM                                                                                                                    
                                                                                                                                
EPRESENTATIVE  HAWKER  said  (a)  is the  policy  provision  that                                                               
reflects  the legislature's  intention:   Lease expenditures  are                                                               
ordinary and necessary costs upstream  of the point of production                                                               
incurred  by  a  calendar  year  ... that  are  direct  costs  of                                                               
exploring  for,  developing, or  producing  oil  or gas  deposits                                                               
located within the  producer's leases or properties  in the state                                                               
or, in  the case  of land in  which the producer  does not  own a                                                               
working interest, that  are direct costs of exploring  for oil or                                                               
gas deposits located within other land in the state.                                                                            
                                                                                                                                
1:28:08 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR said  she objects  to the  amendment because                                                               
the state will  no longer get needed information  from the audit.                                                               
She compared the effect of  the amendment to negotiating on taxes                                                               
with one's  self, which  would result in  a better  position than                                                               
negotiating with  the IRS.    She understood that the  reason for                                                               
the  change in  ACES  was  because under  the  PPT  tax, the  tax                                                               
revenue  was  $800 million  less  than  expected, partly  due  to                                                               
larger  than   expected  lease   deductions.     Therefore,  ACES                                                               
legislation was written to prevent a reoccurrence.                                                                              
                                                                                                                                
MR. DEES, although he did  not have direct experience, agreed the                                                               
aforementioned may  have been a  factor.   He opined what  led to                                                               
the changes  in ACES was  related to  costs from failures  due to                                                               
deferred maintenance in 2006.   In response to Co-Chair Feige, he                                                               
said  the  impact of  lease  expenditures  that are  higher  than                                                               
expected  would be  that  production tax  values  are lower  than                                                               
expected.                                                                                                                       
                                                                                                                                
CO-CHAIR FEIGE  said his question  is whether the  difference was                                                               
due  to  the  definition  of  lease  expenditure  or  because  of                                                               
auditing practices.                                                                                                             
                                                                                                                                
MR. DEES opined  it was not due to auditing  practices but to the                                                               
actual reported expenditures.                                                                                                   
                                                                                                                                
REPRESENTATIVE  HAWKER noted  that the  amendment was  drafted to                                                               
include every change to subsection (e)  that was made in the ACES                                                               
legislation.   "I'm not trying  to go  back and change  that," he                                                               
said.                                                                                                                           
                                                                                                                                
1:31:51 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  asked Mr. Dees for  clarification on whether                                                               
the proposed process would become  more complicated when one sole                                                               
venture  operator  is  in  partnership with  others  in  a  joint                                                               
venture, and some exceptions apply but others do not.                                                                           
                                                                                                                                
MR.  DEES   suggested  that   a  set   of  standards   for  lease                                                               
expenditures that  are applicable  to all  parties affected  by a                                                               
tax structure is  better for the state and the  auditors.  If the                                                               
state  establishes   standards,  just   because  parties   to  an                                                               
operating agreement agree  to certain costs, would  not mean that                                                               
the costs are lease allowable expenditures.                                                                                     
                                                                                                                                
CO-CHAIR FEIGE  expressed his understanding  that an  auditor who                                                               
is auditing the operator would  make the determination on whether                                                               
a cost is a deductible cost.                                                                                                    
                                                                                                                                
MR. DEES  observed that the  department audits the operator  as a                                                               
taxpayer, not as an operator.   Thus, if a cost is not allowable,                                                               
it affects  that particular taxpayer's  assessment, but  not that                                                               
of all  of the partners.   He relayed companies are  resistant to                                                               
the  "operator  approach"  because  taxes  are  proprietary,  and                                                               
companies  do  not  want  the department  to  apply  others'  tax                                                               
assessments  on them.    He explained  that  with joint  operated                                                               
costs, one  company may capitalize  a cost and another  may treat                                                               
it as  an expense; therefore,  in response  to the wishes  of the                                                               
companies, the department audits each taxpayer separately.                                                                      
                                                                                                                                
1:35:44 AM                                                                                                                    
                                                                                                                                
CO-CHAIR   FEIGE  questioned   why  there   are  differences   in                                                               
accounting and how costs are  accounted for, when all parties are                                                               
paying based on the same tax code.                                                                                              
                                                                                                                                
MR. DEES  said the IRS views  a partnership as a  taxable entity;                                                               
however, in production  tax the state does  not tax partnerships,                                                               
and  each  taxpayer, explorer,  or  producer  is assessed  as  an                                                               
individual entity.                                                                                                              
                                                                                                                                
REPRESENTATIVE TARR  gave an example that  an individual taxpayer                                                               
would have  different accounting  because of differing  state and                                                               
federal tax codes.                                                                                                              
                                                                                                                                
MR. DEES said  no; but it could be an  internal accounting policy                                                               
that differs between the joint interest partners.                                                                               
                                                                                                                                
REPRESENTATIVE  TUCK   inquired  as   to  the  "push   back"  the                                                               
department receives from companies.                                                                                             
                                                                                                                                
MR. DEES said  he was referring to push back  from companies that                                                               
do not  want the department  to audit  an operator, and  then use                                                               
the results of that audit for assessing others.                                                                                 
                                                                                                                                
1:38:35 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  was  surprised  to hear  that  the  audit                                                               
process worked well under PPT,  because no audits were completed.                                                               
He  said his  first concern  is that  the effective  date of  the                                                               
amendment  is  3/31/06,  and  questioned  whether  the  developed                                                               
auditing  scheme   and  regulations,  and  the   recently  funded                                                               
computer  system, will  have  to  be revised  to  apply to  joint                                                               
operating agreements.  In addition,  he asked whether audits will                                                               
apply to all parties at once  because "we're auditing a company -                                                               
not a ring-fence  operation." In fact, all of  the information is                                                               
needed, thus  all of the operators  may have to be  audited first                                                               
in order to  decide from the joint operating  agreements what was                                                               
disbursed to each individual company.                                                                                           
                                                                                                                                
MR. DEES responded that the operator  does not have to be audited                                                               
first.   The  department  audits  all of  the  activity for  that                                                               
taxpayer and  looks at  all of  its joint  interest billings.   A                                                               
reconciliation  document  between  the  billings  and  the  lease                                                               
expenditures  that are  being  deducted,  including the  excluded                                                               
costs in  accordance with  AS 43.55.165 (e),  is requested.   The                                                               
tax is not calculated on  individual joint ventures; for example,                                                               
the tax structure identifies segments  by areas of the state, and                                                               
the  North Slope  is a  single  segment.   So, for  a company  in                                                               
several joint ventures  that produce oil on the  North Slope, the                                                               
tax is  calculated on the totality  of its activity.   In further                                                               
response to Representative  Seaton, Mr. Dees said  two years ago,                                                               
the department was  approved for a tax  revenue management system                                                               
in order to help the  department catch up with voluminous amounts                                                               
of data, and that system will be operational in two years.                                                                      
                                                                                                                                
1:43:43 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER closed, saying  the intent of the amendment                                                               
is  to allow  appropriate  regulatory oversight  for  the use  of                                                               
joint  interest billings  in  order to  determine  how costs  are                                                               
allocated amongst  partners in the  oil fields.   He said  one of                                                               
the reasons to go back to  using the billings as an auditing tool                                                               
is due  to the failures  and weaknesses  that exist in  the state                                                               
internal  accounting  control  systems.   He  referred  to  state                                                               
single audit  findings for the  fiscal year (FY)  ending 6/30/12,                                                               
[document not provided to the committee] and said:                                                                              
                                                                                                                                
     [The report found] audit  findings of material internal                                                                    
     accounting  control  weaknesses  in the  Department  of                                                                    
     Revenue.       These    are   considered    significant                                                                    
     deficiencies and  that is, that  in years fiscal  08 to                                                                    
     11, significant  deficiencies ... in the  controls over                                                                    
     the Tax Division, severance  tax audits, were reported.                                                                    
     Control  deficiencies  included:    insufficient  audit                                                                    
     oversight,  lack  of  standard procedures  guiding  the                                                                    
     audit process,  inadequate audit reviews,  and untimely                                                                    
     tax return  reviews and reconciliation.   Additionally,                                                                    
     the Tax  Division lacks standardized templates  for the                                                                    
     annual tax  return.  The  current position - this  is a                                                                    
     year  later  - the  Tax  Division  management has  made                                                                    
     improvements  in  audit   oversight,  written  standard                                                                    
     procedures, and  audit reviews, yes,  nevertheless, the                                                                    
     control  deficiencies identified  in prior  audits have                                                                    
     not been fully addressed.                                                                                                  
                                                                                                                                
1:45:39 AM                                                                                                                    
                                                                                                                                
EPRESENTATIVE HAWKER  then pointed out that  although the written                                                               
standards were implemented in FY  11, the state auditor could not                                                               
confirm the  full implementation  of recommended  procedures and,                                                               
as of FY  12, no audits were completed under  the new procedures.                                                               
Also, the audit  plan guiding the auditors for  tax systems under                                                               
PPT and ACES legislation was not  fully designed at the end of FY                                                               
12.  He  read [from a document not provided  to the committee] as                                                               
follows:                                                                                                                        
                                                                                                                                
     Tax Division  management expects  the audit plan  to be                                                                    
     completed  in FY  13 and  used for  audits starting  in                                                                    
     that  year.   Although ...  no tax  return audits  were                                                                    
        completed in FY 12 under the new procedures, the                                                                        
      division did complete an audit of a 2006 tax return                                                                       
     and audits of tax credits.                                                                                                 
                                                                                                                                
REPRESENTATIVE  HAWKER said  legislative  assessments found  that                                                               
supervisory reviews by the audit  tax master were not documented,                                                               
and the  audit supervisor review  checklist was  not consistently                                                               
completed.  Further, he said the  report he cited also noted that                                                               
money has been appropriated for  management and improvements, and                                                               
the agency  response to the  report was  that it agreed  with the                                                               
findings.   He said the  audit division is understaffed  and does                                                               
not have adequate  resources to complete its  task; the amendment                                                               
will provide a tool to allow  the taxpayer and the tax auditor to                                                               
work together in a reasonable and responsible manner.                                                                           
                                                                                                                                
1:48:14 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  maintained her objection, and  expressed her                                                               
understanding that some of the delay  was caused by the change to                                                               
ACES just as  the regulations for PPT were developed.   She asked                                                               
whether the delays are due to  a failure of the audit department,                                                               
or  because  of the  course  of  time  needed to  facilitate  two                                                               
substantial changes in  legislation.  She said she  was told that                                                               
"once they  get the  first year  done, then  they're going  to be                                                               
able to catch up very quickly."                                                                                                 
                                                                                                                                
MR. FONDER agreed.  He  said his division is currently finalizing                                                               
2007 audits;  part of the complexity  of the 2007 audits  is that                                                               
one-half of the year is computed  under the provisions of PPT and                                                               
one-half of  the year is  computed under the provisions  of ACES.                                                               
Additionally,  the Tax  Division  has begun  audits  on 2008  and                                                               
2009, and is  planning on combining two years at  a time when its                                                               
resources allow.                                                                                                                
                                                                                                                                
1:52:18 AM                                                                                                                    
                                                                                                                                
A roll  call vote  was taken.   Representatives  Hawker, Johnson,                                                               
Olson, P.  Wilson, Seaton, Saddler,  and Feige voted in  favor of                                                               
New  Amendment 32,  as amended.   Representatives  Tarr and  Tuck                                                               
voted against it.   Therefore, New Amendment 32,  as amended, was                                                               
adopted by a vote of 7-2.                                                                                                       
                                                                                                                                
A brief at-ease was taken.                                                                                                      
                                                                                                                                
1:52:20 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  moved to  adopt  Conceptual  Amendment 33  [text                                                               
provided at end of this document].                                                                                              
                                                                                                                                
REPRESENTATIVE HAWKER objected for the purpose of discussion.                                                                   
                                                                                                                                
CO-CHAIR FEIGE remarked:                                                                                                        
                                                                                                                                
     When we instituted the floating  per barrel credit, one                                                                    
     of the results was that  the tax below [$60 per barrel]                                                                    
     - if  you remember from  the [Econ One  Research] slide                                                                    
     Mr.  Pulliam   showed  yesterday  evening  -   the  tax                                                                    
     actually went to zero.   What this amendment will do is                                                                    
     make  sure that  the  floating per  barrel credit  does                                                                    
     not, because  it is applied  after the tax  is assessed                                                                    
     and calculated,  this will make sure  that the floating                                                                    
     per  barrel credit  does  not run  the  total tax  bill                                                                    
     below  the minimum  tax.    So it  ensures  that our  4                                                                    
     percent  minimum tax  on  the gross  is  retained -  no                                                                    
     matter what - within the legacy fields.                                                                                    
                                                                                                                                
1:54:01 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  observed that the amendment  is clarifying                                                               
language,  and removed  his objection.   There  being no  further                                                               
objection, Conceptual Amendment 33 was adopted.                                                                                 
                                                                                                                                
1:54:54 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P.  WILSON  moved  to adopt  Amendment  34  [text                                                               
provided at end of this document].                                                                                              
                                                                                                                                
REPRESENTATIVE TARR objected.                                                                                                   
                                                                                                                                
REPRESENTATIVE P. WILSON explained  Amendment 34 would change the                                                               
proposed tax rate of 35 percent to 33 percent.                                                                                  
                                                                                                                                
REPRESENTATIVE  TARR pointed  out  that Amendment  34 would  also                                                               
adjust the net  operating loss credit down to  33 percent, which,                                                               
she argued, would disadvantage small producers.                                                                                 
                                                                                                                                
MR. PAWLOWSKI agreed with Representative  Tarr that the amendment                                                               
would adjust  the loss carry  forward credit.  However,  he said,                                                               
it is consistent with previous  policy to maintain parity between                                                               
that  and  the  base  rate  from which  a  taxpayer  with  a  tax                                                               
obligation  gets a  benefit  for their  expenditures.   The  loss                                                               
carry forward  credit also  gives the  same benefit  to a  new or                                                               
incumbent  producer.   Regarding its  effect the  economics of  a                                                               
small producer,  the department would  have to look at  the total                                                               
economics  of  the  proposed committee  substitute  to  know  the                                                               
impact or to take a position.                                                                                                   
                                                                                                                                
1:57:56 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  clarified she  meant to say  "a non-taxpayer                                                               
so, a small producer  or an explorer in that context.   So ... by                                                               
lowering a  tax rate  for a taxpayer,  that advantages  them, but                                                               
simultaneously disadvantages by lowering  the credit for the non-                                                               
taxpayer."                                                                                                                      
                                                                                                                                
CO-CHAIR SADDLER  surmised the  amendment directs  adjustments in                                                               
the base  rate for production  tax, except on lines  21-23, which                                                               
direct a change to the net operating loss carry forward.                                                                        
                                                                                                                                
MR. PAWLOWSKI said correct.                                                                                                     
                                                                                                                                
REPRESENTATIVE TARR maintained her objection.                                                                                   
                                                                                                                                
1:59:13 AM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI remarked:                                                                                                         
                                                                                                                                
     Before  we move  too far  with  this I'd  just like  to                                                                    
     point out  that we  need to reserve  the ability  to go                                                                    
     back   and  rerun   these  economics   considering  the                                                                    
     totality  of  the  amendments  that  have  been  passed                                                                    
     tonight including,  in particular, the impact  of the 4                                                                    
     percent  gross  minimum  on  column  (8)  [on  a  slide                                                                    
     provided  by  Econ   One  Research  entitled,  "Average                                                                    
     Government  Take for  All  Existing Producers  (FY2015-                                                                    
     FY2019"],  which I  believe reflects  the ...  proposed                                                                    
     amendment in  front of  you, which  is 33  percent with                                                                    
     the  sliding scale.    But it  would  have a  different                                                                    
     impact at the  lower prices, given the  adoption of the                                                                    
     minimum tax."                                                                                                              
                                                                                                                                
1:59:41 AM                                                                                                                    
                                                                                                                                
A roll  call vote was  taken.  Representatives Olson,  P. Wilson,                                                               
Hawker, Johnson, Saddler,  and Feige voted in  favor of Amendment                                                               
34.   Representatives Seaton,  Tarr, and  Tuck voted  against it.                                                               
Therefore, Amendment 34 was adopted by a vote of 6-3.                                                                           
                                                                                                                                
2:00:43 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  moved  to report  House  Committee  Substitute                                                               
(HCS)  for  CSSB 21,  Version  28-GS1647\K,  as amended,  out  of                                                               
committee  with individual  recommendations  and attached  fiscal                                                               
notes.                                                                                                                          
                                                                                                                                
REPRESENTATIVE TUCK objected.                                                                                                   
                                                                                                                                
2:01:07 AM                                                                                                                    
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
2:01:38 AM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER withdrew his previous motion.                                                                                  
                                                                                                                                
2:01:41 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  moved  to  report HCS  CSSB  21,  Version  28-                                                               
GS1647\K,   as  amended,   out  of   committee  with   individual                                                               
recommendations and forthcoming fiscal notes.                                                                                   
                                                                                                                                
2:02:06 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK objected,  saying more work needs  to be done                                                               
on the  bill.  Many hours  have been spent in  committee hearings                                                               
and  floor sessions,  but there  has not  been an  opportunity to                                                               
think things through.  His said  his objection to moving the bill                                                               
is  that  it  has  been  rushed.  In  addition,  there  is  other                                                               
forthcoming legislation on state oil tax policy to consider.                                                                    
                                                                                                                                
REPRESENTATIVE  TARR said  her objection  to moving  the bill  is                                                               
that substantial  changes have  been made in  the early  hours of                                                               
the morning, even though these  changes will affect every Alaskan                                                               
for many years to come.   Most of the fiscal impacts are unknown,                                                               
except  for the  effect  of the  committee  substitute, which  is                                                               
estimated to  be almost $1 billion  in FY 14.   However, there is                                                               
no  information on  the fiscal  impact of  the other  provisions.                                                               
She pointed  out there  are errors in  some amendments,  and more                                                               
care should  be taken.   Finally,  the committee  has not  had an                                                               
opportunity  to  hear  from   its  constituents  regarding  these                                                               
changes due to the late hour.   She opined the public is not well                                                               
served by these circumstances.                                                                                                  
                                                                                                                                
REPRESENTATIVE SEATON  appreciated the  opportunity to  have long                                                               
discussions  on the  amendments,  although changes  may still  be                                                               
incorporated in  the future.   He said  he wanted to  ensure that                                                               
the previously discussed report  includes the language related to                                                               
the Alaska Industrial Development and Export Authority (AIDEA).                                                                 
                                                                                                                                
2:06:29 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER expressed  his  belief that  the committee  has                                                               
made good changes from the  ACES tax system through the committee                                                               
process of  deliberation.  The  bill will be further  examined in                                                               
the next committee  of referral and on the House  floor.  He said                                                               
the need  for tax reform  in Alaska is  clear and the  stakes are                                                               
high.                                                                                                                           
                                                                                                                                
CO-CHAIR FEIGE  thanked members of  the committee for  their work                                                               
on  tax law,  beginning with  HB  72.   The process  has been  an                                                               
exhaustive amount  of work for  members and their staff,  and for                                                               
Legislative Legal and Research Services,  and he deeply commended                                                               
their efforts.                                                                                                                  
                                                                                                                                
REPRESENTATIVE TUCK maintained his objection.                                                                                   
                                                                                                                                
2:09:28 AM                                                                                                                    
                                                                                                                                
A roll call  vote was taken.  Representatives  Seaton, P. Wilson,                                                               
Hawker,  Johnson, Olson,  Saddler, and  Feige voted  in favor  of                                                               
reporting HCS CSSB  21, Version K, as amended,  out of committee.                                                               
Representatives Tarr and  Tuck voted against it.   Therefore, HCS                                                               
CSSB 21(RES)  was reported  out of  the House  Resources Standing                                                               
Committee by a vote of 7-2.                                                                                                     
                                                                                                                                
2:09:27 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE announced  that  Legislative  Legal and  Research                                                               
Services  has  the authority  to  make  technical and  conforming                                                               
amendments to the bill as necessary.                                                                                            
                                                                                                                                
Following are Amendments 31, 32, New 32, Conceptual 33, and 34:                                                             
                                                                                                                                
   Amendment 31, labeled GS-1647\K.4, Nauman/Bullock, 4/2/13:                                                               
                                                                                                                                
     Page 1, line 8, following "production;":                                                                                 
          Insert "relating to the determination of gross                                                                      
     value at the point of production;"                                                                                       
                                                                                                                                
     Page 22, following line 5:                                                                                                 
     Insert new bill sections to read:                                                                                          
        "* Sec. 31. AS 43.55.150(a) is amended to read:                                                                     
          (a)  For the purposes of AS 43.55.011 -                                                                               
     43.55.180, the  gross value at the  point of production                                                                    
     is calculated  using the  reasonable [ACTUAL]  costs of                                                                
     transportation  of  the oil  or  gas.   The  reasonable                                                                
     costs of  transportation are  the actual  costs, except                                                                
     when the                                                                                                                   
               (1)  parties to the transportation [SHIPPER]                                                                 
     of   oil  or   gas  are   [IS]  affiliated   [WITH  THE                                                                
     TRANSPORTATION CARRIER  OR WITH  A PERSON THAT  OWNS AN                                                                    
     INTEREST IN THE TRANSPORTATION FACILITY];                                                                                  
               (2)  contract for the transportation of oil                                                                      
     or gas  is not  an arm's length  transaction [;]  or is                                                                
     not  representative   of  the  market  value   of  that                                                                
     transportation; and                                                                                                    
               (3)  method [OR TERMS] of transportation of                                                                      
     oil or gas is [ARE]  not reasonable in view of existing                                                                
     alternative methods of transportation [OPTIONS].                                                                       
        * Sec. 32. AS 43.55.150(b) is amended to read:                                                                        
          (b)  If the department finds that the conditions                                                                  
     [A  CONDITION] in  (a)(1), (2),  and [OR]  (3) of  this                                                                
     section  are  [IS] present,  the  [GROSS  VALUE AT  THE                                                                
     POINT  OF PRODUCTION  IS  CALCULATED  USING THE  ACTUAL                                                                    
     COSTS  OF TRANSPORTATION,  OR THE  REASONABLE COSTS  OF                                                                    
     TRANSPORTATION  AS  DETERMINED UNDER  THIS  SUBSECTION,                                                                    
     WHICHEVER  IS LOWER.  THE]  department shall  determine                                                                    
     the reasonable costs of  transportation, using the fair                                                                    
     market value  of like  transportation, the  fair market                                                                    
     value  of equally  efficient and  available alternative                                                                    
     modes of  transportation, or other  reasonable methods.                                                                    
     Transportation costs fixed by  tariff rates properly on                                                                
     file  with  [THAT HAVE  BEEN  ADJUDICATED  AS JUST  AND                                                                
     REASONABLE BY]  the Regulatory Commission of  Alaska or                                                                    
     other [ANOTHER]  regulatory agency  [AND TRANSPORTATION                                                                
     COSTS IN  AN ARM'S  LENGTH TRANSACTION PAID  BY PARTIES                                                                    
     NOT  AFFILIATED   WITH  AN  OWNER  OF   THE  METHOD  OF                                                                    
     TRANSPORTATION]   shall  be   considered  prima   facie                                                                    
     reasonable."                                                                                                               
                                                                                                                                
     Renumber the following bill sections accordingly.                                                                          
                                                                                                                                
     Page 29, line 6:                                                                                                           
          Delete "sec. 31"                                                                                                      
          Insert "sec. 33"                                                                                                      
                                                                                                                                
     Page 29, following line 10:                                                                                                
          Insert a new subsection to read:                                                                                      
          "(d)  Sections 31 and 32 of this Act apply to the                                                                     
     transportation  of oil  and gas  produced on  and after                                                                    
     January 1, 2014."                                                                                                          
                                                                                                                                
     Page 29, line 20:                                                                                                          
          Delete "sec. 36"                                                                                                      
          Insert "sec. 38"                                                                                                      
                                                                                                                                
     Page 29, line 24:                                                                                                          
          Delete "37"                                                                                                           
          Insert "39"                                                                                                           
                                                                                                                                
     Page 29, line 25:                                                                                                          
          Delete "sec. 31"                                                                                                      
          Insert "sec. 33"                                                                                                      
                                                                                                                                
                            Amendment 32                                                                                    
                                                                                                                                
                                                                                                                                
     Page 25, following line 20                                                                                                 
                                                                                                                                
     Insert new subsections to read:                                                                                            
                                                                                                                                
         * Sec. 34. AS 43.55.165 (a) is repealed and                                                                          
     reenacted to read:                                                                                                         
                                                                                                                                
          (a) Except as provided under (c) - (e) of this                                                                        
     section,   for  the   purposes  of   AS  43.55.160,   a                                                                    
     producer's lease  expenditures for a calendar  year are                                                                    
     the ordinary and necessary costs  upstream of the point                                                                    
     of production of  oil and gas that  are incurred during                                                                    
     the  calendar  year by  the  producer  after March  31,                                                                    
     2006,  and  that are  direct  costs  of exploring  for,                                                                    
     developing, or  producing oil  or gas  deposits located                                                                    
     within  the  producer's  leases or  properties  in  the                                                                    
     state or,  in the  case of land  in which  the producer                                                                    
     does not own a working  interest, that are direct costs                                                                    
     of  exploring for  oil or  gas deposits  located within                                                                    
     other land  in the state. In  determining whether costs                                                                    
     are lease expenditures,  the department shall consider,                                                                    
     among other factors,                                                                                                       
                                                                                                                                
          (1) the typical industry practices and standards                                                                      
     in  the  state that  determine  the  costs, other  than                                                                    
     items listed in  (e) of this section,  that an operator                                                                    
     is allowed  to bill  a working  interest owner  that is                                                                    
     not the  operator, under  unit operating  agreements or                                                                    
     similar  operating  agreements   that  were  in  effect                                                                    
     before   December  2,   2005,  and   were  subject   to                                                                    
     negotiation with  at least  one working  interest owner                                                                    
     with  substantial  bargaining  power,  other  than  the                                                                    
     operator; and                                                                                                              
                                                                                                                                
          (2) the standards adopted by the Department of                                                                        
     Natural Resources that determine  the costs, other than                                                                    
     items listed in  (e) of this section, that  a lessee is                                                                    
     allowed  to  deduct  from revenue  in  calculating  net                                                                    
     profits   under    a   lease    issued   under       AS                                                                    
     38.05.180(f)(3)(B), (D), or (E).                                                                                           
                                                                                                                                
                                                                                                                                
        * Sec. 35. AS 43.55.165 (b) is repealed and                                                                           
     reenacted to read:                                                                                                         
                                                                                                                                
        (b) For purposes of (a) of this section,                                                                                
                                                                                                                                
          (1) direct costs include                                                                                              
                                                                                                                                
          (A) an expenditure, when incurred, to acquire an                                                                      
     item  if the  acquisition  cost is  otherwise a  direct                                                                    
     cost,  notwithstanding  that  the  expenditure  may  be                                                                    
     required to  be capitalized  rather than treated  as an                                                                    
     expense for financial accounting  or federal income tax                                                                    
     purposes;                                                                                                                  
                                                                                                                                
          (B) payments of or in lieu of property taxes,                                                                         
     sales  and  use taxes,  motor  fuel  taxes, and  excise                                                                    
     taxes;                                                                                                                     
                                                                                                                                
          (C) a reasonable allowance, as determined under                                                                       
     regulations  adopted by  the  department, for  overhead                                                                    
     expenses   directly    related   to    exploring   for,                                                                    
     developing, and  producing oil or gas  deposits located                                                                    
     within  leases  or  properties or  other  land  in  the                                                                    
     state;                                                                                                                     
                                                                                                                                
          (2) an activity does not need to be physically                                                                        
     located on, near,  or within the premises  of the lease                                                                    
     or property  within which an  oil or gas  deposit being                                                                    
     explored  for, developed,  or  produced  is located  in                                                                    
     order  for  the cost  of  the  activity  to be  a  cost                                                                    
     upstream of the point of production of the oil or gas.                                                                     
                                                                                                                                
                                                                                                                                
        * Sec. 36. AS 43.55.165 (c) is repealed and                                                                           
     reenacted to read:                                                                                                         
                                                                                                                                
           (c) Subject to (g) and (h) of this section, if                                                                       
     the department  finds that the pertinent  provisions of                                                                    
     a  unit   operating  agreement  or   similar  operating                                                                    
     agreement   are  substantially   consistent  with   the                                                                    
     department's determinations and  standards under (a) of                                                                    
     this  section   concerning  whether  costs   are  lease                                                                    
     expenditures, the  department may authorize  or require                                                                    
     a  producer,  subject  to conditions  prescribed  under                                                                    
     regulations  adopted by  the  department,  to treat  as                                                                    
     that portion  of its lease expenditures  for a calendar                                                                    
     year applicable  to oil and  gas produced from  a lease                                                                    
     or property in the state only                                                                                              
                                                                                                                                
          (1) the costs,  other than items listed  in (e) of                                                                    
     this section, that are incurred  by the operator during                                                                    
     the calendar year and that                                                                                                 
                                                                                                                                
          (A) are  billable to the producer  by the operator                                                                    
     in accordance with the terms  of the agreement to which                                                                    
     that lease or property is subject;                                                                                         
                                                                                                                                
          (B) for a producer that  is the operator, would be                                                                    
     billable to the producer  by the operator in accordance                                                                    
     with the terms of the  agreement to which that lease or                                                                    
     property  is  subject  if the  producer  were  not  the                                                                    
     operator;                                                                                                                  
                                                                                                                                
          (C)  would  be billable  to  the  producer by  the                                                                    
     operator in accordance with the  terms of the agreement                                                                    
     if  that   lease  or  property  were   subject  to  the                                                                    
     agreement; or                                                                                                              
                                                                                                                                
          (D) for a producer that  is the operator, would be                                                                    
     billable to the producer  by the operator in accordance                                                                    
     with  the  terms of  the  agreement  if that  lease  or                                                                    
     property  were  subject to  the  agreement  and if  the                                                                    
     producer were not the operator; and                                                                                        
                                                                                                                                
          (2) a  reasonable percentage, as  determined under                                                                    
     regulations  adopted by  the department,  of the  costs                                                                    
     that are  billable under (1)  of this subsection  as an                                                                    
     allowance  for overhead  expenses  directly related  to                                                                    
     exploring  for, developing,  and producing  oil or  gas                                                                    
     deposits located  within the lease or  property, to the                                                                    
     extent  those  expenses  are  not  billable  under  the                                                                    
     agreement.                                                                                                                 
                                                                                                                                
                                                                                                                                
        * Sec. 37. AS 43.55.165 (d) is repealed and                                                                           
     reenacted to read:                                                                                                         
                                                                                                                                
          (d) Subject  to (g)  and (h)  of this  section, if                                                                    
     the department  makes the finding  described in  (c) of                                                                    
     this  section   with  respect   to  a   unit  operating                                                                    
     agreement  or  similar   operating  agreement  and,  in                                                                    
     addition,  finds that  at  least  one working  interest                                                                    
     owner party to the  agreement, other than the operator,                                                                    
     with substantial  incentive and ability  to effectively                                                                    
     audit  billings   under  the   agreement  in   fact  is                                                                    
     effectively auditing billings  under the agreement, the                                                                    
     department  may   authorize  or  require   a  producer,                                                                    
     subject  to  conditions  prescribed  under  regulations                                                                    
     adopted by the department, to  treat as that portion of                                                                    
     its lease  expenditures for a calendar  year applicable                                                                    
     to oil  and gas  produced from a  lease or  property in                                                                    
     the state only                                                                                                             
                                                                                                                                
          (1) the costs, other than items listed in (e) of                                                                      
     this section, that are incurred  by the operator during                                                                    
     the calendar year and that                                                                                                 
                                                                                                                                
          (A) are billed to the producer by the operator                                                                        
     under the agreement to which  that lease or property is                                                                    
     subject  and  are  either not  disputed  by  a  working                                                                    
     interest owner  party to the  agreement or  are finally                                                                    
     determined  to  be properly  billable  as  a result  of                                                                    
     dispute resolution; or                                                                                                     
                                                                                                                                
          (B) for a producer that is the operator, would be                                                                     
     billable to the producer  by the operator in accordance                                                                    
     with the terms of the  agreement to which that lease or                                                                    
     property  is  subject  if the  producer  were  not  the                                                                    
     operator; and                                                                                                              
                                                                                                                                
          (2) a reasonable percentage, as determined under                                                                      
     regulations  adopted by  the department,  of the  costs                                                                    
     that  are billed  under (1)  of this  subsection as  an                                                                    
     allowance  for overhead  expenses  directly related  to                                                                    
     exploring  for, developing,  and producing  oil or  gas                                                                    
     deposits located  within the lease or  property, to the                                                                    
     extent  those  expenses  are  not  billable  under  the                                                                    
     agreement                                                                                                                  
                                                                                                                                
                                                                                                                                
     Renumber following sections accordingly                                                                                    
                                                                                                                                
                                                                                                                                
     Page 29, line 20 following "sec."                                                                                          
                                                                                                                                
          Delete "36"                                                                                                           
                                                                                                                                
          Insert "40"                                                                                                           
                                                                                                                                
                                                                                                                                
     Page 29, line 24 following "and"                                                                                           
          Delete "37"                                                                                                           
                                                                                                                                
          Insert "41"                                                                                                           
                                                                                                                                
                                                                                                                                
   New Amendment 32, labeled 28-GS1647\K.34, Nauman/Bullock,                                                                
                            4/3/13:                                                                                         
                                                                                                                                
     Page 1, line 11, following "properties;":                                                                                
          Insert "relating to the calculation of lease                                                                        
     expenditures"                                                                                                            
                                                                                                                                
     Page 25, following line 20:                                                                                                
          Insert a new bill section to read:                                                                                    
        "* Sec.  33. AS 43.55.165  is amended by  adding new                                                                
     subsections to read:                                                                                                       
          (m) Except as provided under (e), (o), and (p) of                                                                     
     this  section,  for  the purposes  of  AS 43.55.160,  a                                                                    
     producer's lease  expenditures for a calendar  year are                                                                    
     the ordinary and necessary costs  upstream of the point                                                                    
     of production of  oil and gas that  are incurred during                                                                    
     the  calendar   year  by  the  producer   on  or  after                                                                    
     January 1,  2014,   and  that   are  direct   costs  of                                                                    
     exploring  for, developing,  or  producing  oil or  gas                                                                    
     deposits  located  within   the  producer's  leases  or                                                                    
     properties  in the  state or,  in the  case of  land in                                                                    
     which  the producer  does not  own a  working interest,                                                                    
     that  are direct  costs  of exploring  for  oil or  gas                                                                    
     deposits  located within  other land  in the  state. In                                                                    
     determining whether  costs are lease  expenditures, the                                                                    
     department shall consider, among other factors,                                                                            
               (1)  the typical industry practices and                                                                          
     standards in the state that  determine the costs, other                                                                    
     than  items listed  in  (e) of  this  section, that  an                                                                    
     operator is  allowed to bill  a working  interest owner                                                                    
     that  is   not  the  operator,  under   unit  operating                                                                    
     agreements  or similar  operating agreements  that were                                                                    
     in effect before December 2, 2005,  and were subject to                                                                    
     negotiation with  at least  one working  interest owner                                                                    
     with  substantial  bargaining  power,  other  than  the                                                                    
     operator; and                                                                                                              
               (2)  the standards adopted by the Department                                                                     
     of Natural  Resources that  determine the  costs, other                                                                    
     than  items  listed in  (e)  of  this section,  that  a                                                                    
     lessee   is  allowed   to   deduct   from  revenue   in                                                                    
     calculating  net profits  under  a  lease issued  under                                                                    
     AS 38.05.180(f)(3)(B), (D), or (E).                                                                                        
          (n)  For purposes of (m) of this section,                                                                             
               (1)  direct costs include                                                                                        
               (A)    an   expenditure,  when  incurred,  to                                                                    
     acquire an item if the  acquisition cost is otherwise a                                                                    
     direct cost,  notwithstanding that the  expenditure may                                                                    
     be required  to be  capitalized rather than  treated as                                                                    
     an expense  for financial accounting or  federal income                                                                    
     tax purposes;                                                                                                              
               (B)    payments of  or  in  lieu of  property                                                                    
     taxes,  sales  and use  taxes,  motor  fuel taxes,  and                                                                    
     excise taxes;                                                                                                              
               (C)   a  reasonable allowance,  as determined                                                                    
     under  regulations  adopted   by  the  department,  for                                                                    
     overhead  expenses directly  related to  exploring for,                                                                    
     developing, and  producing oil or gas  deposits located                                                                    
     within  leases  or  properties or  other  land  in  the                                                                    
     state;                                                                                                                     
               (2)    an  activity   does  not  need  to  be                                                                    
     physically located on, near,  or within the premises of                                                                    
     the  lease  or property  within  which  an oil  or  gas                                                                    
     deposit being  explored for, developed, or  produced is                                                                    
     located in order  for the cost of the activity  to be a                                                                    
     cost upstream of the point  of production of the oil or                                                                    
     gas.                                                                                                                       
          (o)  On or after January 1, 2014, subject to (g)                                                                      
     and (h) of  this section, if the  department finds that                                                                    
     the pertinent provisions of  a unit operating agreement                                                                    
     or  similar   operating  agreement   are  substantially                                                                    
     consistent  with  the department's  determinations  and                                                                    
     standards under (m) of  this section concerning whether                                                                    
     costs  are  lease   expenditures,  the  department  may                                                                    
     authorize or require a  producer, subject to conditions                                                                    
     prescribed   under    regulations   adopted    by   the                                                                    
     department,  to  treat as  that  portion  of its  lease                                                                    
     expenditures for a calendar year  applicable to oil and                                                                    
     gas  produced from  a lease  or property  in the  state                                                                    
     only                                                                                                                       
               (1)   the costs,  other than items  listed in                                                                    
     (e) of this section, that  are incurred by the operator                                                                    
     during the calendar year and that                                                                                          
               (A)   are  billable  to the  producer by  the                                                                    
     operator in accordance with the  terms of the agreement                                                                    
     to which that lease or property is subject;                                                                                
               (B)   for  a producer  that is  the operator,                                                                    
     would be  billable to the  producer by the  operator in                                                                    
     accordance  with the  terms of  the agreement  to which                                                                    
     that lease or property is  subject if the producer were                                                                    
     not the operator;                                                                                                          
               (C)  would be billable to the producer by                                                                        
     the  operator  in  accordance with  the  terms  of  the                                                                    
     agreement  if that  lease or  property were  subject to                                                                    
     the agreement; or                                                                                                          
               (D)  for a producer that is the operator,                                                                        
     would be  billable to the  producer by the  operator in                                                                    
     accordance  with the  terms of  the  agreement if  that                                                                    
     lease or property were subject  to the agreement and if                                                                    
     the producer were not the operator; and                                                                                    
               (2)  a reasonable percentage, as determined                                                                      
     under  regulations adopted  by the  department, of  the                                                                    
     costs that  are billable  under (1) of  this subsection                                                                    
     as an allowance for  overhead expenses directly related                                                                    
     to exploring for, developing, and  producing oil or gas                                                                    
     deposits located  within the lease or  property, to the                                                                    
     extent  those  expenses  are  not  billable  under  the                                                                    
     agreement.                                                                                                                 
          (p)  Subject to (g) and (h) of this section, if                                                                       
     the department  makes the finding  described in  (o) of                                                                    
     this  section   with  respect   to  a   unit  operating                                                                    
     agreement  or  similar   operating  agreement  and,  in                                                                    
     addition,  finds that  at  least  one working  interest                                                                    
     owner party to the  agreement, other than the operator,                                                                    
     with substantial  incentive and ability  to effectively                                                                    
     audit  billings   under  the   agreement  in   fact  is                                                                    
     effectively auditing billings  under the agreement, the                                                                    
     department  may   authorize  or  require   a  producer,                                                                    
     subject  to  conditions  prescribed  under  regulations                                                                    
     adopted by the department, to  treat as that portion of                                                                    
     its lease  expenditures for a calendar  year applicable                                                                    
     to oil  and gas  produced from a  lease or  property in                                                                    
     the state only                                                                                                             
               (1)  the costs, other than items listed in                                                                       
     (e) of this section, that  are incurred by the operator                                                                    
     during the calendar year and that                                                                                          
               (A)  are billed to the producer by the                                                                           
     operator  under the  agreement to  which that  lease or                                                                    
     property is  subject and are  either not disputed  by a                                                                    
     working interest  owner party  to the agreement  or are                                                                    
     finally determined to be properly  billable as a result                                                                    
     of dispute resolution; or                                                                                                  
               (B)  for a producer that is the operator,                                                                        
     would be  billable to the  producer by the  operator in                                                                    
     accordance  with the  terms of  the agreement  to which                                                                    
     that lease or property is  subject if the producer were                                                                    
     not the operator; and                                                                                                      
               (2)  a reasonable percentage, as determined                                                                      
     under  regulations adopted  by the  department, of  the                                                                    
     costs that are  billed under (1) of  this subsection as                                                                    
     an allowance for overhead  expenses directly related to                                                                    
     exploring  for, developing,  and producing  oil or  gas                                                                    
     deposits located  within the lease or  property, to the                                                                    
     extent  those  expenses  are  not  billable  under  the                                                                    
     agreement."                                                                                                                
                                                                                                                                
     Renumber the following bill sections accordingly.                                                                          
                                                                                                                                
     Page 29, line 1:                                                                                                           
          Delete "and 43.55.160(c)"                                                                                             
          Insert "43.55.160(c), 43.55.165(a), 43.55.165(b),                                                                     
     43.55.165(c), and 43.55.165(d)"                                                                                            
                                                                                                                                
     Page 29, line 20:                                                                                                          
          Delete "sec. 36"                                                                                                      
          Insert "sec. 37"                                                                                                      
                                                                                                                                
     Page 29, line 24:                                                                                                          
          Delete "37"                                                                                                           
          Insert "38"                                                                                                           
                                                                                                                                
                                                                                                                                
                    Conceptual Amendment 33:                                                                                
                                                                                                                                
     Page 18, line 1, following "2013"                                                                                          
                                                                                                                                
          Insert "from leases or properties north of 68                                                                         
     degrees North latitude."                                                                                                   
                                                                                                                                
     Page 18, line 1, following "not"                                                                                           
                                                                                                                                
          Insert "be applied against the tax calculated                                                                         
     under AS 43.55.011(f).  A  tax credit authorized by the                                                                    
     subsection may not"                                                                                                        
                                                                                                                                
     Page 18, line 2, following "below"                                                                                         
                                                                                                                                
          Insert   "the    amount   calculated    under   AS                                                                    
     43.55.011(f)"                                                                                                              
                                                                                                                                
          Delete "zero"                                                                                                         
                                                                                                                                
                                                                                                                                
                         Amendment 34:                                                                                      
                                                                                                                                
     Page 6, line 8:                                                                                                            
          Delete "35"                                                                                                       
          Insert "33"                                                                                                       
                                                                                                                                
     Page 10, line 17:                                                                                                          
          Delete "35"                                                                                                       
          Insert "33"                                                                                                       
                                                                                                                                
     Page 11, line 1:                                                                                                           
          Delete "35"                                                                                                       
          Insert "33"                                                                                                       
                                                                                                                                
     Page 11, line 14:                                                                                                          
          Delete "35"                                                                                                       
          Insert "33"                                                                                                       
                                                                                                                                
     Page 11, line 23:                                                                                                          
          Delete "35"                                                                                                       
          Insert "33"                                                                                                       
                                                                                                                                
     Page 15, line 10:                                                                                                          
          Delete "35"                                                                                                       
          Insert "33"                                                                                                       

Document Name Date/Time Subjects