Legislature(2015 - 2016)BARNES 124

02/22/2016 01:00 PM RESOURCES

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Audio Topic
01:22:30 PM Start
01:23:25 PM HB247
03:02:37 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Continuation of Overviews:
- Tax Division, Dept. of Revenue
- Division of Oil & Gas, Dept. of Natural
Resources
- Civil Division, Division of Oil, Gas, &
Mining, Dept. of Law
+ Bills Previously Heard/Scheduled TELECONFERENCED
         HB 247-TAX; CREDITS; INTEREST; REFUNDS; O & G                                                                      
                                                                                                                                
1:23:25 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  NAGEAK announced  that the  only order  of business  is                                                               
HOUSE BILL NO. 247, "An  Act relating to confidential information                                                               
status and public record status  of information in the possession                                                               
of the Department of Revenue;  relating to interest applicable to                                                               
delinquent tax; relating to disclosure  of oil and gas production                                                               
tax credit information;  relating to refunds for  the gas storage                                                               
facility tax  credit, the liquefied natural  gas storage facility                                                               
tax   credit,   and   the   qualified   in-state   oil   refinery                                                               
infrastructure expenditures  tax credit; relating to  the minimum                                                               
tax for certain  oil and gas production; relating  to the minimum                                                               
tax  calculation for  monthly installment  payments of  estimated                                                               
tax;  relating to  interest on  monthly  installment payments  of                                                               
estimated  tax; relating  to limitations  for the  application of                                                               
tax credits; relating  to oil and gas production  tax credits for                                                               
certain  losses and  expenditures;  relating  to limitations  for                                                               
nontransferable oil and  gas production tax credits  based on oil                                                               
production  and  the  alternative  tax credit  for  oil  and  gas                                                               
exploration;  relating to  purchase  of  tax credit  certificates                                                               
from the oil  and gas tax credit fund; relating  to a minimum for                                                               
gross  value  at  the  point of  production;  relating  to  lease                                                               
expenditures  and tax  credits for  municipal entities;  adding a                                                               
definition   for  "qualified   capital  expenditure";   adding  a                                                               
definition for  "outstanding liability  to the  state"; repealing                                                               
oil  and   gas  exploration  incentive  credits;   repealing  the                                                               
limitation on  the application of  credits against  tax liability                                                               
for  lease   expenditures  incurred   before  January   1,  2011;                                                               
repealing provisions related to  the monthly installment payments                                                               
for  estimated tax  for oil  and gas  produced before  January 1,                                                               
2014;  repealing  the  oil  and gas  production  tax  credit  for                                                               
qualified  capital expenditures  and  certain well  expenditures;                                                               
repealing   the  calculation   for  certain   lease  expenditures                                                               
applicable before January 1,  2011; making conforming amendments;                                                               
and providing for an effective date."                                                                                           
                                                                                                                                
1:24:18 PM                                                                                                                    
                                                                                                                                
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
on behalf  of the governor,  first drew attention to  two letters                                                               
to Representative  Seaton from the  Tax Division,  dated February                                                               
2, 2016, and February 19, 2016.   He explained that these letters                                                               
are the  latest iterations  and updates  to modeling  efforts for                                                               
the North  Slope and the Cook  Inlet that were prepared  over the                                                               
last interim  in response to Representative  Seaton's request for                                                               
analysis of  field lifecycle costs  and benefits to the  State of                                                               
Alaska of  various new  field developments  and what  the state's                                                               
cash  flow is  going  to look  like from  new  development.   The                                                               
letters are  provided as background  documents for  the committee                                                               
as well as a  precursor to some of the modeling  that DOR will be                                                               
providing  in  its next  presentation  to  the committee.    That                                                               
modeling looks at the current situation,  which is what is in the                                                               
aforementioned letters,  as well as  looks at the impact  on that                                                               
of the changes envisioned in HB 247.                                                                                            
                                                                                                                                
MR. ALPER  began a PowerPoint  presentation titled, "Oil  and Gas                                                               
Tax  Credit   Reform-HB247,  Additional  Modeling   and  Scenario                                                               
Analysis -  Part 1."   He  turned to  slide 2,  "What We  Will Be                                                               
Discussing," and  outlined the  topics that  he planned  to cover                                                               
today and on  2/24/16:  overview of revenue  and production; what                                                               
credits worked and what didn't;  credit cost in perspective; bill                                                               
details and how the pieces  work; scenario analysis and economics                                                               
of changes; and gas supply issues in Cook Inlet.                                                                                
                                                                                                                                
1:27:01 PM                                                                                                                    
                                                                                                                                
MR. ALPER  moved to the  graph on  slide 4, "Overview  of Revenue                                                               
and  Production,"  to  discuss what  the  state's  revenues  have                                                               
looked like over the last 10  years [fiscal years 2006-2015].  He                                                               
pointed out  that the production  tax (depicted in dark  blue) is                                                               
the most reactive  to the changes in  the price of oil.   This is                                                               
followed  by the  state's other  petroleum revenues  such as  the                                                               
corporate  income  tax and  property  tax  (depicted in  orange),                                                               
unrestricted royalties  (depicted in gold),  restricted royalties                                                               
(depicted  in  grey),  and non-petroleum  revenues  (depicted  in                                                               
lighter blue).   Thus, the  graph shows the  state's undesignated                                                               
general fund (UGF) plus the  permanent fund royalties.  The graph                                                               
puts into perspective  how much impact that changes  in the price                                                               
of oil have on things, especially on the production tax side.                                                                   
                                                                                                                                
MR.  ALPER displayed  the  pie  chart on  slide  5, "Overview  of                                                               
Revenue and Production," and reported  that 17 billion barrels of                                                               
crude oil have been produced on  the North Slope since the Trans-                                                               
Alaska Pipeline  System (TAPS) began  [in 1977].  The  great bulk                                                               
of that oil, over 90 percent,  came from two fields - Prudhoe Bay                                                               
(depicted in red) and Kuparuk  (depicted in dark green).  Various                                                               
other fields are depicted by the other colors on the chart.                                                                     
                                                                                                                                
MR. ALPER  brought attention to  the graph on slide  6, "Overview                                                               
of Revenue and Production," to  review the declining curve in oil                                                               
production between  the years 1977  and 2025.  He  explained that                                                               
things ramped up after the  commencement of commercial operations                                                               
and have been gradually declining  since then.  An expectation of                                                               
a  flattening in  the decline  can be  seen on  the graph,  but a                                                               
decline  still continues  from today's  number  of about  500,000                                                               
barrels  a day  to about  300,000-400,000 barrels  a day  in 8-10                                                               
years from now.                                                                                                                 
                                                                                                                                
1:28:53 PM                                                                                                                    
                                                                                                                                
MR. ALPER showed  slide 7, "Overview of  Revenue and Production,"                                                               
and noted  that the graphic  is from the U.S.  Energy Information                                                               
Administration.  He said the  graph depicts the scale of Alaska's                                                               
oil fields  and shows production  aggregate [from 1990  to date].                                                               
The central North  Slope has produced about 8  billion barrels of                                                               
oil  [shown in  black] and  still  has a  lot  of oil  yet to  be                                                               
produced (shown in light blue).   A substantial chunk of that oil                                                               
is proven,  especially in  the offshore.   There  is also  a very                                                               
large amount  of unproved technically  recoverable oil,  oil that                                                               
has not  explicitly been discovered  but which  the professionals                                                               
say is  there.  The  two bars at the  bottom of the  graph depict                                                               
the largest  shale developments in  the Lower 48, the  Bakken and                                                               
the  Eagle Ford,  which in  terms  of total  production are  much                                                               
smaller than Alaska has had, but  they have very large volumes of                                                               
potential or technically recoverable oil.                                                                                       
                                                                                                                                
MR.  ALPER turned  to the  pie charge  on slide  8, "Overview  of                                                               
Revenue  and Production,"  to point  out that  the great  bulk of                                                               
Alaska's oil production comes from  the three "majors," which are                                                               
BP, ConocoPhillips, and  ExxonMobil.  Alaska also  has five other                                                               
substantial  producers:   Chevron,  Hilcorp,  ENI, Anadarko,  and                                                               
Caelus.  Some  of these five companies operate  smaller fields of                                                               
their own  and some  have smaller partnerships  in the  major oil                                                               
fields of Prudhoe  Bay and Kuparuk; many of  the proposed changes                                                               
in HB 247 would impact these  companies.  The proposed changes in                                                               
the  bill would  also impact  the explorers,  such as  the Brooks                                                               
Range/Mustang  field, the  Repsol/Armstrong project,  Great Bear,                                                               
Furie, BlueCrest, and several others.                                                                                           
                                                                                                                                
1:30:54 PM                                                                                                                    
                                                                                                                                
MR.  ALPER  moved to  slide  10,  "Credits:   What  Worked,  What                                                               
Didn't?"   He noted that a  number of credits have  been put into                                                               
law over the years that have  never been used.  These include the                                                               
New Areas  Credit [AS 43.55.024(a)  and also known as  the Middle                                                               
Earth Credit], a credit of up  to $6 million that was provided in                                                               
House Bill 3001,  the production profits tax (PPT)  bill that was                                                               
passed in  2006 [Twenty-Fourth Alaska  State Legislature].   This                                                               
credit  was  structured  very similarly  to  the  Small  Producer                                                               
Credit:  a company that began  producing in the frontier areas in                                                               
the Interior  would get a $6  million offset to its  taxes.  That                                                               
has not been  used because there has not yet  been any commercial                                                               
production  from the  Interior portions  of the  state.   Another                                                               
unused credit  is the Jack-Up Rig  Credit, which was part  of the                                                               
various reform  measures passed in  2010 [AS  43.55.025(m) Senate                                                               
Bill 309,  Twenty-Sixth Alaska State  Legislature].   Also unused                                                               
is the  80 percent Frontier  Basin Drilling Credit that  was part                                                               
of the Frontier  Basin Act of 2012 [AS  43.55.025(n), Senate Bill                                                               
23,  Twenty-Seventh Alaska  State  Legislature].   While some  of                                                               
those  activities  have occurred,  the  companies  have found  it                                                               
advantageous to use ....                                                                                                        
                                                                                                                                
CO-CHAIR NAGEAK requested a definition of the term "stacking."                                                                  
                                                                                                                                
MR. ALPER  used the Cook Inlet  Jack-Up Rig Credit as  a means to                                                               
define  stacking.   Under that  credit, he  explained, the  state                                                               
will pay  100 percent of the  cost of drilling a  well that meets                                                               
certain criteria.   But tied up with that 100  percent credit are                                                               
various  conditions,  including  some  data  requirements  and  a                                                               
requirement to pay  back half the money  if commercial production                                                               
is brought in from that.   In Cook Inlet, companies have found it                                                               
more advantageous to  instead use the general  purpose 40 percent                                                               
Well Lease Expenditure  Credit and to stack it,  combine it, with                                                               
a 25  percent Net  Operating Loss Credit.   In  that circumstance                                                               
the state  pays roughly 65  percent of a company's  costs without                                                               
some of the contingencies and requirements  to pay it back in the                                                               
future.                                                                                                                         
                                                                                                                                
1:33:13 PM                                                                                                                    
                                                                                                                                
MR. ALPER resumed his discussion  of slide 10 and reiterated that                                                               
the  New Areas  Credit, Jack-Up  Rig Credit,  and Frontier  Basin                                                               
Drilling Credit  are in current  law but scheduled to  sunset [in                                                               
2016].   To qualify  for any  of these  benefits a  company would                                                               
have to do some  activity by sometime in 2016.   He said [the Tax                                                               
Division]  doesn't  anticipate  making  any  payments  on  those,                                                               
although there is certainly a possibility of it.                                                                                
                                                                                                                                
MR. ALPER  drew attention  to slide 11,  "Credits:   What Worked,                                                               
What Didn't?" and  discussed credits that have been  used but are                                                               
scheduled  to sunset  and be  phased out  regardless of  what the                                                               
committee does.   Regarding North  Slope exploration  credits, he                                                               
said the Exploration  Incentive Credit that came  into statute in                                                               
2003 is  scheduled to sunset  on July  1, 2016, meaning  the work                                                               
must be  done by that  date.   While DOR cannot  provide specific                                                               
numbers due  to confidentiality,  he can say  that the  state has                                                               
paid between $125  million and $200 million  on those exploration                                                               
credits.   Another $150-$200 million was  used against liability,                                                               
meaning the companies that explored  had a tax liability, most of                                                               
those companies being the state's  major producers, and they used                                                               
that credit  to reduce  their tax  payments.   The great  bulk of                                                               
credits used against liability occurred  before fiscal year 2011,                                                               
while the refunded  credits have been more used  in recent years.                                                               
In  round  numbers,  the North  Slope  exploration  credits  have                                                               
resulted in between  $275 million and $400 million  of state past                                                               
expense,  direct   or  indirect.     Regarding   non-North  Slope                                                               
exploration  credits, primarily  Cook Inlet  Exploration Credits,                                                               
the range of refunded credits  is roughly between $25 million and                                                               
$75 million.   Not a material amount of credits  was used against                                                               
liability because there is not a  lot of tax liability due to the                                                               
Cook Inlet tax  caps that are in statute.   He further noted that                                                               
as part of  Senate Bill 21 [passed in  2013, Twenty-Eighth Alaska                                                               
State  Legislature],  the Net  Operating  Loss  (NOL) Credit  was                                                               
increased  to  45  percent  starting January  2014.    When  that                                                               
happened the  Exploration Credit of  40 percent could  be stacked                                                               
with an  operating loss  and there  was a  time period  where the                                                               
state was  paying up to [85]  percent of companies' costs  on the                                                               
North Slope.   That was  a two-year  increment that went  away at                                                               
the end of 2015.  Meanwhile,  with the addition of the 40 percent                                                               
Well  Credit  in 2010,  the  Exploration  Credit became  somewhat                                                               
redundant.  Many of the  expenditures that were qualified for the                                                               
Exploration Credit were  also qualified for the  Well Credit with                                                               
certain  exceptions  like in  seismic  work.   These  exploration                                                               
credits are going to be going away under current law.                                                                           
                                                                                                                                
1:35:55 PM                                                                                                                    
                                                                                                                                
MR.  ALPER turned  to  slide  12, "Credits:    What Worked,  What                                                               
Didn't?" and  discussed two  more credits  that are  scheduled to                                                               
sunset and be  phased out.  He explained that  the Small Producer                                                               
Credit  is a  nonrefundable,  non-carry forward  credit that  can                                                               
only  be used  to reduce  a  small producer's  tax by  up to  $12                                                               
million.   This credit  has been  well used  on the  North Slope:                                                               
between $250  million and  $400 million  was used  through fiscal                                                               
year  2015 and  another  $257  million is  projected  to be  used                                                               
before  this credit  goes away.   He  explained that  even though                                                               
this credit  is going away,  the sunset  is for applying  for the                                                               
credit  and that  is  why another  [$257]  million is  projected.                                                               
Once a  company starts producing  as a new producer,  the company                                                               
can get this  credit for up to nine consecutive  years.  Although                                                               
those companies that  might have been receiving it  since 2007 or                                                               
2008 are phasing  out, any new companies coming into  it now will                                                               
be able to  receive this credit until approximately  2025, so the                                                               
state will be making some payments on this credit until then.                                                                   
                                                                                                                                
1:36:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  said that  sounds like, in  effect, the                                                               
companies control the  key to the statute  of limitations because                                                               
they set the clock ticking.                                                                                                     
                                                                                                                                
MR. ALPER replied  the clock begins ticking when  a company first                                                               
claims that  credit, which is  generally when it first  came into                                                               
production.   It  is not  like  companies are  in production  and                                                               
choosing not  to use the credit,  it is that there  are companies                                                               
that are just starting up and they will begin using the credit.                                                                 
                                                                                                                                
REPRESENTATIVE  JOSEPHSON,  using  the  North  Slope  exploration                                                               
credits on slide  11 as an example, surmised  that someone within                                                               
DOR or  DNR knows which  of the credits  bore fruit as  a general                                                               
proposition for the  people of Alaska, but  cannot fully disclose                                                               
that because it would violate current law.                                                                                      
                                                                                                                                
MR. ALPER responded  that [the Tax Division] cannot  discuss on a                                                               
case-by-case basis.   For example, [the division]  cannot say the                                                               
state gave  $20 million to Company  X and Company X  ended up not                                                               
producing anything, or  that Company Y was given  $10 million and                                                               
subsequently found an oil field  that is producing 10,000 barrels                                                               
a day.   [The  Tax Division]  is unable  to share  at a  level of                                                               
detail, but  it can  aggregate these things.   For  example, last                                                               
week  the committee  was shown  a slide  that talked  about total                                                               
dollars  on projects  that have  borne fruit,  are in  production                                                               
right now,  and then dollars spent  on credits that have  not yet                                                               
borne fruit.  He said he  believes that for the North Slope about                                                               
$650 million  in credits has  gone to companies or  projects that                                                               
are not  yet in  production and about  $1.45 billion  in refunded                                                               
credits has gone to projects that are now in production.                                                                        
                                                                                                                                
REPRESENTATIVE JOSEPHSON  asked whether as a  general proposition                                                               
there should be  a statute that at least  lets [legislators] meet                                                               
in executive  session so that  they can  do their jobs  fully and                                                               
not miss this critical fact.                                                                                                    
                                                                                                                                
MR. ALPER answered  he is not an attorney and  is not certain how                                                               
that would work.   He pointed out  that Section 8 of  HB 247 does                                                               
allow  for a  confidentiality  waiver so  these  things could  be                                                               
discussed  going  forward.   To  be  able  to have  an  executive                                                               
session  to discuss  what credits  the state  has spent  over the                                                               
last 10  years so legislators  and policymakers  could understand                                                               
the scope  of what is  before them is an  idea that he  thinks is                                                               
excellent.   However, he  qualified, he does  not know  the legal                                                               
nuance of that.                                                                                                                 
                                                                                                                                
1:39:43 PM                                                                                                                    
                                                                                                                                
MR. ALPER returned to his discussion  of slide 12.  He reiterated                                                               
that the  Small Producer Credits  will sunset slowly.   A smaller                                                               
amount  of the  Small Producer  Credits  was used  in Cook  Inlet                                                               
because the volumes  are smaller in the inlet:   $50-$100 million                                                               
has been used against liability  and about another $15 million is                                                               
projected before that credit goes away fully.                                                                                   
                                                                                                                                
MR. ALPER noted  that the credit which subsidized  the Cook Inlet                                                               
Natural Gas  Storage Alaska (CINGSA)  facility in Kenai  was part                                                               
of the Cook Inlet Recovery Act  of 2010 [AS 43.20.046, House Bill                                                               
280,  Twenty-Sixth Alaska  State Legislature].   That  credit was                                                               
specifically  written  to  only  allow  a  single  credit  for  a                                                               
specific  project  and  has  been   used.    That  statute  could                                                               
therefore be  repealed without any  plus or minus to  the system,                                                               
but  [the  administration]  didn't contemplate  doing  that  when                                                               
writing the  bill.  That  statute has a  specific confidentiality                                                               
waiver, he  said, so he  is able to  tell the committee  that the                                                               
state gave $15 million to CINGSA to build its facility.                                                                         
                                                                                                                                
1:40:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  inquired as to  why the CINGSA  credit was                                                               
not eliminated  from the  statute given it  is a  credit targeted                                                               
specifically to corporate income tax rather than production tax.                                                                
                                                                                                                                
MR. ALPER  confirmed that this  credit is  in AS 43.20,  which is                                                               
the corporate income  tax statute and so was intended  to be used                                                               
against that tax.   He said he does not  recall whether CINGSA is                                                               
a corporate  taxpayer, but that  the company earning  this credit                                                               
would  have the  ability to  transfer or  sell that  credit to  a                                                               
company that  might owe corporate  income taxes in Alaska.   That                                                               
occurred and was paid out in  fiscal year 2014.  According to the                                                               
historic record of  credits provided for this meeting,  it can be                                                               
seen that credits  under AS 43.20 are $15 million  in fiscal year                                                               
2014, which is a specific reference  to this credit that has been                                                               
paid.   He reiterated that  there is  no reason why  this statute                                                               
could not be repealed as part of this or any other legislation.                                                                 
                                                                                                                                
REPRESENTATIVE  SEATON   advocated  for  repealing   this  credit                                                               
because, to his  knowledge, it is the only place  where the state                                                               
is giving an oil and  gas production tax credit against corporate                                                               
income  tax.    He said  he  thinks  this  is  a model  that  the                                                               
committee would want to remove from statute.                                                                                    
                                                                                                                                
CO-CHAIR NAGEAK  inquired whether Representative Seaton  plans to                                                               
move his suggestion at a later time.                                                                                            
                                                                                                                                
REPRESENTATIVE  SEATON replied  that  he will  be  doing so,  but                                                               
added that he is just making members aware of the probability.                                                                  
                                                                                                                                
MR. ALPER  pointed out that  there are  two other credits  in the                                                               
oil  and  gas statutes  that  go  against corporate  income  tax,                                                               
CINGSA being AS  43.20.046.  He explained that AS  43.20.047 is a                                                               
similar  credit  that would  build  storage  tanks; for  example,                                                               
liquefied natural gas (LNG) storage  tanks are envisioned for the                                                               
Interior  gas utility.    He  offered his  belief  that there  is                                                               
intention to use  that credit, which remains on the  books and is                                                               
useable against  corporate income  tax.  Likewise,  he continued,                                                               
the  "Refinery Tax  Credit" in  AS 43.20.053  [qualified in-state                                                               
oil refinery infrastructure expenditures  tax credit] can be used                                                               
against  the  corporate  income  tax, and  at  least  one  Alaska                                                               
refinery is publicly talking about  an asphalt plant project that                                                               
it envisions earning that tax credit against.                                                                                   
                                                                                                                                
1:43:24 PM                                                                                                                    
                                                                                                                                
MR. ALPER brought attention to  slide 13, "Credits:  What Worked,                                                               
What Didn't?"  to discuss which  credits would be repealed  in HB                                                               
247.  He noted  that the bill would change many  of the rules but                                                               
would not  repeal that  many credits.   He  allowed that  the two                                                               
credits that would be repealed,  the 20 percent Qualified Capital                                                               
Expenditure  (QCE)   Credit  and   the  40  percent   Well  Lease                                                               
Expenditure (WLE) Credit, are very  large credits.  The Qualified                                                               
Capital  Expenditure  Credit existed  on  the  North Slope  until                                                               
2013, but the Well Lease  Expenditure Credit never existed on the                                                               
North Slope.  [The Tax  Division] cannot discuss exact totals, he                                                               
noted, but  he can say that  a total of between  $500 million and                                                               
$800 million  in Cook  Inlet and  some in  the Interior  has been                                                               
credited, cashed out,  for these line items.  Over  85 percent of                                                               
it  occurred  after fiscal  year  2013,  largely because  of  the                                                               
greater activity that  was incentivized by the passage  of the 40                                                               
percent Well Lease Expenditure Credit in  2010.  So, the state is                                                               
spending $150 million  to $200 million a year.   If these credits                                                               
were repealed,  the state's credit liability  going forward would                                                               
go  down commensurately  by about  $150  million per  year.   Mr.                                                               
Alper  noted that  these credits  were created,  in part,  due to                                                               
supply anxiety and the fear that gas  was going to run out in the                                                               
Cook Inlet.  That problem has  now been somewhat fixed.  He urged                                                               
members to  keep in mind that  these credits could also  be spent                                                               
on  oil  drilling and  oil  well  workovers and  activities  that                                                               
increase  oil production,  which  are good  for  the economy  and                                                               
great for having  oil in the refineries, but  not necessarily the                                                               
same sort of life and death issue....                                                                                           
                                                                                                                                
1:45:05 PM                                                                                                                    
                                                                                                                                
CO-CHAIR NAGEAK requested Mr. Alper to expand on well workovers.                                                                
                                                                                                                                
MR. ALPER explained that a workover  is when an existing oil well                                                               
is  cleaned  out and  new  equipment  added, a  second-generation                                                               
activity to make an old oil  well newer again and produce better.                                                               
It  fits under  the  definition of  well  lease expenditures,  so                                                               
generally that  sort of activity  would get the higher  level, 40                                                               
percent, credit.  Cook Inlet has a lot  of old oil wells.  In the                                                               
1960s production  was over  200,000 barrels a  day.   New players                                                               
have  come in  and worked  over some  of the  old wells  and Cook                                                               
Inlet  oil production  has  more  than doubled  in  the last  few                                                               
years.  A  lot of that activity would have  been eligible for the                                                               
state's credits  at the  higher level  because that  activity met                                                               
the definition.                                                                                                                 
                                                                                                                                
CO-CHAIR NAGEAK  asked whether this  is currently being  used "up                                                               
north" by the companies that  have taken over production from the                                                               
bigger companies and are doing well workovers.                                                                                  
                                                                                                                                
MR.  ALPER replied  yes, "Cook  Inlet north"  is most  definitely                                                               
earning these credits.                                                                                                          
                                                                                                                                
CO-CHAIR NAGEAK clarified he is meaning the North Slope.                                                                        
                                                                                                                                
MR. ALPER responded  that on the North Slope  these well drilling                                                               
credits are  not available so  the companies are unable  to claim                                                               
the credits.   However, the companies are working  over old wells                                                               
and trying to get increased  production from mature fields in the                                                               
North Slope.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  NAGEAK recounted  that  he visited  one of  those                                                               
wells last  year and was  told that smaller companies  have taken                                                               
over fields from BP and others  and these companies have a system                                                               
for doing this to  the wells.  He said he  thinks this will occur                                                               
more and more as the wells age.                                                                                                 
                                                                                                                                
MR. ALPER  answered it is  important to  note that, yes,  this is                                                               
happening  on  the North  Slope  and  companies are  not  getting                                                               
drilling credits for it, although  the state is offering drilling                                                               
credits in  Cook Inlet for  similar work.   He surmised  that the                                                               
companies will  provide greater detail  in this regard  when they                                                               
testify before the committee.                                                                                                   
                                                                                                                                
1:47:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  inquired whether splitting out  the amount                                                               
that was given  for oil and for gas can  be done without breaking                                                               
confidentiality.                                                                                                                
                                                                                                                                
MR. ALPER  replied he will  talk with staff to  determine whether                                                               
that would be  possible.  He asked  whether Representative Seaton                                                               
is meaning to  try to break the oil-related  from the gas-related                                                               
expenditures for  Cook Inlet or  non-North Slope credits  in this                                                               
category.                                                                                                                       
                                                                                                                                
REPRESENTATIVE SEATON responded yes and  added that he would like                                                               
the information for the years since 2013.                                                                                       
                                                                                                                                
MR. ALPER agreed to do his best to get that to the committee.                                                                   
                                                                                                                                
1:48:35 PM                                                                                                                    
                                                                                                                                
MR. ALPER concluded his discussion of  slide 13.  He said he will                                                               
make the case  later in the presentation that the  Cook Inlet gas                                                               
supply issues  are less problematic  than they were in  2010 when                                                               
Southcentral Alaska was planning and practicing brownout drills.                                                                
                                                                                                                                
MR.  ALPER  moved to  slide  14,  "Credits:   What  Worked,  What                                                               
Didn't?" to  outline the credits  that would remain on  the books                                                               
should HB  247 pass  as presented.   He said  the Carried-Forward                                                               
Annual  Loss Credit,  also called  the Net  Operating Loss  (NOL)                                                               
Credit, is the primary credit  envisioned by [the administration]                                                               
as being part  of the state's system going forward.   This credit                                                               
is 25 percent  in Cook Inlet and the Interior,  and 35 percent on                                                               
the North Slope.   It can be cashed out,  with the exception that                                                               
large  producers  must  carry  it  forward  and  use  it  against                                                               
liability.   Regarding  the exploration  credits that  he earlier                                                               
spoke  to  as  being  about  to sunset,  he  explained  that  the                                                               
exception to that is the  Middle Earth Exploration Credits, which                                                               
are  outside of  the  North  Slope and  the  Cook  Inlet.   These                                                               
credits are 30-40 percent of  qualified expenditures depending on                                                               
the location  of the well  and the  activity, and will  sunset in                                                               
5.5  years on  January 1,  2022.   Regarding the  Cook Inlet  Tax                                                               
Caps, he noted  that they are not strictly speaking  a credit but                                                               
a statutory maximum on the amount  of taxes the producers can pay                                                               
if  they are  producing  in Cook  Inlet.   He  said  this cap  is                                                               
roughly 17  cents per thousand  cubic feet  (MCF) of gas  and the                                                               
oil tax  is zero.   These tax caps are  tied to the  old economic                                                               
limit factor  (ELF) formulas that were  in place in 2005  and are                                                               
currently scheduled to sunset on January 1, 2022.                                                                               
                                                                                                                                
1:50:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  drew attention  to the Net  Operating Loss                                                               
Credit that  is 35 percent on  the North Slope and  25 percent in                                                               
the  Cook Inlet.    He  requested Mr.  Alper  to  explain why  25                                                               
percent is  working well  in Cook  Inlet while  it is  10 percent                                                               
more on the North Slope.                                                                                                        
                                                                                                                                
MR.  ALPER  answered  that  the Net  Operating  Loss  Credit  has                                                               
historically  been tied  to  the  base rate  of  the Net  Profits                                                               
Production  Tax.   The 2007  bill, Alaska's  Clear and  Equitable                                                               
Share (ACES), had a 25 percent  tax rate with a sliding scale, or                                                               
progressive  factor,  that went  higher  based  on that,  so  the                                                               
decision was  made to  pay losses  at the base  level of  that 25                                                               
percent and  that was both  Cook Inlet and  North Slope.   On the                                                               
North Slope,  the passage of Senate  Bill 21 raised the  tax rate                                                               
itself.  The rate  of 35 percent is more of a  maximum tax than a                                                               
minimum tax  and it tends to  slide down because of  the sliding-                                                               
scale credit.   The  way the legislature  addressed that  in 2013                                                               
was by raising  the size of the Net Operating  Loss Credit on the                                                               
North Slope  to 35  percent, tying it  to the tax  rate.   The 25                                                               
percent operating  loss rate in  Cook Inlet  is a remnant  of the                                                               
2007 ACES  statute.  In some  ways the North Slope  Net Operating                                                               
Loss  Credit is  called a  playing  field leveler:   a  producing                                                               
company  who owes  taxes spends  more money  and reduces  its tax                                                               
liability, so  this creates a  parallel benefit to  the newcomer.                                                               
In  Cook  Inlet where  there  isn't  much  tax liability,  it  is                                                               
arguable that  the 25  percent Net  Operating Loss  Credit itself                                                               
isn't needed to  level the playing field, but it  is very much of                                                               
an incentive  and encourages ongoing  work and enables  people to                                                               
get an advantage to investing money in Cook Inlet.                                                                              
                                                                                                                                
1:52:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON noted  that there is the  increased base of                                                               
35  percent on  the North  Slope as  well as  a "per-barrel  well                                                               
credit" that  is not figured  in or subtracted  from the 35.   He                                                               
asked whether  the way to  make these things equivalent  would be                                                               
to somehow  calculate in the [Per-Taxable-Barrel]  Credit against                                                               
the 35 percent base tax.                                                                                                        
                                                                                                                                
MR. ALPER  replied that Representative  Seaton is  really talking                                                               
about  a  calculation  of  the effective  tax  rate  after  [Per-                                                               
Taxable-Barrel]  Credits   and  somehow  scaling  back   the  Net                                                               
Operating Loss Credit to an effective  tax rate.  He advised that                                                               
there might be some technical  complexities in doing that because                                                               
the effective  tax rate varies  from field to field  and producer                                                               
to producer,  but if it was  the will of the  committee to reduce                                                               
that Net Operating  Loss Credit to some sort of  metric that used                                                               
an effective tax  rate for the North  Slope, [the administration]                                                               
could  help  the  committee produce  an  amendment  or  different                                                               
language.   He added that  Representative Seaton is  correct that                                                               
as  a playing  field leveler  the state  is probably  giving more                                                               
than equal benefit.  When looking  at it from the marginal dollar                                                               
level -  and other committees  have looked at marginal  costs and                                                               
marginal tax rates over the years  - when a major producer spends                                                               
one  incremental  dollar  it  gets an  incremental  35  cent  tax                                                               
benefit  at  the margin  because  the  producer has  reduced  its                                                               
taxable  base, its  production  tax  value, by  $1,  and then  35                                                               
percent  off of  that is  35 cents.   However,  the [Per-Taxable-                                                               
Barrel]  Credit   itself  is  not   impacted  by   that  marginal                                                               
additional dollar of  spend and therefore this is  designed to be                                                               
a marginal  benefit -  the 35 percent  Net Operating  Loss Credit                                                               
equals not  so much the  effective tax  but the tax  benefit that                                                               
the company receives from its last dollar spent.                                                                                
                                                                                                                                
CO-CHAIR NAGEAK  added that  the cost of  doing business  is much                                                               
higher in the North Slope than it  is in the south because of the                                                               
transportation cost.                                                                                                            
                                                                                                                                
MR. ALPER agreed that without  question the logistical costs, the                                                               
mobilization costs,  in the North  Slope are very  different than                                                               
anything else in Alaska.                                                                                                        
                                                                                                                                
1:54:54 PM                                                                                                                    
                                                                                                                                
MR. ALPER  concluded his discussion  of slide 14.   He reiterated                                                               
that the credits that would remain  after passage of HB 247 would                                                               
be  the  Carried-Forward Annual  Loss  Credit,  the Middle  Earth                                                               
Exploration Credits, and the Cook Inlet Tax Caps.                                                                               
                                                                                                                                
MR.  ALPER turned  to  slide 15  to continue  his  review of  the                                                               
credits that  would remain if HB  247 passes.  These  credits are                                                               
less known, he  noted, because there has not  yet been production                                                               
in Middle Earth.  The first of  these is the Middle Earth Tax Cap                                                               
at 4  percent of  the gross  value for the  first seven  years of                                                               
production so long  as that production begins before  2027.  That                                                               
is  a provision  of the  "Frontier  Basins Credit"  bill of  2012                                                               
[Senate Bill  23, Twenty-Seventh Alaska State  Legislature].  Any                                                               
production that  begins in, say,  Nenana or similar areas  in the                                                               
state, will pay a 4 percent  gross tax regardless of the price of                                                               
oil  for the  first seven  years of  production.   The other  two                                                               
remaining credits are the corporate  income tax credits mentioned                                                               
earlier.   The  LNG  Storage Facility  Credit  and the  "Refinery                                                               
Infrastructure   Credit"   [qualified   in-state   oil   refinery                                                               
infrastructure  expenditures  tax  credit,  AS  43.20.053]  would                                                               
remain on the books, although  the Refinery Infrastructure Credit                                                               
is scheduled to go away in 2020.                                                                                                
                                                                                                                                
1:56:06 PM                                                                                                                    
                                                                                                                                
MR.  ALPER   drew  attention  to   slide  17,  "Credit   Cost  in                                                               
Perspective," to  discuss how much  the state has spent  and what                                                               
it  has  received  related  to  North  Slope  refundable  credits                                                               
[between fiscal  years 2007  and 2015].   He reiterated  that the                                                               
state spent  $1.45 billion supporting  six projects that  are now                                                               
in production.   Production from those six  projects equaled 38.5                                                               
million barrels of oil in total  aggregate.  This means the state                                                               
spent  $37.30  for every  barrel  of  production from  these  new                                                               
fields that have come on in  the North Slope.  That dollar number                                                               
will decline over  time because, for the most part,  the money is                                                               
spent and the oil is going to  keep flowing for years to come and                                                               
every new  barrel from  that is going  to dilute/reduce  the per-                                                               
barrel cost.  Meanwhile, the  lease expenditures for all of those                                                               
projects through the  end of fiscal year 2015 was  just less than                                                               
$5 billion  for the  companies involved.   So, the  state's $1.45                                                               
billion  in   credits  represents  roughly  29   percent  of  the                                                               
companies' total  lease expenditures;  this is  the share  of the                                                               
project that  the state  has put  money into  on the  North Slope                                                               
over the last 8-10 years.                                                                                                       
                                                                                                                                
1:57:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  understood  that  the  per-barrel  dollar                                                               
amount is  anticipated to go  down, but  noted that the  state is                                                               
continuing to pay lease expenditures  at 29 percent of the costs.                                                               
He asked how rapidly that is expected to go down.                                                                               
                                                                                                                                
MR.  ALPER expected  that that  number will  go down  because the                                                               
incremental  lease expenditures,  the  operating expenditures  to                                                               
keep the existing fields going,  is less than the start-up costs.                                                               
Likewise,  this analysis  is only  looking  at refunded  credits.                                                               
So, the answer to the question  is also largely contingent on the                                                               
price of  oil -  are these  companies going  to be  profitable or                                                               
not?   If they are  profitable and  they are taxpayers,  they are                                                               
not  going to  be  getting cash  credits.   If  they are  running                                                               
operating losses during production,  the state will be continuing                                                               
to  pay them  refundable credits  on their  operating losses  and                                                               
that will  bring up the  spend numbers.   Therefore, a  couple of                                                               
different variables  are in play here.   He said he  would expect                                                               
this lease expenditure credit to drop,  but not as rapidly as the                                                               
per-barrel number.                                                                                                              
                                                                                                                                
1:58:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON understood from  slide 17 that the North                                                               
Slope  refundable credits  for  six projects  have  aided in  the                                                               
production of nearly 39 million barrels.                                                                                        
                                                                                                                                
MR.  ALPER  answered that  "aided"  is  a  subjective term.    He                                                               
repeated that the state has  given $1.45 billion to the companies                                                               
that were  involved in six  projects that are now  in production.                                                               
To date, those projects have  produced 39 million barrels of oil.                                                               
He allowed it is fair to say that the state has "aided" them.                                                                   
                                                                                                                                
REPRESENTATIVE JOSEPHSON posited that if  this were 1988 it would                                                               
be  the  equivalent  of  19  days of  Alaska  North  Slope  (ANS)                                                               
production at 2 million barrels a day.                                                                                          
                                                                                                                                
MR. ALPER replied  yes and said 1988/1989 production  was about 2                                                               
million barrels a day.                                                                                                          
                                                                                                                                
REPRESENTATIVE  JOSEPHSON,  regarding   the  $37.30  per  barrel,                                                               
offered his  understanding that if  the net value was  $74 during                                                               
the period  in question,  the tax rate  would be  applied against                                                               
half that because the credit is half the $74.                                                                                   
                                                                                                                                
MR. ALPER  responded that  the great bulk  of these  credits were                                                               
refunded before there was substantial  amounts of production.  So                                                               
these were under  construction - the companies  had their capital                                                               
credits at  the time and then  their operating loss credits.   It                                                               
is therefore  hard to answer  that question without  getting into                                                               
project specifics  because once  a company  is in  production the                                                               
company's spending is far less.                                                                                                 
                                                                                                                                
2:00:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON observed from  slide 17 that previously the                                                               
state spent  $1.45 billion on  these six projects and  that lease                                                               
expenditures  for  these projects  were  $5  billion.   He  asked                                                               
whether the credit  support of 29 percent of $5  billion of lease                                                               
expenditures was in addition to the $1.45 billion.                                                                              
                                                                                                                                
MR.  ALPER answered  that the  29 percent  is the  $1.45 billion:                                                               
the  companies spent  $5 billion  and  the state  paid them  back                                                               
nearly $1.5 billion through the state's credit programs.                                                                        
                                                                                                                                
2:01:27 PM                                                                                                                    
                                                                                                                                
MR. ALPER  turned to slide  18, "Credit Cost in  Perspective," to                                                               
discuss how  much the state  has spent  and what it  has received                                                               
related to  Cook Inlet Refundable  Credits [between  fiscal years                                                               
2007 and  2015].  He reiterated  that the state spent  about $450                                                               
million on  credits that went  to six producing projects.   Those                                                               
projects have produced about 56  million barrel of oil equivalent                                                               
(BOE), with  the great bulk  of that  being gas.   State spending                                                               
comes to $7.80 per  BOE or about $1.30 per MCF  of gas, with this                                                               
number  decreasing over  time if  additional production  comes on                                                               
from those  same fields.   The lease expenditures over  that time                                                               
period for those  companies involved in those six  projects was a                                                               
little less  than $1.1  billion.   Although the  per-barrel state                                                               
cost  in Cook  Inlet  is  less, the  percentage  of  the cost  is                                                               
higher,  with the  state supporting  these projects  by about  40                                                               
percent of the lease expenditures.                                                                                              
                                                                                                                                
MR.  ALPER   drew  attention  to   slide  19,  "Credit   Cost  in                                                               
Perspective," to discuss the benefit  of the Cook Inlet tax caps.                                                               
He  said it  is  important  to remember  that  there  is a  delta                                                               
between the  statutory tax rate and  the capped tax rate  that is                                                               
tied  to ELF.    The  Tax Division's  analysis  of  that will  be                                                               
available  at the  next committee  hearing, he  advised, but  the                                                               
division estimates that  the value of the tax cap  to industry is                                                               
between $550 million  and $850 million over  the years 2007-2013.                                                               
This amount  is the  tax savings  from not having  to pay  at the                                                               
statutory rate from  Cook Inlet and instead paying  at the capped                                                               
rate.  Cook Inlet produces about 250  MCF of gas per day, so over                                                               
that  seven-year period  that is  the equivalent  of 640  billion                                                               
cubic feet  (BCF) of  gas or  106 million BOE.   Cook  Inlet also                                                               
produces about 10,000  barrels of oil a day (it  was lower at the                                                               
beginning of  the period  and a little  higher towards  the end),                                                               
which over that  seven-year period comes to 26 million  BOE.  The                                                               
total production  of 132 BOE and  the $700 million in  taxes that                                                               
were not  paid (using  the midpoint  of the  division's estimate)                                                               
equals a  tax savings of  roughly $5.30  per barrel or  $0.88 per                                                               
MCF.   Adding together the  credit support  of $1.30 per  MCF and                                                               
$0.88 per MCF equals $2.18 per  MCF in benefit that the state has                                                               
given to incremental gas production in Cook Inlet.                                                                              
                                                                                                                                
MR. ALPER next addressed the  specific sections of HB 247, saying                                                               
he will be  providing additional modeling and  explanation as per                                                               
the  committee's request  and that  this is  not a  comprehensive                                                               
sectional.   Moving to slides  21-22, "Section 7:   Interest Rate                                                               
Compounding," he  began reviewing  the evolution of  the interest                                                               
rate language in Senate Bill 21.                                                                                                
                                                                                                                                
2:05:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR drew  attention  to the  previous slides  to                                                               
compare  the per-barrel  equivalent of  $37 for  the North  Slope                                                               
credits and the  per-barrel equivalent of about $13  for the Cook                                                               
Inlet  credits.    She  asked Mr.  Alper  whether  those  numbers                                                               
surprised  him  or  seemed  about  right  in  terms  of  relative                                                               
favorability for the North Slope versus Cook Inlet.                                                                             
                                                                                                                                
MR.  ALPER  replied that  it  was  a  little surprising  to  him.                                                               
However, he  explained, there are  oddities in the data  that are                                                               
hard to  parse out.   For  example, what  is really  being talked                                                               
about here  is by  company.   There are  companies in  Cook Inlet                                                               
that  are  producing a  lot  of  oil and  gas  and  all of  their                                                               
production might not have benefitted  from credits, but all of it                                                               
fits  into  the  total  production  that  was  worked  into  this                                                               
division factor.   So, that  might lead to some  smaller apparent                                                               
numbers  in Cook  Inlet than  the  reality of  what was  actually                                                               
impacted by the  state's contribution.  It is hard  to separate a                                                               
specific company into its component parts in different projects.                                                                
                                                                                                                                
REPRESENTATIVE TARR,  regarding Alaska's  overall competitiveness                                                               
relative to  other jurisdictions, pointed  out that the  focus is                                                               
often on  Alaska's base tax  rate rather than  the aforementioned                                                               
perspective.   In  terms of  comparing  Alaska's favorability  to                                                               
other jurisdictions as  a place to invest, she  asked whether any                                                               
other  jurisdiction provides  credits  of almost  $40 per  barrel                                                               
equivalent or, as in  the Cook Inlet, in the range  of $13 to $15                                                               
per barrel equivalent.                                                                                                          
                                                                                                                                
MR. ALPER  responded that  comparative fiscal  systems is  a very                                                               
complicated art.   He said DOR participated in,  and drafted, the                                                               
document for the  Competitiveness Review Board.   The most recent                                                               
version of the  board's report came out in February.   It is very                                                               
hard  apples to  apples  because every  system  is different,  he                                                               
explained.   Some  jurisdictions count  sales taxes  and property                                                               
taxes  differently than  does Alaska.   Other  jurisdictions have                                                               
production sharing  agreements.  In  general, it is hard  to say.                                                               
Alaska's  realm  of refundable  credits  tied  to expenditure  is                                                               
relatively unique  in the world.   There are  not a lot,  if any,                                                               
other jurisdictions that do this to the degree that Alaska has.                                                                 
                                                                                                                                
2:08:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON commented that he  is trying to determine a                                                               
relative-value  chain looking  at the  Cook Inlet  tax caps.   He                                                               
related that according  to the radio recently, the  Henry Hub was                                                               
less than  $2 per MCF, yet  Alaska is providing credits  of $2.18                                                               
per MCF and the sales price  [in Southcentral Alaska] is about $7                                                               
per  MCF.   He  inquired as  to  where the  $2.18  per MCF  would                                                               
compare  to the  development and  operational costs  of producing                                                               
that gas as far as comparing the relative value of gas.                                                                         
                                                                                                                                
MR. ALPER answered:                                                                                                             
                                                                                                                                
     We don't  know the  extent to  which our  credit regime                                                                    
     impacts  the  price  of  gas  in  Homer  or  Anchorage,                                                                    
     without question.   We can't tell you  if these credits                                                                    
     were to change  how that might impact  the market price                                                                    
     of gas.  But, if  these numbers are relatively accurate                                                                    
     ...  as the  companies  go through  their own  internal                                                                    
     economics and say, "we're spending  this much money and                                                                    
     we're  selling  this  much  gas and  we  have  a  sales                                                                    
     contract," they are  more or less able to  build in the                                                                    
     assumption ...  that they're going to  be getting $1.30                                                                    
     in  refunded credits  on the  average unit  of gas  and                                                                    
     that  they're  avoiding taxation  of  88  cents on  the                                                                    
     average unit of gas.   So, if they're comparing that to                                                                    
     ... an  opportunity they have elsewhere  in the country                                                                    
     that  should be  built  into their  equations.   But  I                                                                    
     can't say  how any individual company  might build that                                                                    
     into their internal modeling.                                                                                              
                                                                                                                                
REPRESENTATIVE SEATON said  his reason for trying  to figure this                                                               
out is because  at a hearing in Kenai this  last interim, Hilcorp                                                               
testified  that  it   has  been  able  to   reduce  its  [Alaska]                                                               
exploration and  drilling costs to the  same costs it has  in the                                                               
Lower 48.   He stated he  is therefore struggling with  why these                                                               
tax   and  credit   supports  are   necessary   with  the   price                                                               
differential that is being seen  in sedimentary basins and retail                                                               
sales in Alaska versus the same comparisons in the Lower 48.                                                                    
                                                                                                                                
CO-CHAIR NAGEAK  commented that maybe Representative  Seaton will                                                               
come up with something in thinking about it.                                                                                    
                                                                                                                                
MR. ALPER  added that  Representative Seaton  is right  that Cook                                                               
Inlet does  have among  the most generous  fiscal regimes  in the                                                               
world as  far as how the  state treats production and  also has a                                                               
substantially higher price than other areas in the U.S.                                                                         
                                                                                                                                
2:12:02 PM                                                                                                                    
                                                                                                                                
MR. ALPER returned to slides  21-22 and resumed his discussion of                                                               
the evolution  of the interest  rate language in Senate  Bill 21.                                                               
He addressed  why Alaska does  not have compound interest  in its                                                               
tax right now and  noted that this is not just  oil taxes but all                                                               
of  Alaska's  taxes.    The  general tax  statute  is  where  the                                                               
interest  rates are,  he explained,  so  someone with  delinquent                                                               
cigarette  taxes  would  be  working   from  the  same  statutory                                                               
formulas.   When Senate Bill 21  was in the other  body, the idea                                                               
was  to reduce  the  rate from  11 [percent]  to  a much  smaller                                                               
number.  When it passed the  other body, Senate Bill 21 failed to                                                               
pass an effective  date vote.  This meant that  all of the things                                                               
that changed a  number on a date certain were  not applicable and                                                               
it couldn't be said that on  January 1 the interest rate would be                                                               
changed.   For purposes  of administration one  wants to  have an                                                               
even breakdown on when something  begins and when something ends.                                                               
Consequently, when  Senate Bill  21 came  to the  House Resources                                                               
Standing Committee  in the  2013 session,  multiple parts  of the                                                               
bill  received what  is  called  applicability language,  meaning                                                               
production before  January 1, 2014,  falls under  "this" criteria                                                               
and after 2014 falls under "that"  criteria.  It was something of                                                               
a work-around  to the inability to  get a two-thirds vote  in the                                                               
other body.   When that  happened, one  of the sections  to which                                                               
that  was done  was the  interest  rate section.   Meanwhile  the                                                               
compound language remained.   There was a technical  error in the                                                               
language that came out of  the House Resources Standing Committee                                                               
that put back  some of this 11 percent language  that had existed                                                               
in  prior statute,  but the  compounded language  was there.   He                                                               
noted  that  for every  major  bill,  especially in  the  finance                                                               
committee, there is  always a cleanup amendment  with the chair's                                                               
name  on it  that  fixes about  a dozen  things  and that  passes                                                               
unanimously.  In this case,  the cleanup amendment from the House                                                               
Finance  Committee  that  intended   to  delete  the  11  percent                                                               
language  also  deleted  the  compounding  language,  which  [the                                                               
administration]  believes was  inadvertent.    The sentence  from                                                               
that amendment stated to delete from  page 2, lines 23-25:  ", or                                                           
at  the  annual  rate  of   11  percent,  whichever  is  greater,                                                           
compounded quarterly  as of the last  day of that quarter".   The                                                           
phrase,  "compounded quarterly",  means  that the  state is  only                                                           
charging  simple  interest on  all  delinquent  taxes across  the                                                               
board starting  January 1, 2014;  that there is no  more interest                                                               
compounding from  that date forward.   Restoration of compounding                                                               
is one of the things that would be fixed with HB 247.                                                                           
                                                                                                                                
2:14:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON asked  why  Mr. Alper  thinks this  was                                                               
inadvertent.                                                                                                                    
                                                                                                                                
MR.  ALPER replied  that  every  version of  Senate  Bill 21  had                                                               
compounding language, there was  much debate and discussion about                                                               
reducing  the interest  rate  and charging  a  much less  onerous                                                               
rate.   There was consensus,  at least among those  who supported                                                               
the  bill,  to do  that.    There  was  never any  discussion  of                                                               
eliminating  compounding,   it  was  never  brought   up  in  any                                                               
committee debate.   It just  showed up  in the last  amendment in                                                               
the last committee  as a technical amendment that  happened to do                                                               
that  while  it was  also  doing  something  else.   He  said  he                                                               
therefore  believes  it  was  inadvertent  because  he  found  no                                                               
committee record to show that doing it on purpose was discussed.                                                                
                                                                                                                                
2:15:34 PM                                                                                                                    
                                                                                                                                
MR.  ALPER continued  his presentation.   He  moved to  slide 23,                                                               
"Section 7:  Interest Rate  Increase," and stated that increasing                                                               
the interest  rate is much  more substantive.  He  explained that                                                               
the  current interest  rate of  4  percent is  a rate  that is  3                                                               
percent above  the federal discount  rate.  The  federal discount                                                               
rate changes quarterly  and right now that rate is  1 percent.  A                                                               
4 percent  rate, he  noted, could  actually create  incentives to                                                               
delay and  contest tax payments.   When  the rate was  11 percent                                                               
and the  Tax Division informed a  company that it owed  the state                                                               
$100  million, even  if  the  company didn't  want  to, it  would                                                               
typically pay it because if  the appeals process went another two                                                               
years  the company  would owe  11 percent  interest on  that $100                                                               
million and  the company  didn't want to  have pay  the interest.                                                               
So the company would pay the money  and then if at the end of the                                                               
appeals process the company won,  the state would pay the company                                                               
back the difference plus the interest,  so the company got the 11                                                               
percent  back  from the  state.    At  4 percent,  the  incentive                                                               
structure is flipped  on its head a little bit  and companies are                                                               
more likely to  not pay contested taxes.  The  appeals process is                                                               
gone through with the money in  the company's bank instead of the                                                               
state's because the  company is generally able to  earn more than                                                               
4 percent on its  money; if the company loses at  the end, it has                                                               
actually  made money  over the  time.   So, [the  administration]                                                               
believes that  somewhere in between  4 percent and 11  percent is                                                               
the right number.  Importantly,  in a low price environment where                                                               
the  state is  spending its  savings to  operate the  state every                                                               
day, every  dollar of  tax that  is not paid  is one  more dollar                                                               
that the  state is taking  out of  its savings.   Therefore, when                                                               
that tax is  eventually paid, it should compensate  the state for                                                               
what  it would  have  earned had  it remained  in  savings.   The                                                               
number  from the  permanent  fund's  financial advising  company,                                                               
Callan & Associates, is about 7 percent.                                                                                        
                                                                                                                                
2:17:09 PM                                                                                                                    
                                                                                                                                
CO-CHAIR NAGEAK requested Mr. Alper  to provide correspondence to                                                               
tell the  committee if  it is  actually happening  the way  he is                                                               
explaining it.                                                                                                                  
                                                                                                                                
MR.  ALPER  responded  that  the   permanent  fund  publishes  an                                                               
estimate  of returns  and also  publishes its  actual returns  as                                                               
time  goes by.    The permanent  fund's  most recent  publication                                                               
shows an  expected earnings rate for  the next 10 years  or so as                                                               
averaging about 7  percent per [year].  He said  he will be happy                                                               
to keep  the committee up to  date as those numbers  change going                                                               
forward.  He  clarified that the bill isn't tied  to this number;                                                               
rather, the  bill has a  fixed number  of 7 percent  above prime,                                                               
which currently  works out  to 8  percent.  That  is an  error on                                                               
[the  administration's] part,  it probably  should say  6 percent                                                               
over the  discount rate,  which would  be 7  percent.   A formula                                                               
could  be built  that is  somehow  tied to  the permanent  fund's                                                               
estimated  earnings or  its actual  earnings and  have it  change                                                               
every quarter.   There would be a way to  make an adjustable rate                                                               
within statute,  it's just one  step more complex.   When putting                                                               
the  bill  together, [the  administration]  chose  to go  with  a                                                               
simpler formula  tied to  currently expected  earnings.   But, he                                                               
advised,  that might  not  fully compensate  if  there are  broad                                                               
swings in expected earnings in years to come.                                                                                   
                                                                                                                                
2:18:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  understood Mr. Alper to  be saying that                                                               
the intent  was really to  achieve 7  percent so the  bill should                                                               
properly  say 6  percent.   He remarked  that this  seems like  a                                                               
multi-million  dollar question  and  inquired whether  it is  the                                                               
administration's preference that the committee adopt 6 percent.                                                                 
                                                                                                                                
MR.   ALPER  answered   that  his   understanding  is   yes,  the                                                               
administration's  preference is  to  have a  number  tied to  the                                                               
permanent  fund's estimate,  which is  7 percent.   The  bill, as                                                               
written,  really  says 8  percent,  so  the administration  would                                                               
prefer  7 percent  in  that  that is  tied  more  closely to  the                                                               
permanent fund's estimate.                                                                                                      
                                                                                                                                
2:19:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  recalled that the last  audit completed [by                                                               
the Tax Division]  on the production tax was 2008.   He requested                                                               
Mr. Alper to  provide a breakdown of the audit  amount due on the                                                               
interest for 2008.                                                                                                              
                                                                                                                                
MR. ALPER  replied that the  complete set  of audits for  all the                                                               
producers that  paid taxes claimed  - not  all has been  paid and                                                               
some is being contested -  the division assessed $265 million, of                                                               
which about  $110 million,  or almost half,  was interest.   That                                                               
was based  on the  11 percent compounded  interest for  the years                                                               
2008 to January 1, 2014.   The interest rate did not change until                                                               
the effective date  of Senate Bill 21.   For the last  year of it                                                               
the interest was a much smaller number.                                                                                         
                                                                                                                                
REPRESENTATIVE  OLSON understood  it took  six years  to complete                                                               
the audit or to get to the point that the division is at now.                                                                   
                                                                                                                                
MR. ALPER confirmed  that the 2008 audit was  completed six years                                                               
after the  taxes were received.   He clarified that  the division                                                               
was not  working on that audit  for six years; it  was doing lots                                                               
of other things  during that time, including the  2007, 2006, and                                                               
2005  audits.     The  division  used  all  of   the  statute  of                                                               
limitations available to it last year.                                                                                          
                                                                                                                                
2:20:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  understood that  Section 7 would  change the                                                               
interest  rate from  3 percent  to 7  percent above  [the federal                                                               
discount rate], so with the 1  percent that would make the rate 8                                                               
percent.   She asked  whether instead  of the  cap at  7 percent,                                                               
[the administration] would  want it to be  an either/or scenario,                                                               
so the  language would  give a  cap of whichever  is greater  - 7                                                               
percent or....                                                                                                                  
                                                                                                                                
MR. ALPER  responded that this  gets a bit beyond  his expertise,                                                               
but explained  that the 1 percent  discount rate has some  tie to                                                               
inflation.   If  there  was  a spike  in  inflation  it would  be                                                               
expected to  have a spike in  that rate and therefore  a spike in                                                               
the  interest  that the  state  would  be  charging.   Also,  the                                                               
permanent fund would  start seeing higher returns as  well.  Even                                                               
though  the real  returns  might remain  the  same, the  interest                                                               
embedded in  all of its  portfolio would  be going up  along with                                                               
inflation.  That 7 percent  number assumes about 4.5-4.75 percent                                                               
real returns offset by 2.5-2.25 percent expected inflation.                                                                     
                                                                                                                                
REPRESENTATIVE  TARR remarked  that it  sounds like  this is  the                                                               
scenario that [the  administration] would want to  avoid if there                                                               
was a change  in inflation because that would end  up getting the                                                               
state close to the current scenario  of 11 percent, which is what                                                               
[the administration]  is saying is too  high.  She said  it seems                                                               
that  maybe the  alternative would  be to  put this  plus 1  or 7                                                               
percent, whichever is greater.                                                                                                  
                                                                                                                                
MR. ALPER  responded that  the language prior  to the  passage of                                                               
Senate Bill 21 was the higher of  11 percent or of 5 percent over                                                               
discount, which  would be 6  percent in  today's world.   So, the                                                               
higher of calculation was eliminated  and the 5 was replaced with                                                               
a 3.   Representative Tarr is  suggesting a minimum rate  of 7 so                                                               
that if  the state was going  6 above discount, and  the discount                                                               
rate  was  below  1  percent  for several  years,  which  was  an                                                               
historical anomaly.   If it gets  down below that, he  said he is                                                               
personally not terribly worried  about the difference between 6.5                                                               
and 7  in the  returns.   Rather, he is  more curious  about what                                                               
happens if  the discount  rate gets a  lot higher and  an 8  or 9                                                               
percent interest is starting to be  seen; but, on the other hand,                                                               
there is a  lot more underlying inflation and  then the permanent                                                               
fund would be  growing faster.  Ideally they  should be balancing                                                               
each  other.   He suggested  that if  trying to  tie this  to the                                                               
permanent fund, it might wise to  find a more explicit way to tie                                                               
it to fund performance inside the state's assets.                                                                               
                                                                                                                                
2:23:49 PM                                                                                                                    
                                                                                                                                
MR. ALPER resumed  his presentation and brought  attention to the                                                               
chart on  slide 24,  "Section 7:   Interest  Rate Increase."   He                                                               
explained that  the chart compares  an interest  rate calculation                                                               
on a standard  $1 million assessment under current  law and under                                                               
HB 247.   He said the  chart uses a smaller  number because these                                                               
are general tax statutes, not oil  and gas language, and for many                                                               
of Alaska's smaller  taxes the assessments are much  smaller.  As                                                               
well, most of the general fund money  that is going to come in as                                                               
a result of this change is  going to be in these smaller numbers.                                                               
For the major  oil and gas settlements and  assessments that come                                                               
in, almost  all go to  the Constitutional Budget Reserve  and not                                                               
to the general fund.  If there  is a $1 million assessment at the                                                               
end of the  2015 tax year it  would be the end  of second quarter                                                               
2017 by  the time the  Tax Division  assesses it, so  the company                                                               
would  owe a  year and  a half's  worth of  interest.   At simple                                                               
interest on $1 million, the total  interest would be $60,000 at 1                                                               
percent per quarter  or 4 percent per year.   If an interest rate                                                               
of 8  percent is begun on  the proposed effective date  in HB 247                                                               
of July 1, 2016, and if  from that date forward that interest was                                                               
subject to compounding, the net  effect of status quo and changes                                                               
by the bill  is $42,000 in additional interest to  the state.  If                                                               
instead  of  $1 million  the  assessment  is $100  million,  that                                                               
$40,000 becomes $4 million.                                                                                                     
                                                                                                                                
                                                                                                                                
2:25:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON inquired  whether it  is delinquent  if the                                                               
division waits six years to do the audit.                                                                                       
                                                                                                                                
MR. ALPER allowed  it is not ideal business practices.   He noted                                                               
that there  have been a few  extenuating circumstances, including                                                               
multiple tax changes  and the implementation of  a major software                                                               
rewrite that  took everyone off  task for a  long time.   The Tax                                                               
Division is  doing everything in its  power to catch up  and move                                                               
off of that  statute of limitations, which was  something that he                                                               
inherited when  he took the job.   He said he  is extremely proud                                                               
of the division's  staff in the Audit Group and  he believes that                                                               
in a year from now there will be substantial catchup.                                                                           
                                                                                                                                
REPRESENTATIVE OLSON  recalled that a  few minutes ago  Mr. Alper                                                               
stated that the division used the statute of limitations fully.                                                                 
                                                                                                                                
MR.  ALPER  replied   he  is  unsure  what  he   just  said  that                                                               
contradicted that.   He said the  division did go up  against the                                                               
statute of limitations, meaning it  took all of the time allotted                                                               
to it  to get the 2008  audits out.   The 2009 audits are  due at                                                               
the end of March.   The audits were expected a  month or two ago,                                                               
but  the division  was  given  a snafu  in  a  court ruling  that                                                               
affected some tariff  rates from 2009; they need  to get reworked                                                               
through the  system and  this threw  a lot  things back  into the                                                               
work pool for  a little while.  He reiterated  that 2010 and 2011                                                               
are going to  be completed simultaneously and by a  year from now                                                               
the division should be at least  one full year off the statute of                                                               
limitations and by  three years from now the  division would like                                                               
to be three years off the statute of limitations.                                                                               
                                                                                                                                
2:27:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR understood  Mr. Alper  is projecting  that a                                                               
year from  now the  division will be  more within  the three-year                                                               
range  of the  statute of  limitation.   She understood  there is                                                               
likely some expected  period of delay and that  once the division                                                               
is caught up a two-year to three-year delay is reasonable.                                                                      
                                                                                                                                
MR. ALPER responded that three  years, possibly four, is probably                                                               
reasonable.  The old statute before  the passage of ACES was four                                                               
years.   It was extended  two years because of  the understanding                                                               
that the system  got a whole lot more complex  with the switch to                                                               
a net profits tax.   The division's work plan right  now is to be                                                               
five years off the statute one  year from now, four years off the                                                               
statute  two years  from now,  and  three years  off the  statute                                                               
three years  from now.   The  division is going  to be  doing two                                                               
years in one for  the next two or three years.   He said his hope                                                               
is  that the  division's resources  hold out  and that  no strong                                                               
wrinkles get  thrown at the  division, but the  division believes                                                               
that it  will be able to  do that.   The new software in  2011 is                                                               
making  an order  of  magnitude difference  in  DOR's ability  to                                                               
handle  data, as  well as  in DOR's  ability to  handle data  for                                                               
every other tax type.                                                                                                           
                                                                                                                                
2:29:07 PM                                                                                                                    
                                                                                                                                
MR. ALPER  returned to his presentation  and concluded discussion                                                               
of Section  7 by moving to  slide 25, "Section 7:   Interest Rate                                                               
Increase."   He explained that  while he created an  example with                                                               
$42,000,  it  is  difficult to  quantify  future  revenue  impact                                                               
because the  division cannot  know what is  going to  be assessed                                                               
and  cannot know  what is  going to  be delinquent  because these                                                               
things are  different every year  in every  tax type.   The near-                                                               
term impact would  be very small because the  difference does not                                                               
start accruing until July 1,  2016, but increasing delta would be                                                               
seen between that point and  years afterwards.  In the production                                                               
tax, most  of the  impact is  going to  be in  the Constitutional                                                               
Budget Reserve.                                                                                                                 
                                                                                                                                
MR. ALPER moved to the graph  on slide 26, "Section 12:  Increase                                                               
Minimum  Tax."   He said  Section 12  of the  bill increases  the                                                               
[gross] minimum tax  from 4 percent to 5 percent.   The grey line                                                               
on the  graph, he explained,  depicts the underlying  Senate Bill                                                               
21 net tax  of 35 percent after credits without  any minimum tax.                                                               
Currently, that  tax would go to  zero at an oil  price of around                                                               
$70  and  fortunately  the  state benefits  from  the  4  percent                                                               
minimum tax  depicted by  the blue line.   Current  revenue looks                                                               
like the  blue line until it  crosses the grey line  and the grey                                                               
line is to the  right of the mark for roughly $80 a  barrel.  A 5                                                               
percent minimum tax  is depicted by the orange line  that is seen                                                               
above the  blue line and  which then  crosses over with  the grey                                                               
line.   The delta of revenue  is the wedge between  the blue line                                                               
and the orange line.                                                                                                            
                                                                                                                                
2:31:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON asked whether any  models have been done for                                                               
prices up to $135 or $140 a  barrel, given that the mistake a few                                                               
years ago was stopping at $95 a barrel.                                                                                         
                                                                                                                                
MR.  ALPER answered  that [the  division's] standard  modeling is                                                               
now using $20  to $130 a barrel.   There is now a  giant table of                                                               
royalty  production  tax,  unrestricted royalty,  and  restricted                                                               
royalty  at all  oil prices  from  $20 to  $130 for  the next  10                                                               
years.  He said he will provide this table to the committee.                                                                    
                                                                                                                                
MR.  ALPER returned  to his  review of  slide 26  and noted  that                                                               
while the grey line will continue  to go up and larger numbers in                                                               
revenue  would be  seen at  an  oil price  of $130,  slide 26  is                                                               
illustrating the  impact of the  minimum tax and the  minimum tax                                                               
is irrelevant at  those prices.  Slide 26 looks  at the crossover                                                               
point  between the  minimum tax  and the  net profits  tax, which                                                               
currently occurs at an oil price  of around $80.  If that minimum                                                               
tax were to  be raised to 5 percent, the  crossover would move to                                                               
a price  of somewhere between  $80 and  $85.  If  the legislature                                                               
were to desire  a very large minimum  tax of 10 or  15 percent, a                                                               
much higher  parallel line  would be  seen on  the graph  and the                                                               
crossover of  the grey line might  not happen until an  oil price                                                               
of $100 or higher.  The higher  the minimum tax, the more a gross                                                               
tax paradigm  is being  introduced over the  net tax  system that                                                               
Alaska has.                                                                                                                     
                                                                                                                                
2:32:42 PM                                                                                                                    
                                                                                                                                
MR. ALPER drew  attention to the illustrative model  on slide 27,                                                               
"Section 12:   Increase Minimum  Tax."   He said the  model shows                                                               
how much money  is being talked about  if all of the  oil were at                                                               
the same  price and none  of the oil  was eligible for  the Gross                                                               
Value Reduction (GVR).  The  model simplifies the whole system at                                                               
a range  of prices  between $20  and $100, and  looks at  the net                                                               
value (fifth  row down) after  a per-barrel cost of  roughly $46,                                                               
which is  the cost estimate for  the current year in  the Revenue                                                               
Sources Books.   The calculated  net value cannot be  below zero.                                                               
The tax rate is 35 percent of  that, and then there is a sliding-                                                               
scale  credit.   Bringing attention  to  the two  lines for  "Tax                                                               
After Credits"  and "Minimum  Tax", he  explained that  these are                                                               
calculated  in parallel  and  the companies  pay  the higher  of.                                                               
Where  the Wellhead  Gross Value  is  $10, the  state is  getting                                                               
$0.40;  where the  Wellhead  Gross  Value is  $20,  the state  is                                                               
getting $0.80.   When the Wellhead Gross Value is  $60, the state                                                               
is getting  $2.40 and  the calculated tax  after credits  is only                                                               
$0.40.   But, at an  oil price of $80,  the minimum tax  is $2.80                                                               
and the  calculated tax jumps up  to $3.90 because that  is where                                                               
the  crossover is.   The  revenue from  a 5  percent minimum  tax                                                               
would increase  by $16  [at an  oil price  of $20]  on up  to $96                                                               
million  at an  oil price  of $70.   At  an oil  price of  $80 it                                                               
[drops to  no increase].   That roughly parallels the  graph seen                                                               
on slide  26.  The  number in the fiscal  note is $50  million, a                                                               
number that roughly lines up with DOR's forecasted revenue.                                                                     
                                                                                                                                
MR.  ALPER turned  to the  bar graph  on slide  28, "Section  12:                                                               
Increase Minimum  Tax," depicting  the revenue impact  of raising                                                               
the minimum tax  from 4 percent to 5 percent.   He explained that                                                               
while slide 27  was a more illustrated and  calculated model, the                                                               
graph  on slide  28 is  closer to  the actual  revenue.   This is                                                               
because the graph  lines up with the state's  forecasted price of                                                               
oil,   the   forecasted   production,  and   how   the   specific                                                               
circumstances of  the state's individual producers  interact.  If                                                               
the price  of oil remained  at $30 for  all of fiscal  year 2017,                                                               
the proposed 5 percent tax would  only get the state $20 million.                                                               
But if the  price of oil were  to rise to $50, the  5 percent tax                                                               
would get  the state  $50 million.   [At  a price  of $75,  the 5                                                               
percent tax] would peak at about $80 million and then drop off.                                                                 
                                                                                                                                
2:35:18 PM                                                                                                                    
                                                                                                                                
MR.  ALPER moved  to slide  29, "Section  17(b):   Strengthen the                                                               
Minimum  Tax," to  review  which credits  can  break through  the                                                               
floor under  current law.   He explained  that the  slide depicts                                                               
the  4  percent  tax  floor  and underneath  that  floor  is  the                                                               
"basement" of zero tax.  He  discussed what is and is not limited                                                               
by the floor.  Limited by the floor is the sliding-scale per-                                                                   
barrel  credit  specifically  on  non-GVR-eligible  oil,  meaning                                                               
legacy oil, and this old oil is  limited by the floor.  All other                                                               
credits under  current law  can go below  the floor  and include:                                                               
the Net Operating Loss Credits, Per-Barrel Credits on GVR-                                                                      
eligible oil (new oil), the  Exploration Credit that is scheduled                                                               
to sunset, and  the Small Producer Credit.  All  of these credits                                                               
are being used  to reduce tax payments below the  minimum tax, he                                                               
pointed out, and  in many circumstances are being  used to reduce                                                               
tax payments to zero.                                                                                                           
                                                                                                                                
CO-CHAIR NAGEAK requested Mr. Alper to further explain that.                                                                    
                                                                                                                                
MR. ALPER replied that each one  of these is a slightly different                                                               
situation.   He posed  a scenario of  a small  producer producing                                                               
less than  50,000 barrels  a day  that is a  junior partner  in a                                                               
major oil field that pays at the  legacy rate.  In other words, a                                                               
company  that owns  a smaller  percentage of  Prudhoe Bay.   This                                                               
company's profits  would be subject  to the 4 percent  floor just                                                               
as  this company's  larger  partners  would be  paying  at the  4                                                               
percent floor.  However, this  small producer would earn a credit                                                               
of up to $12 million that could  be subtracted off the top of its                                                               
taxes.  If this company's minimum  tax was less than $12 million,                                                               
this  company would  pay the  state zero  tax.   Mr. Alper  posed                                                               
another scenario of  a small producer operating a  newer field on                                                               
the North Slope.  This company  would pay a tax on its production                                                               
tax  value and  would be  eligible for  the GVR,  which tends  to                                                               
reduce  the company's  liability, but  if the  oil price  is high                                                               
enough  the company  will have  a  tax liability.   However,  the                                                               
company's  $5-Per-Barrel Credit  can offset  the company's  taxes                                                               
all the  way down to zero  and, if it doesn't,  the company could                                                               
also be  eligible for the Small  Producer Credit.  So,  at a wide                                                               
range  of  prices  it  is  reasonable to  say  that  the  smaller                                                               
producers  with the  smaller fields  can  generally offset  their                                                               
taxes all  the way to  zero between the $5-Per-Barrel  Credit and                                                               
the Small Producer Credit.                                                                                                      
                                                                                                                                
2:37:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  noted that  industry got  a legislature                                                               
to  pass Senate  Bill 21,  which then  went to  a referendum  and                                                               
industry prevailed in the referendum.   He surmised that this may                                                               
not have  gotten much  attention in the  debate that  occurred in                                                               
August  2014  because it  is  complicated.    He inquired  as  to                                                               
whether the  "basement" issue  was vetted  by the  legislature in                                                               
committee in 2013.                                                                                                              
                                                                                                                                
MR. ALPER  responded that this  condition is not a  by-product of                                                               
Senate Bill  21, but rather  a pre-existing condition  going back                                                               
to Alaska's Clear  and Equitable Share (ACES)  and the production                                                               
profits tax (PPT) that came before  ACES.  Senate Bill 21 created                                                               
the limited  hardening of the  floor:  the legacy  producers with                                                               
the sliding-scale credit  cannot use that credit to  go below the                                                               
floor.    The  comparable  large  credit  earned  by  the  legacy                                                               
producers before 2013 was the  20 percent Capital Credit and that                                                               
could be  used, and was  used, to go down  below the floor.   The                                                               
other reality is that until 18  months ago the minimum tax was an                                                               
academic conversation.   The price of  oil had not gone  into the                                                               
territory in modern history where  the minimum tax came into play                                                               
in any material way, modern history  being since Alaska has had a                                                               
net profits.   The minimum  tax is  now suddenly relevant  and is                                                               
being  discussed in  greater  detail because  that  is where  the                                                               
state is getting its revenue  from, whereas during the referendum                                                               
debate it was not part of the conversation in any material way.                                                                 
                                                                                                                                
2:39:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON said the other  major variable that is still                                                               
not being talked about is the  lack of production over the years.                                                               
When he  was first sworn  into office 12  years ago the  price of                                                               
oil was  $30, but a major  difference from now is  that a million                                                               
barrels a day was going through the pipeline.                                                                                   
                                                                                                                                
MR. ALPER offered  his belief that Representative  Olson is right                                                               
that production  has dropped  by half during  the last  12 years.                                                               
He further  stated that $30  then is  different than $30  now and                                                               
that  the cost  of producing  those  barrels and  the tariff  for                                                               
moving them down the pipeline are  also higher than they were.  A                                                               
lot  of things  are  working  against the  state  in addition  to                                                               
reduced production.   Many of these incentives were  put in place                                                               
to do what  they could to reverse or at  least slow that decline.                                                               
The decline  has continued.   There is  geology in place  that he                                                               
cannot speak to, but there are other people who can.                                                                            
                                                                                                                                
2:41:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  recalled that the  goal when Senate  Bill 21                                                               
was passed  was to see  100,000 new  barrels of production.   She                                                               
asked  what  the  current  Revenue  Sources  Book  forecasts  for                                                             
production increase.                                                                                                            
                                                                                                                                
MR. ALPER replied he doesn't know  the numbers off the top of his                                                               
head, but said that a number  of fields are under development and                                                               
under evaluation.   He explained that DOR considers  the oil that                                                               
is currently  being produced and  adds the oil that  DOR believes                                                               
to be happening.   The department applies  probabilities and risk                                                               
factors  to  the   oil  that  is  under   development  and  under                                                               
evaluation.   The Mustang, Nuna,  and Point Thomson  projects, he                                                               
reported, are presumed to be  happening within the period studied                                                               
in DOR's  forecast.  He offered  to provide the committee  with a                                                               
comprehensive list of  the fields and projects that  are in DOR's                                                               
forecast.                                                                                                                       
                                                                                                                                
REPRESENTATIVE TARR said she would like to receive that list.                                                                   
                                                                                                                                
2:42:59 PM                                                                                                                    
                                                                                                                                
MR.  ALPER resumed  his presentation.   He  brought attention  to                                                               
slide  30, "Section  17(b):   Strengthen  the  Minimum Tax,"  and                                                               
specified that  current law  allows all credits  to go  below the                                                               
floor with the exception of  the sliding-scale per-barrel credit.                                                               
[The administration]  is seeking to  change the law under  HB 247                                                               
so that four distinct different  credits also cannot reduce taxes                                                               
below  the  floor.   The  bill  would make  it  so  that:   small                                                               
producers  would have  to pay  the  minimum tax  level; new  GVR-                                                               
eligible  fields would  pay at  the  minimum tax  level; the  Net                                                               
Operating  Loss Credits  that are  carried forward  could not  be                                                               
used to  reduce payments below  the minimum tax;  and Exploration                                                               
Credits,  if used  against liability,  could  not be  used to  go                                                               
below the minimum tax.                                                                                                          
                                                                                                                                
MR. ALPER  turned to  slide 31, "Section  17(b):   Strengthen the                                                               
Minimum  Tax."   He  advised  that  three very  different  policy                                                               
questions  are  before the  committee  and  allowed that  members                                                               
might have a different opinion  and a different desired result on                                                               
each one.   Several things are  being done with the  minimum tax,                                                               
he explained.   First, regarding  the Small Producer  Credit, the                                                               
question  being asked  is whether  everyone, not  just the  major                                                               
producers, should  pay at the  minimum tax level.   Under current                                                               
law, only the large producers  pay that floor.  Second, regarding                                                               
the Per-Taxable-Barrel Credits for  "new" oil, the question being                                                               
asked is whether the tax on  production from new fields should be                                                               
allowed to  go to zero.   The third  question is whether  a major                                                               
producer that  carries a loss  forward into the next  year should                                                               
be  able to  use that  Net Operating  Loss Credit  to reduce  its                                                               
payments below the  floor or should the company be  forced to pay                                                               
at the minimum  tax level and then continue to  carry that credit                                                               
forward into a future year when  it has more tax liability.  And,                                                               
if  it is  made so  that the  net operating  loss cannot  be used                                                               
against  minimum  tax  payments,  the question  is  whether  that                                                               
should be made retroactive to January  1, 2016, as proposed in HB                                                               
247.  Mr. Alper reported that  at least one major producer showed                                                               
a  loss for  2015 and  will  be offsetting  minimum tax  payments                                                               
beginning  this month  to  the level  of zero  by  using its  Net                                                               
Operating Loss Credit  from calendar year 2015  to offset minimum                                                               
tax payments from 2016.                                                                                                         
                                                                                                                                
2:45:43 PM                                                                                                                    
                                                                                                                                
MR.  ALPER drew  attention to  the  table on  slide 32,  "Section                                                               
17(b):  Strengthen  the Minimum Tax," to illustrate  how the GVR-                                                               
eligible per-barrel  credits [can reduce taxes  below the minimum                                                               
tax] at  a West Coast  oil price of $80.   He explained  that the                                                               
table includes two  parallel calculations of how  the minimum tax                                                               
treatment applies  under current  law to legacy  oil and  to GVR-                                                               
eligible new  oil.  At a  price of $80 and  a transportation cost                                                               
of [$10], the wellhead value (also  called the gross value at the                                                               
point of  production) is  $70.   The minimum tax  is tied  to the                                                               
gross  calculation,  not   to  the  market  price.     The  lease                                                               
expenditure cost  of $36 is  subtracted from the  wellhead value,                                                               
arriving at a  net value of $34.   If that oil is  subject to the                                                               
20 percent  Gross Value Reduction  (GVR), then 20 percent  of the                                                               
$70 gross  is $14; this $14  is then further subtracted  from the                                                               
net  value of  $34, arriving  at a  net value  after GVR  of $20.                                                               
This is where the disparity is seen:   the net value after GVR is                                                               
$34 for legacy oil  and is $20 for GVR-eligible oil.   The tax is                                                               
then calculated by taking 35 percent  of the net value after GVR;                                                               
so the tax before  credits is $11.90 on the legacy  oil and is $7                                                               
on  GVR-eligible  oil.   For  legacy  oil the  Per-Taxable-Barrel                                                               
Credit is a  sliding-scale credit; at a price of  $80 this credit                                                               
reaches its maximum of $8,  which reduces the base production tax                                                               
after credits on  the legacy oil to $3.90.   For the GVR-eligible                                                               
oil, the Per-Taxable-Barrel Credit is  $5, which reduces the base                                                               
production tax  after credits to $2.00.   At a price  of $80, the                                                               
minimum tax calculation is $2.80.   The tax of $3.90 paid on each                                                               
taxable barrel of legacy oil is  above the minimum tax.  However,                                                               
the  tax of  $2.00  paid on  the GVR-eligible  oil  is below  the                                                               
minimum tax;  this is because  under current law the  minimum tax                                                               
does  not count  for  the  GVR-eligible oil.    Under  HB 247,  a                                                               
producer  in that  circumstance would  be  forced to  pay at  the                                                               
level of $2.80.                                                                                                                 
                                                                                                                                
2:49:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON surmised  that bringing GVR-eligible oil                                                               
up to the legacy rate is the parity Mr. Alper was talking about.                                                                
                                                                                                                                
MR. ALPER  responded correct.   He pointed  out that  because the                                                               
taxes are higher, the legacy oil  is not impacted by the floor at                                                               
$80, but  the GVR-eligible oil is.   If the floor  were in place,                                                               
the GVR-eligible  oil would  be paying  $2.80, whereas  under the                                                               
current statutory rate the tax on that oil is $2.00.                                                                            
                                                                                                                                
2:49:48 PM                                                                                                                    
                                                                                                                                
MR.  ALPER resumed  his  presentation.   He  moved  to slide  33,                                                               
"Section 17(b):   Strengthen the  Minimum Tax," and did  the same                                                               
calculations at  a price of  $60.  At  this price, he  noted, the                                                               
taxable net value goes down to $14.   At a tax rate of 35 percent                                                               
the base production  tax before credits is $4.90  for legacy oil.                                                               
The full  value of  the $8  per barrel  credit is  partially lost                                                               
when applied because the tax goes  to zero.  The minimum tax then                                                               
comes into  play:  at 4  percent of the wellhead  value, which is                                                               
$50, the minimum tax is $2.00.   So, under current law at a price                                                               
of $60, the tax on legacy oil is $2.00 per barrel.  For GVR-                                                                    
eligible oil, the  net value of $14 is reduced  by the 20 percent                                                               
Gross Value Reduction, reducing the net  value to $4.00.  At a 35                                                               
percent tax rate the tax before credits is $1.40.  The $5-per-                                                                  
barrel credit reduces  that tax to zero.  So,  under current law,                                                               
GVR-eligible oil  is paying a  tax of zero.   Under HB  247, GVR-                                                               
eligible oil  would pay [a minimum  tax] at the same  rate as the                                                               
legacy oil - 4 percent of the gross or $2.00 a barrel.                                                                          
                                                                                                                                
MR.  ALPER  brought  attention   to  slide  34,  "Section  17(b):                                                               
Strengthen the  Minimum Tax," to  discuss the portion  of Section                                                               
17(b) that is related to the  Net Operating Loss (NOL) Credit and                                                               
would affect the  major producers.  This  provision would prevent                                                               
companies from applying  a Net Operating Loss  Credit against the                                                               
minimum  tax.   The  statutory definition  of a  loss  is when  a                                                               
producer's  total  lease expenditures  for  the  year exceed  the                                                               
gross  value [at  the point  of production].   In  plain English,                                                               
this is when  a producer has negative net income  based on Alaska                                                               
law.   He pointed  out that this  is for a  calendar year,  not a                                                               
fiscal  year.   At around  $50 and  below, some  Alaska producers                                                               
start experiencing operating losses.                                                                                            
                                                                                                                                
2:51:53 PM                                                                                                                    
                                                                                                                                
MR. ALPER turned  to the tables on slides  35-36, "Section 17(b):                                                               
Strengthen the  Minimum Tax,"  to review  how Net  Operating Loss                                                               
(NOL) Credits are  earned and used.  He explained  that the table                                                               
on slide  35 is a  stylized reality for  the aggregate of  all of                                                               
Alaska's producers  for calendar  year 2015.   The  table depicts                                                               
each month of the year and  how the production tax value, meaning                                                               
after  all expenses,  is calculated.   The  negative numbers  are                                                               
shown in  grey.  Those numbers  cannot really be below  zero when                                                               
calculating  them, he  explained,  but they  are calculated  when                                                               
dealing with Net Operating Loss  Credits.  This leads to negative                                                               
taxation  or tax  calculations that  would be  negative if  these                                                               
operating losses  were calculated  into the  tax.   What actually                                                               
happens is that  the minimum tax is charged and  from the minimum                                                               
tax  comes certain  credits.   The State  of Alaska's  actual tax                                                               
payments for  calendar year 2015  roughly equals the  bottom line                                                               
on slide 35 - about $187 million.   Adding up all of the negative                                                               
numbers  on the  production tax  value  line will  show that  the                                                               
companies lost  $183 million  in Alaska  last year.   So,  at the                                                               
2015  Net Operating  Loss Credit  rate of  45 percent,  this $183                                                               
million  loss  translates  into  a  Carried-Forward  Annual  Loss                                                               
Credit of $82 million.                                                                                                          
                                                                                                                                
2:53:25 PM                                                                                                                    
                                                                                                                                
MR.  ALPER moved  to  slide 36  to explain  what  happens to  the                                                               
Carried-Forward Annual  Loss Credit in  2016 if the price  of oil                                                               
goes to $40 and stays there  through December.  He noted that the                                                               
second  to last  line  on the  table is  the  application of  the                                                               
carried-forward credits.   The third  to last line should  be the                                                               
companies'  minimum  tax payment.    However,  the companies  are                                                               
subtracting  the carried-forward  credits  from  the minimum  tax                                                               
payment and paying zero tax  all the way through until September.                                                               
By September the companies have  used up all their Operating Loss                                                               
Credits and are then left with  only paying the amount that is in                                                               
the last  row of the table  for the months of  October, November,                                                               
and December - a total of about  $27 million.  So, the state only                                                               
gets the minimum  tax for the last three months  out of the year.                                                               
More importantly,  if these trends  continue, and these  are well                                                               
below  the state's  forecast,  the companies  would  show a  $1.2                                                               
billion loss  in 2016, which  at the credit  rate in play  at the                                                               
time would result in over  $400 million in Carried-Forward Annual                                                               
Loss Credits.   If these  low prices continue for  another couple                                                               
years, that's another  two years of zero tax  revenue because the                                                               
companies  would be  able to  completely offset  any minimum  tax                                                               
payments  for two  years  into  the future  until  they have  run                                                               
through  the  $400  million  in   credits  and  possibly  earning                                                               
additional credits along  the way.  Essentially,  the state would                                                               
not  start seeing  any revenue  until there  is substantial  cost                                                               
recovery.   It is being  proposed under  HB 247 that  this credit                                                               
cannot reduce  the minimum tax  payments.  Even if  the companies                                                               
are losing  money, [the administration]  wants them to pay  the 4                                                               
percent gross  tax because the  state should be getting  at least                                                               
something.  Those credits would  then be carried forward and used                                                               
in a  future year once there  was adequate recovery in  the price                                                               
of oil  and adequate  tax liability that  the companies  would be                                                               
able to offset it with their credits.                                                                                           
                                                                                                                                
2:55:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON inquired  whether the  companies are  doing                                                               
anything illegal or unethical in their calculations.                                                                            
                                                                                                                                
MR. ALPER  answered that, to  his knowledge,  they are not.   The                                                               
companies  are following  the  law and  paying  and filing  their                                                               
taxes the way Alaska's rules and regulations instruct them to.                                                                  
                                                                                                                                
REPRESENTATIVE  OLSON  remarked  that the  companies  are  paying                                                               
approximately 90  percent already and  now the state is  going to                                                               
go after the other 10 percent.                                                                                                  
                                                                                                                                
2:56:10 PM                                                                                                                    
                                                                                                                                
MR. ALPER  recommenced his presentation,  stating that  slide 37,                                                               
"Section 17(b):   Strengthen  the Minimum  Tax," talks  about the                                                               
previous two  slides.   He said the  information on  slides 35-36                                                               
shows how those operating losses  would be used to carry forward.                                                               
He reiterated that the net  operating loss for calendar year 2015                                                               
is  $183  million, this  loss  would  generate  a credit  of  $82                                                               
million,  and  this  loss  credit  would  start  offsetting  2016                                                               
minimum taxes beginning  in January.  If oil prices  were to rise                                                               
to $40 and stay at that  level through all of calendar year 2016,                                                               
[the North Slope producers] would see  a loss of over $1 billion.                                                               
That loss  would stack  up yet another  $400 million  loss credit                                                               
that would  be applied  beginning in January  2017.   The changes                                                               
proposed by HB  247 would not take the credits  away from anyone,                                                               
he  stressed.   An Operating  Loss Credit  is something  that has                                                               
value  and is  wanted to  be carried  forward.   He advised  that                                                               
there  are  other  changes  to   Operating  Loss  Credit  payback                                                               
elsewhere  in   the  bill.     He  said   [the  administration's]                                                               
expectation is that  these would be deferred,  kicked forward, to                                                               
some future  year when the  state had  more money and  higher tax                                                               
revenue  coming in  from production  tax.   Those Operating  Loss                                                               
Credits would be used then to  reduce tax payments and take money                                                               
from the state in the future when  it has money instead of in the                                                               
present when the state doesn't have money.                                                                                      
                                                                                                                                
2:58:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR recalled that  the negative scenario depicted                                                               
on slide 36  was not contemplated during  consideration of Senate                                                               
Bill 21.   She noted  she was on the  committee at that  time and                                                               
feels  that   if  this  very   low  price  environment   and  the                                                               
consequences had  been contemplated  the committee may  have done                                                               
something  differently.    She  asked  whether  there  are  other                                                               
calendar years that mimic what is being shown on slide 36.                                                                      
                                                                                                                                
MR. ALPER  replied that  he can provide  other calendar  years to                                                               
show stylized  how it worked.   In none of those  years was there                                                               
an issue  of minimum  tax.   He recalled that  there was  a price                                                               
collapse in the early months of  2009 and therefore that might be                                                               
a year to  provide the committee.  The ACES  regime was in effect                                                               
at that  time.   He stated  that these issues  are not  unique to                                                               
Senate Bill 21 and said this  is not the appropriate time to cast                                                               
dispersions at  the current  tax regime.   These are  issues that                                                               
have been  embedded in Alaska  statute since switching over  to a                                                               
net profits regime.  They happened  to have come to the forefront                                                               
now, not because  of Senate Bill 21, but because  oil prices have                                                               
collapsed to such a degree  that operating losses are starting to                                                               
be seen in the industry.                                                                                                        
                                                                                                                                
REPRESENTATIVE TARR requested Mr.  Alper to provide the committee                                                               
with [the 2009] calendar year for comparison purposes.                                                                          
                                                                                                                                
MR. ALPER agreed  to do so, and added that  he would continue his                                                               
presentation when he was next before the committee [on 2/24/16].                                                                
                                                                                                                                
[HB 247 was held over.]                                                                                                         

Document Name Date/Time Subjects
HB247 ver A.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Sectional Analysis.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Fiscal Note - FUNDCAP-OIL & GAS TAX CREDIT FUND-2-1-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Fiscal Note - DOR-TAX-2-1-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB 247 Production Tax Credits FY07-FY25 Excel Table_Figure 8-4_Fall 15 RSB.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB 247 Oil Credit Bill - Key Features 2-2-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB 247 - HSE RES DOR 1st Presentation- OG Credit Reform Bill 2-2-16.pdf HRES 2/5/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HB 247
Senate Oil & Gas Tax Credit Summary Report - December 1, 2015.pdf HRES 2/22/2016 1:00:00 PM
HSE RES 2.12.16 Professor Gunnar Knapp's ISER Rpt Comments on HB 247.pdf HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HB 247
HSE RES 2.12.16 ISER economic impacts study-preliminary conclusions.pdf HRES 2/22/2016 1:00:00 PM
HSE RES DOR Response to Representative Seaton - 1 7 16.pdf HRES 2/22/2016 1:00:00 PM
HSE RES DOR Response to Representative Seaton - 2 19 16.pdf HRES 2/22/2016 1:00:00 PM
HSE RES 2.22.16 DOR 2nd Presentation - HB247 - Fiscal Details Part 1.pdf HRES 2/22/2016 1:00:00 PM
HB 247
HSE RES DOR Response to Representative Seaton - 1 7 16.pdf HRES 2/22/2016 1:00:00 PM
HB 247
HSE RES DOR Response to Representative Seaton - 2 19 16.pdf HRES 2/22/2016 1:00:00 PM
HB 247