Legislature(2015 - 2016)BARNES 124

03/19/2016 01:00 PM RESOURCES

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as
Download Video part 1. <- Right click and save file as

Audio Topic
01:00:27 PM Start
01:00:55 PM HB247
04:00:39 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued from 3/18/16 Meeting --
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
                                                                                                                                
1:00:55 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."                                                                                           
                                                                                                                                
1:01:09 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  TALERICO   moved  to   adopt  the   proposed  committee                                                               
substitute  (CS)   for  HB  247,  Version   29-GH2609\P,  Shutts,                                                               
3/18/16, as the working document.                                                                                               
                                                                                                                                
REPRESENTATIVE JOSEPHSON objected for purposes of discussion.                                                                   
                                                                                                                                
1:01:57 PM                                                                                                                    
                                                                                                                                
GARY ZEPP,  Staff, Representative  Benjamin Nageak,  Alaska State                                                               
Legislature, on  behalf of the  co-chairs of the  House Resources                                                               
Standing Committee,  said the proposed  work draft is  the result                                                               
of 20  committee hearings.   The committee heard from  the Walker                                                               
Administration;  independent legislative  consultants; explorers,                                                               
developers,  and  producers operating  in  Alaska's  oil and  gas                                                               
industry; representatives of  support services organizations; and                                                               
the public.   These are  difficult times  for Alaska and  for the                                                               
oil  and gas  industry.   Alaska has  serious budget  problems in                                                               
light of low  oil prices.  The oil and  gas industry is operating                                                               
at losses in Alaska,  it costs more to get barrels  of oil out of                                                               
the ground  than is being  received for  the oil.   The co-chairs                                                               
recognize  Alaska's  budget  problems   and  want  to  support  a                                                               
balanced  resource  policy  that protects  investment,  maintains                                                               
production, and provides  state revenues over the  short term and                                                               
into  the future.    The right  balance  between exploration  and                                                               
production is  critical.  The  exploration success over  the next                                                               
three to five  years becomes the production for  twenty years and                                                               
into  the  future.   The  revenues  support  Alaska's  government                                                               
services.   The co-chairs requested and  received permission from                                                               
Representative Hawker to  have Ms. Rena Delbridge  assist the co-                                                               
chairs  and  their staff  in  the  technical provisions  of  this                                                               
legislation and to  assist the co-chairs and  staff in developing                                                               
the CS.   He  said Ms.  Delbridge will provide  a summary  of the                                                               
changes and a sectional analysis for the CS.                                                                                    
                                                                                                                                
1:03:50 PM                                                                                                                    
                                                                                                                                
RENA DELBRIDGE,  Staff, Representative Mike Hawker,  Alaska State                                                               
Legislature, on  behalf of the  co-chairs of the  House Resources                                                               
Standing Committee,  reviewed the summary of  changes included in                                                               
the proposed CS,  Version P.  She explained that  overall for the                                                               
North Slope, Version P would  maintain the existing fiscal system                                                               
that  was put  into place  in  2013.   Version P  would not  make                                                               
changes to the gross minimum tax or  to the tax floor.  Version P                                                               
would prevent the use of the  gross value reduction (GVR) for new                                                               
oil from increasing the size of  a loss.  Version P would provide                                                               
that statewide the state can  reimburse each eligible company per                                                               
year a  maximum of $200 million  from the oil and  gas tax credit                                                               
fund.   For Cook Inlet and  Middle Earth, Version P  would reduce                                                               
the well  lease expenditure credit  from 40 percent today,  to 30                                                               
percent in 2017, and  to 20 percent in 2018.   For Cook Inlet and                                                               
Middle  Earth,  Version  P  would   reduce  the  25  percent  net                                                               
operating loss  credit to 10  percent effective January  1, 2017.                                                               
Version  P   would  maintain  the  current   transferability  and                                                               
refundability options subject  to the annual cap  of $200 million                                                               
per company.                                                                                                                    
                                                                                                                                
MS. DELBRIDGE  explained that Version  P would also  maintain the                                                               
current interest rate  on delinquent taxes at  three points above                                                               
the  Federal Reserve  rate, which  today is  an interest  rate of                                                               
about 4 percent.  Version P  would change from simple interest to                                                               
interest  compounding quarterly  beginning  in 2017.   Version  P                                                               
would  ensure  that municipal  entities  that  are producers  are                                                               
eligible for  credits only in  proportion to the  production that                                                               
they have  that is  subject to production  taxes; the  work draft                                                               
would require them to proportion  those lease expenditures to the                                                               
taxable production.   In  case of  companies with  an outstanding                                                               
liability to  the state  related to their  oil and  gas activity,                                                               
Version  P  would  allow  the  Department  of  Revenue  (DOR)  to                                                               
withhold the  amount of that  liability from any repurchase  of a                                                               
credit certificate.   The  applicant would  be able  to authorize                                                               
the  payment of  that liability  out of  that amount  withheld so                                                               
that  DOR could  make that  payment on  behalf of  the taxpayers.                                                               
For  Cook Inlet,  Version P  would create  a legislative  working                                                               
group  to  develop  system  reform for  evaluation  by  the  full                                                               
legislature in 2017; this would  be a comprehensive review of the                                                               
entire Cook Inlet and Middle Earth fiscal systems.                                                                              
                                                                                                                                
1:06:42 PM                                                                                                                    
                                                                                                                                
MS.  DELBRIDGE reviewed  the sectional  analysis  for Version  P.                                                               
She said  Sections 1-5 provide  conforming language  that relates                                                               
to the repeal in Section 28  of a Department of Natural Resources                                                               
(DNR)  exploration  program  that applied  pre-2007  [AS  41.09];                                                               
those provisions were  also in HB 247.  She  said Section 6, page                                                               
3  of  Version P,  relates  to  interest  and provides  that  the                                                               
interest rate on  delinquent taxes remains at  the current amount                                                               
of 3 percent  [three points above the Federal  Reserve rate], but                                                               
would  be compounded  quarterly beginning  in 2017.   Section  7,                                                               
page 3 of Version P,  provides conforming language related to the                                                               
new outstanding  liability to  the state  provisions that  are in                                                               
Section  17.   Section  7  applies  to  the natural  gas  storage                                                               
facility credit so  that the new Section 17 rules  would apply to                                                               
that credit as  well.  Section 8 likewise  provides conforming to                                                               
the new outstanding  liability language; it ensures  that for the                                                               
purposes  of the  liquefied natural  gas  (LNG) storage  facility                                                               
credit, the outstanding liability language  in the new Section 17                                                               
apply.    Section   9  similarly  applies  the   new  Section  17                                                               
outstanding  liability provisions  to the  in-state oil  refinery                                                               
infrastructure expenditures  credit.  Sections 10  and 11 provide                                                               
conforming language  related to the  repeal in Section 28  of the                                                               
two Department  of Natural Resources exploration  credit programs                                                               
[in AS 38.05.180(i) and 41.09].                                                                                                 
                                                                                                                                
MS. DELBRIDGE  explained that  Section 12, page  5 of  Version P,                                                               
makes  some  of the  key  changes  related to  this  legislation.                                                               
First,  for the  area south  of 68  degrees North  latitude, this                                                               
section  reduces the  amount of  the carried-forward  annual loss                                                               
[tax credit] from 25 percent to  10 percent.  Second, lines 19-22                                                               
on  page  6  ensure  that  the  application  for  a  gross  value                                                               
reduction (GVR)  for new oil  on the North  Slope is not  used to                                                               
increase the  amount of  a loss.   In regard  to Section  13, she                                                               
noted  that  later  in this  legislation  the  qualified  capital                                                               
expenditure  (QCE)  credit  of  20   percent  in  Cook  Inlet  is                                                               
maintained, but the work draft  sunsets that credit with the rest                                                               
of the Cook Inlet regime in 2022.   The sunset of the QCE and the                                                               
well  lease  expenditure (WLE)  credits  in  Cook Inlet  in  2022                                                               
results in  a great  number of reforming  sections to  this bill.                                                               
The  current definition  of a  qualified  capital expenditure  in                                                               
many sections of  the tax statute says the definition  in the QCE                                                               
credit is  how a QCE expenditure  is defined.  So,  if the credit                                                               
is repealed  in 2022, any  place where the credits  definition is                                                               
used  means that  a new  definition must  be created  and conform                                                               
those  statutes to  that  new definition.    Section 13  provides                                                               
conforming to the  change in placement of the  QCE definition [in                                                               
Section 27] related  to the QCE [credit] repeal  [in Section 29].                                                               
Section 14 provides conforming language  to the repeal of the QCE                                                               
credit in 2022.                                                                                                                 
                                                                                                                                
1:10:41 PM                                                                                                                    
                                                                                                                                
MS.  DELBRIDGE  said Section  15,  pages  7-8  of Version  P,  is                                                               
material  in  that  in  Cook  Inlet it  reduces  the  well  lease                                                               
expenditure (WLE) credit from 40  percent to 30 percent beginning                                                               
January 1, 2017, and from 30  percent to 20 percent on January 1,                                                               
2018.  Section  15 also makes a conforming change  related to the                                                               
repeal  of  the  two  DNR exploration  credits.    Ms.  Delbridge                                                               
related her understanding that the  co-chairmen may in the future                                                               
be offering an  amendment to this section as it  was an oversight                                                               
to retain the  20 percent WLE stepdown into 2022.   She explained                                                               
that the  WLE credit is an  additional amount of incentive  for a                                                               
segment of  the work that is  already covered by the  QCE credit.                                                               
So, once  the WLE credit reaches  20 percent, it is  in effect no                                                               
different  than  the QCE  credit  at  20 percent;  the  amendment                                                               
repeal the  WLE credit once  it reaches  20 percent and  not wait                                                               
until 2022.                                                                                                                     
                                                                                                                                
MS. DELBRIDGE  noted that Section  16 is also a  material change.                                                               
For disbursements from  the oil and gas tax credit  fund when DOR                                                               
purchases  a  credit  certificate,  DOR  would  not  be  able  to                                                               
purchase  a  total  of  more  than $200  million  in  tax  credit                                                               
certificates from a  single entity per year.   She drew attention                                                               
to the  portion of Section  16 on page  8, lines 29-31,  and said                                                               
there is concern that a cap  per company on the amount of overall                                                               
credit  refunds that  a company  can  get from  the state,  could                                                               
motivate a company  to split into multiple versions  of that same                                                               
company for the purpose of  getting the cap several times instead                                                               
of  once.   This  language  protects  against such  splitting  by                                                               
ensuring that if DOR finds that  a single entity has divided into                                                               
multiple entities  for the  purpose of trying  to evade  this cap                                                               
per  company, DOR  does not  need  to pay  from this  fund.   The                                                               
language is  very similar to  existing provisions related  to the                                                               
small producer credit already in statute.                                                                                       
                                                                                                                                
1:13:22 PM                                                                                                                    
                                                                                                                                
MS.  DELBRIDGE  specified that  Section  17  is the  new  section                                                               
related to  outstanding liability.   Section 17 provides  that if                                                               
an  applicant seeking  refund from  the  state for  a tax  credit                                                               
certificate  has  an  outstanding  liability to  the  state  that                                                               
relates to the  company's oil and gas activity,  DOR may purchase                                                               
only that part of a  tax certificate that exceeds the outstanding                                                               
liability.   The effect  is that DOR  would withhold  from refund                                                               
the amount  that is  outstanding in  liability somewhere  else in                                                               
the state.   With  the taxpayer's consent,  DOR can  actually use                                                               
that  withholding to  pay off  that  liability on  behalf of  the                                                               
taxpayer.   If the  department does  that, it  is clear  in these                                                               
lines  that  that does  not  affect  the applicant's  ability  to                                                               
contest that liability.                                                                                                         
                                                                                                                                
REPRESENTATIVE  SEATON  inquired  whether  the rest  of  the  tax                                                               
credits would still remain transferable.                                                                                        
                                                                                                                                
MS.  DELBRIDGE  replied  that  this   would  only  apply  to  the                                                               
refundability.   The company  would get  refunded for  the amount                                                               
less the liability that it owes.                                                                                                
                                                                                                                                
REPRESENTATIVE  CHENAULT asked  whether that  liability would  go                                                               
just to  liability related  to state issues  or would  it include                                                               
any   liability,  such   as   a   liability  to   subcontractors,                                                               
contractors,  or  other  private   corporations  that  have  done                                                               
business with the company in question.                                                                                          
                                                                                                                                
MS. DELBRIDGE  responded it relates strictly  for the applicant's                                                               
liability  to  the  state;  if   a  company  has  an  outstanding                                                               
liability, something  that has been  assessed and not  been paid,                                                               
then  that would  apply.   She  said  she will  get  back to  the                                                               
committee as to how broad that is related to subcontractors.                                                                    
                                                                                                                                
1:15:41 PM                                                                                                                    
                                                                                                                                
MS.  DELBRIDGE resumed  her sectional  analysis.   She reiterated                                                               
that Section  17 allows DOR to  pay on behalf of  the taxpayer to                                                               
another entity  and said it  also allows the department  to enter                                                               
into contracts or  agreements with other departments  in order to                                                               
do that.   She noted  that Section 18  is conforming to  the 2022                                                               
repeal of  the QCE  and WLE  credits in Cook  Inlet.   Section 19                                                               
conforms to the  change in placement of the  QCE definition since                                                               
the QCE  credit would be repealed  in 2022.  Section  20 conforms                                                               
to the change  in placement of the QCE definition  in relation to                                                               
the QCE repeal.   Section 21, page 11, of  Version P, conforms to                                                               
the repeal of  AS 43.55.165(j) and (k) in Section  29.  These are                                                               
sections  of  statute which  include  the  QCE definition  issue;                                                               
however, they  apply to tax  years prior to 2010,  so Legislative                                                               
Legal and  Research Services recommends  they be  repealed rather                                                               
than to change  the definitions.  Section 22, page  12 of Version                                                               
P, also  conforms to the  change in placement of  QCE definition.                                                               
Sections 23  and 24, page  15 of Version  P, conform to  the 2022                                                               
repeal of the  QCE credit.  Section 25 conforms  to the change in                                                               
placement of the QCE definition related to the 2022 repeal.                                                                     
                                                                                                                                
MS. DELBRIDGE  explained that Section  26, page 16 of  Version P,                                                               
requires  municipalities that  are  producers  to allocate  their                                                               
lease expenditures  and their tax  credits between  their taxable                                                               
and exempt production.   The effect is that  a municipality would                                                               
not  receive  credits  for  production that  is  not  subject  to                                                               
production taxes.   Section 27 provides the new  definition for a                                                               
qualified capital expenditure, which  is necessary because of the                                                               
repeal  of  the  QCE  credit   where  a  capital  expenditure  is                                                               
currently  defined.    Section 28  repeals  two  DNR  exploration                                                               
credit programs.   The AS  41.09 credit  was sunset in  2007, but                                                               
remains on the  books.  The AS 38.05.180(i)  program provides the                                                               
authority for  DNR to create a  credit program, but it  was never                                                               
created  and  therefore this  is  a  good  time to  repeal  that.                                                               
Section 29 repeals  the QCE credit and the WLE  credit in January                                                               
1,  2022, and  repeals  AS 43.55.165(j)  and  (k), which  applied                                                               
before 2010.                                                                                                                    
                                                                                                                                
1:19:17 PM                                                                                                                    
                                                                                                                                
MS. DELBRIDGE  specified that Section  30, page 17 of  Version P,                                                               
creates  a  legislative working  group  that  is charged  with  a                                                               
thorough analysis  of the existing  Cook Inlet fiscal  regime for                                                               
oil and gas.  It is  tasked with recommending changes to the full                                                               
legislature  for  consideration  during the  regular  session  in                                                               
2017.  It is asked to account for  a number of provisions:  a tax                                                               
structure that looks  to the unique circumstances  related to oil                                                               
versus gas; consideration  of all phases of oil  and gas activity                                                               
from exploration to development  and production; consideration of                                                               
Alaska's   competitiveness    in   attracting    new   investors;                                                               
consideration of  the unique market  features, or lack  of market                                                               
features,  related   to  local   energy  supply;   evaluation  of                                                               
alternative  means   of  state  support  for   that  exploration,                                                               
development, and production phases that  might not be direct cash                                                               
support via credits  but may be programs  where Alaska Industrial                                                               
Development  and  Export  Authority  (AIDEA)  might  be  able  to                                                               
provide some  financing or  support; evaluation  of the  need for                                                               
public  disclosure of  some confidential  information related  to                                                               
taxpayers  and confidentiality  in  credits.   The working  group                                                               
would be  composed of  legislative membership  only and  would be                                                               
led by two  co-chairs, one appointed by the speaker  of the house                                                               
and one  by the president of  the senate.  Those  co-chairs would                                                               
determine the numbers  and needs of the working  group.  Specific                                                               
provisions  are  provided so  co-chairs  can  create an  advisory                                                               
group to  the working  group that would  include members  who are                                                               
not  legislators but  have  expertise to  bear  on the  industry,                                                               
fiscal systems, and the unique  gas supply issues related to Cook                                                               
Inlet.    The  expectation  is  that  consultants  already  under                                                               
contract  through  the  Legislative Budget  and  Audit  Committee                                                               
would be able to support this working group in its activities.                                                                  
                                                                                                                                
1:21:45 PM                                                                                                                    
                                                                                                                                
MS. DELBRIDGE  said Section  31, page 18  of Version  P, provides                                                               
applicability  language  related  to   the  new  requirements  in                                                               
Section 17  for purchasing transferrable tax  credit certificates                                                               
through the  oil and gas  tax credit  fund.  Section  32 provides                                                               
transition language  for the January  1, 2022, repeal of  the QCE                                                               
and  WLE credits.   The  effect  is to  ensure that  expenditures                                                               
incurred  before the  repeal date  are eligible  for the  credits                                                               
even after  the repeal date.   Section 33, page 19  of Version P,                                                               
provides transition language related to  the Section 29 repeal of                                                               
AS  43.55.165(j)  and  (k).     Section  34  provides  transition                                                               
language  that  would  empower  the  Department  of  Revenue  and                                                               
Department of  Natural Resources to adopt  regulations related to                                                               
this bill.   Section 35  provides transition language  related to                                                               
retroactive  regulations.   Section  36, page  20  of Version  P,                                                               
provides  for an  immediate effective  date  for the  legislative                                                               
working  group and  for the  authority of  DOR and  DNR to  write                                                               
regulations.   Section 37  provides a  delayed effective  date of                                                               
January 1,  2022, for the  repeal of the  QCE credit and  the WLE                                                               
credit; this applies to sections [13,  14, 18-25, 27, 29, 32, and                                                               
33].  Section  [38] is an effective date of  January 1, 2017, for                                                               
all other bill sections.                                                                                                        
                                                                                                                                
1:23:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON,  regarding  Section 12,  asked  what  the                                                               
effect is of  reducing the net operating loss  (NOL) credits from                                                               
25 percent to 10 percent, but then maintaining the QCE credits.                                                                 
                                                                                                                                
MS. DELBRIDGE  answered that the  three aforementioned  items are                                                               
the  three levers  to be  pulled in  Cook Inlet.   The  co-chairs                                                               
looked  hard at  what degree  those  levers could  be pulled  and                                                               
still  protect the  supply of  gas for  local consumption  and to                                                               
maintain  as much  support as  possible  for current  investments                                                               
without  entering   into  a  situation   in  which   the  state's                                                               
substantial credit  program offers incentive for  whole newcomers                                                               
to now  enter Cook Inlet  and undertake new activities  that rely                                                               
very heavily  on this  currently high level  of 65  percent state                                                               
support.   The co-chairs had  heard clearly from  the legislative                                                               
consultant, enalytica, that that 65  percent is high for what the                                                               
state may be realizing in return  for that work.  So, the attempt                                                               
was to  bring the  overall state  support down.   Right  now with                                                               
these changes after  the WLE steps down, it would  be up to about                                                               
30  percent.   The NOL  in particular  is something  that a  non-                                                               
producer, someone still  in that early development  stage, may be                                                               
looking to.  By reducing that,  the intended effect is that while                                                               
the Cook  Inlet regime  is examined  in 2017  there is  a limited                                                               
number  of newcomers  to Cook  Inlet that  come strictly  for the                                                               
attractiveness of that  credit system.  The QCE  is work related;                                                               
it  is  for lease  expenditures  that  are happening  to  develop                                                               
production and it  is very much a key supporting  credit for work                                                               
that is currently  underway.  Likewise, the WLE  credit, which is                                                               
a  super-credit for  a certain  segment of  QCE work,  has proven                                                               
very  helpful in  accomplishing the  goal of  energy security  in                                                               
Cook Inlet  and is used fairly  consistently.  So the  hope is to                                                               
stepdown  that WLE  credit while  maintaining that  QCE level  of                                                               
support  for   that  ongoing  investment  to   maintain  what  is                                                               
happening today, and to bring down that NOL lever as well.                                                                      
                                                                                                                                
REPRESENTATIVE  SEATON remarked  that he  really wants  to figure                                                               
out the interaction  because taking the net operating  loss to 10                                                               
percent sounds like  the state is not interested  in anybody else                                                               
coming in.   He said he wants  "to get a very  fine definition on                                                               
who and  what types of  companies that maintaining  the qualified                                                               
capital investment credit  relates to instead of them  using as a                                                               
net operating  loss and qualifying  that same kind  of investment                                                               
as ... the net operating loss credit."                                                                                          
                                                                                                                                
1:27:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CHENAULT clarified it is  Section 38, not 36, that                                                               
provides  an effective  date of  January 1,  2017, for  all other                                                               
bill sections [not included under Sections 36 and 37].                                                                          
                                                                                                                                
MS. DELBRIDGE confirmed  that it is a typographical  error on the                                                               
last page of the sectional analysis and she will correct it.                                                                    
                                                                                                                                
1:28:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON, in  regard to  Cook Inlet,  understood                                                               
that Version  P would  reduce the state's  outlays to  roughly 40                                                               
percent  effective  January 1,  2017,  and  30 percent  effective                                                               
January 1, 2018.                                                                                                                
                                                                                                                                
MS. DELBRIDGE requested the question be repeated.                                                                               
                                                                                                                                
REPRESENTATIVE JOSEPHSON noted the  subtraction in the credits is                                                               
40 percent effective  nine months from now and  the credits would                                                               
drop to 30 percent by January 1, 2018, from the 65 percent.                                                                     
                                                                                                                                
MS.  DELBRIDGE replied  yes,  because in  2018  the WLE  [credit]                                                               
would  have been  stepped down  to 20  percent, so  the remaining                                                               
credits available would be the 20  percent QCE and the 10 percent                                                               
net operating loss.                                                                                                             
                                                                                                                                
REPRESENTATIVE  JOSEPHSON recalled  that the  governor's original                                                               
proposal would  cut the state's  deficit by $500 million,  and by                                                               
some accounts it  could be $600 million.  He  inquired whether it                                                               
is Ms. Delbridge's  obligation to find out what  the result would                                                               
be under the CS.                                                                                                                
                                                                                                                                
MS. DELBRIDGE responded, "The fiscal  note will be something that                                                               
is forthcoming  from the  department.  We  have a  general sense,                                                               
based on the reductions of  overall support, that this would have                                                               
reductions  to  the  outlay  of state  credits  that  would  then                                                               
certainly affect the state's budget."                                                                                           
                                                                                                                                
REPRESENTATIVE  JOSEPHSON  said  he  sees some  things  that  are                                                               
interesting for  him from his  perspective, but that  the state's                                                               
problem is now  as well as 2022.   He asked whether  there is any                                                               
sense of what Version P would do to the budget.                                                                                 
                                                                                                                                
MS.  DELBRIDGE  answered   that  HB  247  as   presented  by  the                                                               
administration  had immediate  and  retroactive effective  dates.                                                               
The immediate effective  dates would have occurred  in July 2016,                                                               
which is the middle of the tax  year.  The direction from the co-                                                               
chairmen  was that  changes  should be  responsibly  made to  the                                                               
effect  of  providing  companies   ample  time  to  adjust  their                                                               
investment and spending for a  tax year, and therefore provisions                                                               
should not  take effect until the  beginning of the new  tax year                                                               
in January 2017.   That would then have the  impact of not having                                                               
immediate budgetary impacts for the state's budget this year.                                                                   
                                                                                                                                
1:31:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON,  regarding Version P, said  he does not                                                               
understand the  sequence of  making very  serious changes  to the                                                               
Cook Inlet  credit system  and then  later doing  a [legislative]                                                               
working group.                                                                                                                  
                                                                                                                                
MS.  DELBRIDGE responded  that the  co-chairs heard  clearly from                                                               
enalytica, the  legislature's consultant,  that the  current Cook                                                               
Inlet direct state support is excessive  and the state may not be                                                               
receiving benefit  proportional to its direct  investment through                                                               
the credit  system.  This is  an attempt now to  immediately curb                                                               
that  direct   state  support  while  providing   some  level  of                                                               
protection for  current investments  during the undertaking  of a                                                               
wholesale regime evaluation.  The  reason the co-chairs wanted to                                                               
establish  the [legislative]  working  group is  that they  heard                                                               
equally clearly from  the consultants that a good  regime that is                                                               
stable and predictable  and lasts 10 years is the  right thing to                                                               
do to maintain  industry's investment and interest  in Alaska and                                                               
the production that  is needed.  To establish the  kind of regime                                                               
that is going to have lasting  power of 10 or more years requires                                                               
time  and great  deliberation and  a very  serious deep  inquiry.                                                               
Doing  this  over  the  interim   with  it  coming  back  to  the                                                               
legislature  in  2017 provides  a  grace  period to  ensure  that                                                               
everything  is  being examined  top  to  bottom related  to  this                                                               
regime - gas  supply, gas security, gas rates, oil,  and the rest                                                               
of  the  world.    The  co-chairs  were  also  hesitant  to  make                                                               
wholesale regime changes  right now in a  very challenging fiscal                                                               
environment under which industry is  suffering greatly due to low                                                               
oil prices.   The existing Cook Inlet regime sunsets  in 2022 per                                                               
statute.    Having  a working  group  undertake  this  evaluation                                                               
sooner  rather  than   later  so  as  to   have  something  under                                                               
evaluation  by  the legislature  in  2017  allows time  for  this                                                               
working  group to  determine how  to phase  in or  make effective                                                               
those changes  that have the  least damaging effects  possible on                                                               
current investment and activity.                                                                                                
                                                                                                                                
1:35:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  addressed  the selection  of  credits  that                                                               
Version P is  choosing to use.  She noted  that the original bill                                                               
moved  much  more  to  the net  operating  loss  framework  while                                                               
Version  P  would  keep  several  credits.    She  requested  Ms.                                                               
Delbridge to  talk further  about why  the preference  of keeping                                                               
all three  credits rather than  consolidating into  net operating                                                               
loss as a simpler way to address that.                                                                                          
                                                                                                                                
MS. DELBRIDGE  answered that  the net  operating loss  concept as                                                               
kept in the original version of  HB 247 would sort of mirror what                                                               
is in existence on the North  Slope.  However, on the North Slope                                                               
there is  also a tax of  substance and the net  operating loss is                                                               
designed to be  equivalent to that same production tax.   In Cook                                                               
Inlet there  is very  little to no  production tax,  although the                                                               
state receives benefit via royalties  and economic gains of jobs.                                                               
There are certainly companies that may  not be in a loss position                                                               
necessarily in  Cook Inlet  should oil  prices increase  a little                                                               
bit,  but that  may  still need  to  draw on  a  degree of  state                                                               
support to  continue building  their business  in Cook  Inlet and                                                               
continue their investment.   So, maintaining that level  of a QCE                                                               
credit that  supports that capital investment  and continues work                                                               
underway  seemed  like a  reasonable  route  forward to  the  co-                                                               
chairs.  Once a Cook  Inlet regime is established, understandably                                                               
there may  be a  tax and  maybe a  proportional loss  provided as                                                               
well.                                                                                                                           
                                                                                                                                
1:37:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON,  relative to the  [legislative] working                                                               
group, asked whether  the intent in Version P  is that provisions                                                               
such as  the January 1, 2017,  stepdown of the WLE  [credit], for                                                               
example, could be  undone "if the facts would take  us where they                                                               
lead us"  and that  the credit  system as it  exists may  be made                                                               
fully whole if  the case is made  that it should be.   He said he                                                               
is saying  this in the context  where in 2008 the  state paid $53                                                               
million and  this year it is  $650 million, which he  thinks is a                                                               
1,200  percent  increase.    He further  asked  whether  that  is                                                               
sustainable.  Responding to Ms.  Delbridge, he clarified that for                                                               
the term  "fully whole" his is  meaning that if this  bill became                                                               
law, soon into  the Thirtieth Alaska State  Legislature this work                                                               
would be undone and the WLE be made 40 percent again.                                                                           
                                                                                                                                
MS.  DELBRIDGE replied  the  co-chairs felt  that  while a  whole                                                               
regime change is  being undertaken it is  appropriate to stepdown                                                               
the WLE  [credit] in particular.   The  WLE [credit] is  an extra                                                               
benefit for  a segment of work  that came about through  the 2010                                                               
Cook Inlet  Recovery Act.   It was  in a sense  a fire-alarm-pull                                                               
emergency  measure related  to rolling  brownouts and  a fear  of                                                               
serious gas  supply shortages and  the prospect of  importing LNG                                                               
to Southcentral.   It  accomplished the  desired effect  and Cook                                                               
Inlet has  pulled out  of the situation  somewhat with  gas under                                                               
contract mostly for the next 10  years or so.  The co-chairs were                                                               
equally  clear that  they  do not  intend to  pull  the rug  from                                                               
underneath businesses  that are doing  work in exchange  for that                                                               
benefit.   Stepping it down was  therefore a logical thing  to do                                                               
through that interim  period.  Other than to present  the plan to                                                               
the   legislature  in   2017  regular   session,  there   are  no                                                               
requirements in the  working group's direction as  to whether its                                                               
newly developed  regime should  not take  effect until  2022 when                                                               
the  current  regime  sunsets,  whether  it  should  take  effect                                                               
immediately for some reason, or  whether it should also phase in.                                                               
On  the North  Slope, Senate  Bill  21 [passed  in 2013,  Twenty-                                                               
Eighth Alaska  State Legislature] had  a provision for sort  of a                                                               
two-year interim  period.   Transitional investment  credits were                                                               
also  offered for  the production  profits tax  (PPT) [passed  in                                                               
2006, Twenty-Fourth  Alaska State Legislature] to  Alaska's Clear                                                               
and Equitable  Share (ACES) [passed in  2007, Twenty-Fifth Alaska                                                               
State Legislature].   So, it  is not uncommon to  phase something                                                               
in or  out.  This  starts to stepdown that  support, acknowledges                                                               
that the  WLE [credit] has  worked to  a large degree  related to                                                               
energy  security  and was  an  amplified  benefit for  a  special                                                               
reason that can start being stepped down.                                                                                       
                                                                                                                                
1:40:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  noted that Section  16 of Version  P would                                                               
limit the repurchase of tax  credits to $200 million [per company                                                               
per year], while the limit in  the original bill was $25 million.                                                               
He questioned  whether that number  is at all  effective, whether                                                               
it is  any limit at  all.  For example,  he pointed out,  four or                                                               
more players on all of the  major fields would bring the total to                                                               
$800 million per year.                                                                                                          
                                                                                                                                
MS. DELBRIDGE suggested this question  be posed to enalytica, but                                                               
said the  thinking of the  co-chairs was  that $200 million  is a                                                               
generous limit and rather than  being an immediate-year budgetary                                                               
protection it is intended to  cap the state's potential liability                                                               
against an outlier  development, a development that is  on a much                                                               
greater scale  than the  work seen to  date.   Multiple companies                                                               
could  certainly be  participating, it  would not  be capped  per                                                               
project.   The  $25 million  cap was  the starting  point brought                                                               
forward  by the  Department  of Revenue  in the  administration's                                                               
bill.   She believed the  number to be  similar to the  number in                                                               
the  PPT era,  adjusted for  inflation maybe  $40 million  today;                                                               
Version P  says $200 million.   For  as many partners  as someone                                                               
brings in to a field, she  continued, those partners would all be                                                               
needing to spend a great deal of  money in order to receive up to                                                               
$200 million  of a net  operating loss, and each  partner brought                                                               
in  would further  dilute  the original  company's  reward.   So,                                                               
while it is a possibility that  eight players could be brought in                                                               
so that all  eight players can get $200 million  apiece, it might                                                               
be hard to  truly identify a situation where a  partner will feel                                                               
that it  is in its interest  to bring in that  many partners that                                                               
then reduces its reward in the end.                                                                                             
                                                                                                                                
REPRESENTATIVE SEATON  pointed out that the  current major fields                                                               
all have  more than  four partners.   He said  he would  like the                                                               
committee to look at the aforementioned as it goes forward.                                                                     
                                                                                                                                
1:44:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON noted that Section  27 would repeal the QCE                                                               
credit and  inquired why qualified capital  expenditures would be                                                               
redefined if they are no longer being used for credits.                                                                         
                                                                                                                                
MS.   DELBRIDGE  replied   that  the   term  "qualified   capital                                                               
expenditure"  is used  in conjunction  with other  tax provisions                                                               
not  related  to the  credit.    For  other tax  purposes  Alaska                                                               
statutes  say that  certain things  must be  a qualified  capital                                                               
expenditure.   Instead of defining it  on its own, the  bill says                                                               
that  means what  it  means  in the  credit.    So, if  qualified                                                               
capital expenditure  no longer  exists defined  in the  credit, a                                                               
definition  of what  that is  needs to  be supplied  elsewhere in                                                               
statute so  that it can continue  to apply to the  other sections                                                               
of  tax statute.   Responding  further to  Representative Seaton,                                                               
she  agreed to  provide the  committee  with a  listing of  those                                                               
other places in statute.                                                                                                        
                                                                                                                                
1:45:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON commented  that Senate  Bill 21  looked at                                                               
credit reform  on the  North Slope  while [HB  247] looks  to the                                                               
Cook  Inlet.   Neither the  administration's bill  nor Version  P                                                               
address  other credits  that  are expiring  soon,  he noted,  and                                                               
those  expiring credits  are going  to save  the state  money and                                                               
reduce cash-back  credits.  Regarding the  proposed [legislative]                                                               
working  group,  he said  the  target  audience is  actually  the                                                               
legislature   because  of   the  state's   deficit  and   so  the                                                               
legislature is who the target audience  has to be.  He agreed the                                                               
working  group should  be done  during  the coming  interim.   He                                                               
requested that  Mr. Alper be  able to provide an  initial comment                                                               
on Version P later today.                                                                                                       
                                                                                                                                
1:47:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  addressed the  "very generous"  $200 million                                                               
limit and  the possibility of  it encouraging  unwanted behavior.                                                               
She recalled  that a criticism  of the  ACES regime was  that the                                                               
capital credits  were not linked  directly to production  and led                                                               
to spending that  did not result in new oil  production.  In this                                                               
current low  price environment, she  continued, it has  been said                                                               
that  this system  is still  encouraging activity  and she  would                                                               
like to know  why [the co-chair's] would  feel comfortable saying                                                               
that  this would  not occur  should  prices reach  $50-$60 and  a                                                               
company has not yet reached a profit point.                                                                                     
                                                                                                                                
MS. DELBRIDGE  understood that  Representative Tarr's  concern is                                                               
about a situation  of not a rock bottom price  but not quite good                                                               
profitability yet, and what would  prohibit someone from spending                                                               
a lot of money to hit that $200 million cap on production.                                                                      
                                                                                                                                
1:48:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  pointed out that  [the cap] is  not directly                                                               
linked to  production, but to  overall spending.   She questioned                                                               
whether it  is being ensured that  it is not so  generous that it                                                               
encourages spending that is not  directly linked to production, a                                                               
criticism of  ACES, and the  state would then have  a substantial                                                               
liability related  to that.   She asked whether this  was thought                                                               
about  when $200  million was  recommended as  the right  number.                                                               
Responding to Ms.  Delbridge, she confirmed that  her question is                                                               
referring to what used to be called "the gold plating."                                                                         
                                                                                                                                
MS. DELBRIDGE responded  by looking at what the  $200 million cap                                                               
would actually  apply to.  It  only applies to refunds  per year.                                                               
A legacy producer  with more than 50,000 barrels  of production a                                                               
day does not  get any refunds, so this producer  can be taken off                                                               
the table.   That leaves  a small producer  with a loss  that can                                                               
get a refund  or a newcomer without any  existing production that                                                               
is developing something.  A  company's continued expenditure on a                                                               
development might  not be directly  related to the  current price                                                               
of  oil,  but   to  the  company's  expectation   of  profit  and                                                               
expectation of oil price farther out  into the future.  There did                                                               
not seem to be a real  concern that there would be amplified gold                                                               
plating because  this credit  limit is quite  high and,  based on                                                               
what is  seen in  the Revenue  Sources Book,  most likely  is not                                                             
necessarily  something that  is being  reached anyway.   To  have                                                               
this situation occur it would have  to be assumed that a company,                                                               
because there is now a limit  that it has not reached yet anyway,                                                               
would be  spending more.  She  urged that this question  be posed                                                               
to enalytica.                                                                                                                   
                                                                                                                                
1:51:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR, regarding  North Slope  [legacy producers],                                                               
noted that even though the state  is not making a cash outlay, it                                                               
is essentially  not getting  money.  She  posited that  this does                                                               
impact the overall budget picture  because those are dollars that                                                               
would otherwise  be paid  as production tax.   She  surmised that                                                               
for the North Slope [the  co-chairs] feel comfortable that [a cap                                                               
of $200 million] would not encourage gold plating.                                                                              
                                                                                                                                
MS. DELBRIDGE  answered that  that was not  a concern  because in                                                               
such an  instance the company is  at a loss position  already, so                                                               
it  seemed  difficult to  construe  of  a company  interested  in                                                               
driving itself deeper into a loss  situation in order to get more                                                               
of a  credit that is going  to be applied against  its future tax                                                               
liability.   There are rules  related to  how a company  can take                                                               
the  35  percent  net  operating loss  deduction  and  for  what.                                                               
Maintaining that status  quo of a company's  ability to calculate                                                               
that loss  and to  carry it  forward was  something that  the co-                                                               
chairs wanted to maintain.                                                                                                      
                                                                                                                                
1:52:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON on this  same subject, recalled Director                                                               
Alper using Armstrong  Oil & Gas Inc.'s Pikka unit  as an example                                                               
of a  75,000 barrel model  where in  the out-years the  people of                                                               
the state  would benefit if it  all came to fruition,  but in the                                                               
near term the state  would be out well over $1  billion.  In this                                                               
case, he maintained, the state  would own it metaphorically - the                                                               
state would become  attached to this field and  burdened by that.                                                               
While the  state could tighten  its belt and try  getting through                                                               
those  tough years  to the  golden egg  at the  end, it  would be                                                               
tough  to do.   He  expressed  his concern  that Armstrong  might                                                               
delay  its development  slightly in  order to  benefit from  $200                                                               
million a year.                                                                                                                 
                                                                                                                                
MS. DELBRIDGE  replied that generally  speaking industry  that is                                                               
invested far  more than the  state's contribution  in development                                                               
is going to  want to get production as soon  as possible to start                                                               
realizing that  benefit.  The  $200 million would certainly  be a                                                               
cap against what is the state's  exposure related to that kind of                                                               
a development.  She said she  believes there was not real concern                                                               
that a  company might  delay development to  be able  to continue                                                               
incurring a loss  when it had production in sight  that was going                                                               
to  help  start the  returns  on  its  own investment,  which  is                                                               
multiple times  what the state's  investment would have  been, in                                                               
cashing out a loss.                                                                                                             
                                                                                                                                
1:55:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON noted  the governor's  proposal [of  a $25                                                               
million cap] was much less than  $200 million.  He asked why $200                                                               
was chosen and not $175 or $150.                                                                                                
                                                                                                                                
MS.  DELBRIDGE responded  there was  much discussion  about this.                                                               
Ultimately the co-chairs' approach was  not to set some arbitrary                                                               
limit that  would potentially have impact  on today's activities,                                                               
but simply  to protect against  an outlier, something that  is so                                                               
much  bigger than  what is  known as  regular business  today and                                                               
could be  beyond the reach  of the state to  continue supporting.                                                               
The $200  million was not meant  to curtail what anyone  today is                                                               
able to  receive in  that refundability,  but to  protect against                                                               
outliers.  The  $200 million is a generous cap,  but the approach                                                               
is  from a  resource  development perspective  as  opposed to  an                                                               
immediate deep cut related to the state's budget.                                                                               
                                                                                                                                
1:56:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR inquired  whether  the proposed  legislative                                                               
working  group  is  envisioned   to  be  bi-partisan,  given  the                                                               
language does not designate seats for members of the minority.                                                                  
                                                                                                                                
MS.  DELBRIDGE offered  her belief  that an  assumption was  made                                                               
that  the  two  chairs  of  this  working  group  would  be  very                                                               
responsible that  way and be  reflective of the legislature  as a                                                               
body, which would account for  respecting that there are majority                                                               
and  minority members  in the  legislature.   This  was a  fairly                                                               
broad  starting point  to  provide  the two  co-chairs  a lot  of                                                               
discretion  as to  numbers and  things like  that.   She imagined                                                               
that  the  co-chairs  would entertain  an  amendment  being  more                                                               
explicit about the membership.                                                                                                  
                                                                                                                                
CO-CHAIR  NAGEAK  added  that there  was  deliberation  regarding                                                               
including as many people as possible.                                                                                           
                                                                                                                                
1:58:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON,  regarding the legislative  working group,                                                               
commented  that there  will be  some select  legislators who  are                                                               
going to  work on this  when the legislature has  committees that                                                               
have this  as their  responsibility.   There are  committees that                                                               
are  already formed  that have  people who  have been  working on                                                               
this  issue for  months.    There is  the  possibility of  having                                                               
legislators who  are just  starting to  get up  to speed  on this                                                               
issue and  it seems  like it  might be  a committee  process that                                                               
might need to be  there as well.  He urged that  at some point it                                                               
needs to  be determined why  the committee structure  cannot work                                                               
on the problem in the way that is being proposed.                                                                               
                                                                                                                                
CO-CHAIR  NAGEAK replied  it is  always nice  to get  other ideas                                                               
from people not related to  this subject, but said the suggestion                                                               
will be taken under consideration.                                                                                              
                                                                                                                                
1:59:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR NAGEAK recognized Mr. Ken Alper.                                                                                       
                                                                                                                                
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
explained he is here today to  answer questions [on behalf of the                                                               
governor].  He  said the Department of Revenue  will be providing                                                               
a structured presentation on 3/21/16.                                                                                           
                                                                                                                                
1:59:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON understood that  in developing the proposed                                                               
CS the co-chairs asked questions of  Mr. Alper.  He requested Mr.                                                               
Alper to provide an initial reaction to the proposed CS.                                                                        
                                                                                                                                
MR. ALPER  clarified he  is not before  the committee  as himself                                                               
but  as  a  representative  of  the  administration  and  to  his                                                               
knowledge  the  governor  has not  seen  the  proposed  committee                                                               
substitute.   He explained that [DOR]  needs to speak to  its own                                                               
superiors before  providing any formal  reaction.  He  noted that                                                               
the  administration's  bill had  four  sets  of things  that  the                                                               
administration was looking  to change.  One related  to the North                                                               
Slope regime  and certain limitations on  repurchase, one related                                                               
to the  Cook Inlet regime,  one related  to the minimum  tax, and                                                               
then  a  number  of  miscellaneous provisions.    Therefore,  any                                                               
reaction he might have is going  to be somewhat different in that                                                               
the elements  of the bill  have been capped or  modified somewhat                                                               
differently related to the four  different themes.  Regarding the                                                               
North  Slope   side,  he  said  he   appreciates  the  co-chairs'                                                               
determination to maintain the core  provisions of Senate Bill 21.                                                               
Senate Bill 21 was very much of  a North Slope tax change and was                                                               
protected and defended through the  referendum process, and there                                                               
was limited  desire to make  those changes.   He further  said he                                                               
appreciates the  maintenance of the  gross value  reduction (GVR)                                                               
and  net  operating loss  comingling  issue  that Mr.  Mayer  [of                                                               
enalytica]  referred   to  as   something  of   an  unanticipated                                                               
circumstance and that will maintain value.                                                                                      
                                                                                                                                
MR.  ALPER said  he  has some  concern  with the  use  of a  $200                                                               
million per  company per year  limit.   Addressing Representative                                                               
Seaton's concern about the potential  for this being multipliable                                                               
through multiple partners  in the same project,  he recalled that                                                               
[during the committee's 1:10 p.m.  meeting on 3/7/16] he provided                                                               
a  life  cycle  analysis  of something  comparable  to  what  the                                                               
Armstrong project  [Pikka Unit] would  look like.   This analysis                                                               
showed  the state's  credits peaking  at about  $800 million  per                                                               
year.  With a couple of partners  that does not make that much of                                                               
a material difference  in a $200 million limit.   Yesterday, upon                                                               
receiving a preview of Version  P from the co-chairs, he reviewed                                                               
historic  records  to see  where  that  sort  of limit  had  been                                                               
approached in  the past and  found one  instance in a  prior year                                                               
where  a single  company received  more  than $200  million in  a                                                               
single tax credit  refund.  He therefore expressed  his hope that                                                               
the committee might consider something of an in-between number.                                                                 
                                                                                                                                
2:02:32 PM                                                                                                                    
                                                                                                                                
MR.  ALPER,  in  regard  to  the Cook  Inlet  side,  offered  his                                                               
appreciation for  the desire  to phase  things in.   He  said the                                                               
administration was  looking for  a much more  immediate effective                                                               
date with two  major changes.  The administration  was looking to                                                               
go from a level of 65 percent at  max to 25 percent.  [Version P]                                                               
would go  to a 30  percent level and  would provide about  an 18-                                                               
month delay in getting to that  30 percent level, but that is not                                                               
a  tremendous hurdle.   In  regard to  members earlier  questions                                                               
about  what  the difference  is  between  offering a  25  percent                                                               
operating  loss versus  a 30  percent combo-credit  that includes                                                               
the  capital, he  said the  main difference  has to  do with  who                                                               
would be  benefitting from it.   Specifically, the administration                                                               
was  looking  to reduce  to  zero  any  benefit through  cash  to                                                               
producers that  were in  production earning  a profit  not paying                                                               
taxes  due to  the  tax  cap but  under  current  law were  still                                                               
eligible  to  receive  the well  lease  expenditure  and  capital                                                               
credits.    [Under Version  P],  those  sorts of  entities  would                                                               
continue to be able to earn  credits at the 20 percent level even                                                               
if profitable and  not paying taxes.  In his  opinion that is the                                                               
primary difference  between the  two different structures,  the 5                                                               
percent difference between the 25 and 30 being less material.                                                                   
                                                                                                                                
MR. ALPER said the administration  came before the committee with                                                               
changes  to  the minimum  tax  and  given  that those  have  been                                                               
eliminated wholesale from Version P there  is really not a lot to                                                               
comment on.   He added he does think there  is a very substantial                                                               
difference between  the conversation over  going between 4  and 5                                                               
[percent], which  did in  many ways speak  to core  provisions of                                                               
Senate Bill  21, and certain hardening  of the floor issues.   If                                                               
he were  to try to  debate and  pushback, he would  personally be                                                               
pushing back  on the  hardening provisions, but  he does  not yet                                                               
have his direction from above.                                                                                                  
                                                                                                                                
MR. ALPER,  regarding the  miscellaneous provisions,  offered his                                                               
belief that Version P does a  very good job of preserving some of                                                               
the smaller  less material issues that  the administration raised                                                               
as  technical issues  that were  discovered  in current  statute,                                                               
such  as  the municipal  credit  pro  rata  issue and  the  other                                                               
liability to the  state issue.  Stating his  belief that compound                                                               
interest was  an oversight  in the  last committee  substitute of                                                               
Senate Bill  21 when it  was in  the House Finance  Committee, he                                                               
offered  his   appreciation  for  the  restoration   of  compound                                                               
interest, but said  he personally believes the rate  is still too                                                               
low.  Alaska is entering a  world where state government is going                                                               
to be operating on the earnings  from the state's savings.  There                                                               
is an opportunity  cost to that, he pointed out,  and an interest                                                               
rate  tied more  closely to  opportunity cost  is an  appropriate                                                               
mechanism.  He said he will provide more details on 3/21/16.                                                                    
                                                                                                                                
2:05:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  understood it would be  illegal for Mr.                                                               
Alper  to tell  the committee  who  the single  company was  that                                                               
received over $200 million [in a single tax credit refund].                                                                     
                                                                                                                                
MR. ALPER replied correct.                                                                                                      
                                                                                                                                
REPRESENTATIVE JOSEPHSON said his sense  is that the $500 million                                                               
in savings  might be reduced  in the  coming fiscal year  to less                                                               
than  $100  million.    In  that event,  he  surmised,  the  only                                                               
comprehensive fiscal plan that he  has seen, the governor's plan,                                                               
does not  balance and  something would have  to change  about the                                                               
governor's change.                                                                                                              
                                                                                                                                
MR.  ALPER  responded  that the  comprehensive  fiscal  plan  the                                                               
governor brought to  the legislature had nine  different bills as                                                               
well  as certain  expectations about  the use  of savings  in the                                                               
future, and  it did not get  to balance until 2019.   [Version P]                                                               
would certainly be a rollback  from that balancing point and will                                                               
require other  measures.  Other  caveats are that all  nine bills                                                               
do not  seem to be  moving this year.   Nothing that DOR  will be                                                               
providing  the  legislature  and  the  public  a  spring  revenue                                                               
forecast update  on 3/21/16, he said  the other issue is  that it                                                               
will  be seen  that the  state has  less money  than was  thought                                                               
because the  price of  oil is  lower than  was expected  when the                                                               
update was done  in December.  There  is going to be  a number of                                                               
updates  to  the  bottom  line  and how  that  might  inform  the                                                               
discussion  for how  to  balance  the budget  in  years to  come.                                                               
Regarding the total  fiscal impact of this bill, he  said he does                                                               
not want to get into  numbers prematurely because that is ongoing                                                               
work.  The  $500 million that DOR suggested as  an initial impact                                                               
of HB 247  was an initial year number, it  decreased in the years                                                               
going forward simply  because of DOR's limited  knowledge of what                                                               
the credit spend  is going to be two, three,  and four years from                                                               
now.   The department  does not know  and cannot  predict company                                                               
behavior, the department  only knows what the  companies tell it.                                                               
That baseline  number itself is going  to be changing due  to the                                                               
forthcoming  spring forecast  update.   Of  the  number that  DOR                                                               
brought before  the committee,  about $100  [million] was  on the                                                               
revenue side related  to the minimum tax, and  he can comfortably                                                               
tell the  committee that the  new number  is zero.   He confirmed                                                               
that the  other $400 million,  which is the savings  from reduced                                                               
or  deferred  credit payment,  is  going  to be  a  substantially                                                               
smaller number.                                                                                                                 
                                                                                                                                
2:08:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR noted that Version  P has no provisions about                                                               
confidentiality or sharing of information,  and asked whether Mr.                                                               
Alper has  an initial reaction to  that.  She said  the committee                                                               
has heard that  this might be difficult because  the structure of                                                               
HB 247  relied more  on the  net operating  loss credit  and what                                                               
that might tell about the  entire company profile.  Given Version                                                               
P would maintain  the QCE and WLE credits, she  surmised it would                                                               
be easier, then, to get at that confidentiality.                                                                                
                                                                                                                                
MR. ALPER concurred  that Version P removes the  provision in the                                                               
governor's  original bill  that  would have  made public  certain                                                               
information  about which  companies receive  tax credits  and how                                                               
much.   He  shared that  DOR  was concerned  that in  a world  of                                                               
almost entirely net operating losses  the reporting of the amount                                                               
of a net  operating loss credit would  effectively enable someone                                                               
to back-in to the size of  a company's loss, which is currently a                                                               
taxpayer confidential  number.   Version P  would have  a broader                                                               
mix  of credits  remaining,  possibly  ameliorating that  problem                                                               
somewhat.  He suggested that  Ms. Delbridge might have additional                                                               
insight  into what  the thinking  might  be in  regard to  future                                                               
potential language on the confidentiality  issue.  He pointed out                                                               
that  Version P  also removes  the original  bill's data  sharing                                                               
provision relating  to the Department of  Natural Resources (DNR)                                                               
and the exploration and seismic  data.  He said his understanding                                                               
of why is because some of  that authority remains in the existing                                                               
AS 43.55.023(a), which is no  longer being repealed.  However, he                                                               
qualified,  he does  not  fully understand  the  details of  that                                                               
since he has not yet spent that much time with Version P.                                                                       
                                                                                                                                
2:10:24 PM                                                                                                                    
                                                                                                                                
MS. DELBRIDGE  confirmed that the sharing  of certain information                                                               
about companies  that are  receiving credits  is not  included in                                                               
Version P.  She said  there were concerns about whether requiring                                                               
a taxpayer to waive confidentiality  that is essentially provided                                                               
by  the   federal  and  the   state  constitutions   had  broader                                                               
implications; it certainly concerned  the taxpayers a great deal.                                                               
The co-chairs acknowledge that the  net operating loss (NOL) is a                                                               
greater concern,  as was stated by  Mr. Alper.  The  NOL is still                                                               
there on the  North Slope as the sole credit  available.  In that                                                               
instance  there  would  always   be  those  concerns  related  to                                                               
confidential information and what Mr.  Alper described as the way                                                               
for  someone to  back-in to  a company's  proprietary information                                                               
related to disclosure of the NOL.   In Cook Inlet the NOL remains                                                               
but is decreased, and the  well lease expenditure [credit] would,                                                               
via a forthcoming amendment from the  co-chairs, be gone in a few                                                               
years.   The qualified capital expenditure  [credit] would remain                                                               
and certainly that  is one credit remaining to  which someone may                                                               
want  to look.    In  regard to  the  significant  list of  other                                                               
credits that  will sunset in  statute this year  through inaction                                                               
to  renew them  rather than  through  this bill,  she said  those                                                               
certainly were very targeted and  some very generous, and without                                                               
those  in  place there  may  be  less  of  a need  to  understand                                                               
precisely what in a public forum.                                                                                               
                                                                                                                                
2:12:13 PM                                                                                                                    
                                                                                                                                
MS. DELBRIDGE  noted that in  regard to data  sharing provisions,                                                               
the  30-40 percent  alternative  credit  for exploration  expires                                                               
this year for both the North  Slope and Cook Inlet, but continues                                                               
until 2022 in  the Middle Earth.  Use of  that significant credit                                                               
has resulted in data sharing  for exploration and seismic work to                                                               
DNR.  As Mr. Alper  testified, the discontinuation of that credit                                                               
drove the desire  to backfill some of that with  data sharing via                                                               
other  credits.   This was  discussed at  length.   The qualified                                                               
capital expenditure  (QCE) credit and the  well lease expenditure                                                               
(WLE) credit both have two parts to  them.  The first part is for                                                               
lease expenditure  work and  the second  part is  for exploration                                                               
and  seismic.   Explorers applying  for those  two credits  would                                                               
still be  incumbent to  abide by the  data sharing  provisions in                                                               
statute in  AS 43.55.025(f)(2),  the data sharing  provisions for                                                               
the  alternative   credit  for  exploration.     Current  statute                                                               
provides  that for  exploration  and seismic  work  a company  is                                                               
still subject to  that data sharing, there would  still be credit                                                               
incentives  that through  the statute  "subs" directly  relate to                                                               
exploration and  seismic.   If fewer people  are doing  this work                                                               
and  getting credits  for it  because of  the sunset  of the  big                                                               
credit,  the alternative  exploration  credit, there  might be  a                                                               
reduction  in that  data.   The Alaska  Oil and  Gas Conservation                                                               
Commission  (AOGCC) receives  data from  companies for  producing                                                               
wells  and  well developments  on  existing  leases that  is  not                                                               
exploration and seismic.   Most of the data  is publically posted                                                               
on  AOGCC's website  within  30  or 60  days,  she believed,  and                                                               
extensive information  is also available  on AOGCC's  website for                                                               
the non-explorer  seismic.   Because AOGCC  does not  have duties                                                               
and responsibilities related to seismic  activity it does not get                                                               
the seismic data.                                                                                                               
                                                                                                                                
2:14:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON agreed that  Section 30 probably needs some                                                               
more detailing done  to it.  He inquired whether  there should be                                                               
a  review of  repealing the  Oil and  Gas Competitiveness  Review                                                               
Board that is currently in place.                                                                                               
                                                                                                                                
MS.  DELBRIDGE  answered that  the  Oil  and Gas  Competitiveness                                                               
Review Board has multiple missions,  one being the ongoing review                                                               
of the  state's competitiveness on  the North Slope regime.   She                                                               
said it  is certainly  up to the  committee to  determine whether                                                               
the value of  that is ongoing.  This board  was also specifically                                                               
tasked with  considering the  Cook Inlet regime.   In  looking at                                                               
this there  was a desire  to be more immediate  and legislatively                                                               
focused  as to  a  2017  examination of  the  Cook Inlet  regime.                                                               
Therefore  the  review  board's  task   for  Cook  Inlet  may  be                                                               
accomplished through the [legislative]  working group proposed in                                                               
Version P.   The review  board's big mission related  to Alaska's                                                               
competitiveness  with  jurisdictions  around the  world  for  big                                                               
investment dollars on the North Slope is separate from that.                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  stated that  in his questioning  he forgot                                                               
that he wanted it to be  narrower about leaving the duty to study                                                               
Cook Inlet  and for the  board to do  the global review  which he                                                               
knows  is necessary.    He  asked Mr.  Alper  whether the  review                                                               
board's task  on the Cook  Inlet should  be suspended and  to let                                                               
the  legislature review  it because  the target  audience is  the                                                               
legislature given it is an important policy call.                                                                               
                                                                                                                                
MR. ALPER qualified  he is speaking off the cuff,  but that there                                                               
is a fundamental difference between  the North Slope and the Cook                                                               
Inlet.   The primary mission  of the Cook Inlet  has historically                                                               
been to provide energy for  Alaskans, although there is certainly                                                               
an export component  and an industrial component.   [The mission]                                                               
of the North Slope is being  Alaska's big revenue generator.  So,                                                               
there  are different  missions in  trying to  attract investment.                                                               
The existing Oil and Gas  Competitiveness Review Board is in many                                                               
ways  kicked to  the administration,  it  is staffed  out of  the                                                               
Department of Revenue and DOR  works in researching and reporting                                                               
with  legislative entities,  whereas  the [proposed  legislative]                                                               
working  group would  very much  be a  legislative-led committee.                                                               
He said  he does not  know that there  is necessarily a  need for                                                               
two, maybe  just a need  for consensus  over how to  structure it                                                               
and what  is the appropriate  forum in which the  analysis should                                                               
be done.   He said he is more  than happy to not take  on a major                                                               
new task inside the Tax Division in an era of major budget cuts.                                                                
                                                                                                                                
2:18:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON, relative  to the [proposed legislative]                                                               
working group, recalled that Senator  Giessel had a working group                                                               
that  met about  six times,  generally three  hours per  meeting.                                                               
The House  Resources Standing  Committee has met  20 times.   The                                                               
committee also met  in Nikiski around June 16  [2015] for several                                                               
hours, at which  Mr. Alper and the commissioner  testified as did                                                               
the  legislature's   consultant,  enalytica.     Senator  Giessel                                                               
invited basically anyone  from industry who wanted  to appear and                                                               
they did.   A large report was written.   As someone who believes                                                               
in scholarship,  he said he believes  it is great to  keep asking                                                               
questions and be searching.   He inquired whether the proposed CS                                                               
was designed to  transition the WLE [credit] slower  because of a                                                               
belief  that   the  working  group   was  essential   given  this                                                               
background where there  is now 900 pages of  documents and scores                                                               
of hours of hearings.                                                                                                           
                                                                                                                                
MS.  DELBRIDGE replied  that to  sunset the  WLE [credit]  slower                                                               
would  essentially  mean to  withdraw  it  completely now.    The                                                               
proposed CS  would stepdown the  WLE [credit] beginning  in 2017,                                                               
reducing it from  40 percent to 30 percent, and  the next year it                                                               
would be  20 percent.   As mentioned,  there was an  oversight in                                                               
Version P,  it would potentially  be amended by the  co-chairs to                                                               
repeal at that point.  So, it  is a slow stepdown over two years,                                                               
this year and next  year.  It is not tied  to the working group's                                                               
activities.    The  stepdown  was related  to  the  concept  that                                                               
companies are using  this today in Cook Inlet to  provide gas and                                                               
oil.   [The  co-chairs]  would like  to  moderate the  companies'                                                               
potential  changes in  investment  behavior by  stepping it  down                                                               
over these two years rather than  withdrawing it all at once.  It                                                               
is correct  that [Senator  Giessel's] working  group has  spent a                                                               
great deal of time and work  and the WLE [credit] stepdown is not                                                               
related to those timelines.                                                                                                     
                                                                                                                                
2:21:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  noted that  at about  $700 million  a year                                                               
the oil  and gas tax credits  is one of the  largest expenditures                                                               
in the state's  entire budget.  He said he  thinks $73 million is                                                               
allocated  in the  house  and the  senate budget  for  this.   He                                                               
argued that the proposed CS  would not make significant budgetary                                                               
progress for fiscal year 2017, because  it does not start to make                                                               
any difference  in Cook Inlet  until halfway through  fiscal year                                                               
2017 and  there is  no difference  at all  in the  refundable tax                                                               
credits for  the North Slope.   He  said he is  having difficulty                                                               
with the  slow ramp-down in Cook  Inlet and the exclusion  of any                                                               
effect at all  on North Slope refundable tax credits  as to where                                                               
the  state will  get  those  funds because  those  funds must  be                                                               
generated from  somewhere.   He added  that he  is having  a very                                                               
difficult time  with taking $1,000  from every  person's dividend                                                               
and then using it to go right back  out to pay tax credits.  Some                                                               
members will  be thinking things  are too much and  some thinking                                                               
too little.   Reducing refundable tax credits on  the North Slope                                                               
cannot be  ignored in  any bill that  the committee  goes forward                                                               
with, because  that is  a huge  budgetary expense.   The  talk is                                                               
about needing  to do budgets and  almost no budget cuts  are seen                                                               
here.    He  urged  that   as  the  committee  goes  forward  the                                                               
parameters  be looked  at  for  what needs  to  be  done for  the                                                               
state's budgetary situation  and to move things  a little quicker                                                               
and more holistically across both basins.                                                                                       
                                                                                                                                
MS. DELBRIDGE answered  that the direction from  the co-chairs to                                                               
the staff  who helped develop the  CS was to be  cognizant of the                                                               
state's budgetary situation.   However, the co-chairs  are not in                                                               
a position on this committee  where they are hearing fiscal bills                                                               
as a whole picture and there is  then a balancing act to look at.                                                               
In  this committee  the  co-chairs wanted  to  focus somewhat  on                                                               
responsible resource development policy.   So, while aware of the                                                               
budgetary  concerns,   the  potential  impacts  to   industry  of                                                               
immediate and dramatic  changes in order to  resolve a short-term                                                               
or immediate-term  budget problem  could have  fairly significant                                                               
effects  to the  state's production  in future  years where,  for                                                               
better or worse, the state is  still looking to a single industry                                                               
for the  majority of its revenue  coming in.  The  co-chairs were                                                               
clear that  there is this  balance to be had  at some point.   If                                                               
the bill progresses from this committee  it would go to the House                                                               
Finance Committee,  which is hearing  a number of  fiscal related                                                               
bills and is  perhaps in a position to truly  assemble the pieces                                                               
in a  manner in which the  ultimate package has the  impacts that                                                               
Representative Seaton is articulating.                                                                                          
                                                                                                                                
2:25:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON clarified he was  not at all knocking staff                                                               
or saying  that staff was  not following direction, rather  he is                                                               
talking about  the committee's work  in the direction of  the CS.                                                               
He reiterated  that some  people will  think it  is too  much and                                                               
some will think  it is too little as the  committee goes forward.                                                               
As  a legislature,  members are  involved  in a  number of  these                                                               
topics to  figure out where to  make cuts and where  the revenues                                                               
are going to  be, and this is one of  the most significant places                                                               
to look for  cuts.  He understands staff  is following direction,                                                               
he continued,  but he  is not  sure the  committee can  afford to                                                               
ignore that  direction.  If  these oil prices are  maintained, he                                                               
is not sure the statement is correct  that oil is going to be the                                                               
significant  funder of  the state;  that may  not be  revenue the                                                               
state  can  rely on  when  deficits  are  three times  more  than                                                               
revenues.   Therefore,  he  is  drawing members  to  that as  the                                                               
committee considers the bill going forward.                                                                                     
                                                                                                                                
CO-CHAIR NAGEAK  responded that  that is what  is being  done and                                                               
the co-chairs are cognizant that  the biggest funder of the state                                                               
is in  dire straits also.   Something must be done,  a discussion                                                               
has been  started, and the  co-chairs are continuing on  with the                                                               
conversation knowing that  if nothing is done there  will be even                                                               
more problems  later.  Everything  must be discussed  that drives                                                               
the state  to come up with  something that will be  workable with                                                               
all concerned.   It must  be a deliberate process,  everyone must                                                               
be heard from if the state  is going to continue working with tax                                                               
credits and  other things, and  it must be ensured  that everyone                                                               
understands why this is being done.                                                                                             
                                                                                                                                
2:30:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR, regarding  where  the  committee is  headed                                                               
with Version  P, recounted that a  criticism of ACES was  that it                                                               
made small  producers winners over  the "big three" on  the North                                                               
Slope.  Senate  Bill 21 was supposed to correct  some of that and                                                               
did not  really deal with Cook  Inlet.  She said  it appears that                                                               
Version  P would  create winners  and  losers in  Cook Inlet  and                                                               
would discourage  any new entrants  over this two-year  period as                                                               
things are  scaled back.  The  proposed stepping down is  so that                                                               
companies  currently doing  work are  not disadvantaged,  but the                                                               
net  effect could  be that  it disadvantages  new entrants  going                                                               
forward.    This concerns  her,  she  continued, because  in  the                                                               
committee's discussions  about gas supply  it was stated  that 10                                                               
years  of  supply are  under  contract.    However, it  has  been                                                               
stressed that  exploration, development, and production  all need                                                               
to be  encouraged at all  times to preclude  a lag in  the supply                                                               
chain.  Those early stages  of work must be ensured, particularly                                                               
if the  market becomes less  constrained due to reopening  of the                                                               
Agrium plant or the ConocoPhillips [LNG export] facility.                                                                       
                                                                                                                                
MS. DELBRIDGE agreed that something  like Agrium reopening or the                                                               
renewal  of  exports  because  prices changed  would  be  a  game                                                               
changer for  people who  have currently  made big  investments in                                                               
Cook  Inlet, particularly  those  with gas  having potentially  a                                                               
difficult time finding  a market for that gas.   She recalled Mr.                                                               
Webb of  Furie Operating Alaska,  LLC, ("Furie")  testifying that                                                               
as of a few  weeks ago Furie had only one  contract at that point                                                               
in time for its  gas and that the revenue to  Furie from that gas                                                               
is insufficient for Furie to meet  its debt.  Since then, she has                                                               
seen  a  contract from  Furie  at  the Regulatory  Commission  of                                                               
Alaska (RCA), and  while not for a huge volume,  every bit helps.                                                               
The co-chairs' position is not  to discourage new entrants; it is                                                               
to suggest that if it is  felt that 65 percent support upfront in                                                               
cash by the state is too much, then  it is a concern to bring new                                                               
entrants into  Cook Inlet  to produce  gas that  people producing                                                               
now  cannot necessarily  find a  market for  or to  find oil  for                                                               
which  the  state  may  get   royalty  income  and  jobs  but  no                                                               
production tax  revenue from.   To moderate  that level  of state                                                               
support  now  while examining  the  entire  regime would  be  the                                                               
responsible action  so that  the state is  not putting  out terms                                                               
saying it  wants to continue  paying 65 percent state  support to                                                               
newcomers when  the state  is suggesting  that the  gain resulted                                                               
from  that  is   not  what  the  state   was  perhaps  targeting.                                                               
Certainly  the  co-chairs'  intent   is  not  to  discourage  new                                                               
investment, but  simply to do it  in a way that  does not require                                                               
that high level  of state upfront support  and becomes attractive                                                               
to  companies  where  the system  looks  sustainable,  fair,  and                                                               
balanced for long-term business decisions.                                                                                      
                                                                                                                                
REPRESENTATIVE TARR said  a timeline needs to be put  out of when                                                               
these  other  credits  are  going  to expire.    Another  of  her                                                               
concerns, she  explained, is that  as a  policy it is  being said                                                               
that once a company is making a  profit the state is going to let                                                               
the company  have credits.  The  North Slope is a  bit different.                                                               
In some ways it is a lack  of consistency, she continued.  It has                                                               
been heard repeatedly that the  state is trying to create systems                                                               
that have  some stability  or durability to  them.   She surmised                                                               
that Ms.  Delbridge is acknowledging  not getting there  today by                                                               
including a [legislative]  working group in the proposed  CS.  To                                                               
the extent  [the legislature]  can get closer  to that,  she said                                                               
she feels  strongly about  how hard  [legislators] should  get to                                                               
work there because that dominates so  much of their time and also                                                               
because  [legislators]  have  other important  matters  to  think                                                               
about relative to  the entire budget.                                                                                           
                                                                                                                                
2:35:48 PM                                                                                                                    
                                                                                                                                
CO-CHAIR NAGEAK asked  whether Representative Josephson maintains                                                               
his objection to adopting Version P as the working document.                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON maintained  his  objection to  adopting                                                               
Version P as the working document.                                                                                              
                                                                                                                                
2:36:05 PM                                                                                                                    
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
2:36:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  withdrew his objection to  adopting the                                                               
proposed  committee  substitute  (CS)  for HB  247,  Version  29-                                                               
GH2609\P, Shutts, 3/18/16, as the  working document.  He noted he                                                               
is  withdrawing   his  objection   in  anticipation   of  further                                                               
discussion  of amendments  in the  coming week.   There  being no                                                               
further objection, Version P was before the committee.                                                                          
                                                                                                                                
2:36:48 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 2:36 p.m. to 2:43 p.m.                                                                       
                                                                                                                                
2:43:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  NAGEAK  announced  that  enalytica,  the  legislature's                                                               
consultant, will provide a presentation on Version P of HB 247.                                                                 
                                                                                                                                
JANAK  MAYER,  Chairman  &   Chief  Technologist,  enalytica,  as                                                               
consultant  to  the  Legislative   Budget  and  Audit  Committee,                                                               
provided  a  PowerPoint presentation,  "CS  HB  247:   Impact  of                                                               
Proposals."   Drawing attention to  slide 2, "CS  HB247 SUMMARY,"                                                               
he addressed  the North Slope  provisions included in  Version P.                                                               
On the  North Slope,  he explained, Version  P would  keep intact                                                               
the overall architecture  of Senate Bill 21, but  two key changes                                                               
would be made.   The first change would remove  the impact of the                                                               
gross  value reduction  (GVR) in  calculating  the net  operating                                                               
loss (NOL).   This refers to  the issue raised by  Mr. Alper that                                                               
under  current statute  it is  possible to  effectively get  more                                                               
than 35 percent  NOL support for North Slope  spending in certain                                                               
circumstances, in particular  for a new development  on the North                                                               
Slope because the  gross value reduction was included  in the way                                                               
the net operating loss was  calculated.  The provision in Version                                                               
P would end that possibility.   The second change would provide a                                                               
per  company cap  of $200  million on  refundability of  credits.                                                               
This  would   not  have   a  major  impact   on  the   amount  of                                                               
refundability  that  occurs  at  the moment,  but  would  protect                                                               
against potential larger development in the future.                                                                             
                                                                                                                                
MR. MAYER  continued on slide  2, next discussing the  Cook Inlet                                                               
provisions included in Version P.   Three principle credits apply                                                               
in the  Cook Inlet, he  said:   the 20 percent  qualified capital                                                               
expenditure (QCE)  credit; the 40 percent  well lease expenditure                                                               
(WLE)  credit;  and  the  25 percent  net  operating  loss  (NOL)                                                               
credit.  Version P would maintain  the 20 percent QCE credit.  It                                                               
would  reduce the  WLE credit  to 30  percent in  2017 and  would                                                               
effectively  phase it  out after  [2018]  by making  it the  same                                                               
level as  the qualified capital  expenditure credit.  As  per Ms.                                                               
Delbridge's  testimony, he  understood  that  a future  amendment                                                               
would sunset  the WLE credit at  that point since the  well lease                                                               
expenditure is a  strict subset of the work that  is eligible for                                                               
the qualified  capital expenditure.   Version P would  reduce the                                                               
net operating loss credit from 25 percent to 10 percent.                                                                        
                                                                                                                                
MR. MAYER  continued on  slide 2 and  reviewed the  three overall                                                               
general  provisions included  in Version  P.   He said  the first                                                               
would  provide  for  compound  interest,  as  opposed  to  simple                                                               
interest,  on delinquent  taxes.   The second  would provide  the                                                               
ability  to withhold  from refundable  tax  credits the  existing                                                               
liabilities to the state that a  company has from its oil and gas                                                               
production.  The third provision  would establish a [legislative]                                                               
working  group to  look  at a  [new] Cook  Inlet  tax regime  and                                                               
present that to the 2017 regular [legislative] session.                                                                         
                                                                                                                                
2:48:08 PM                                                                                                                    
                                                                                                                                
MR.  MAYER  turned to  the  chart  on  slide 3,  "BIG  DIFFERENCE                                                               
BETWEEN NORTH  SLOPE AND COOK  INLET," and looked at  the credits                                                               
refunded by the state versus  the total revenues brought into the                                                               
state under the  current fiscal system.  He said  there is a very                                                               
big  difference between  the revenue  that comes  from the  North                                                               
Slope  in production  taxes, and  especially  royalties at  these                                                               
price environments, versus the low  to nonexistent production tax                                                               
in Cook  Inlet and small  amount of  royalty that comes  from the                                                               
much higher  production volumes in  Cook Inlet.  In  general when                                                               
looking across the  years there is a fairly  even balance between                                                               
the amounts  of credit  refunds in  those two  places.   But, for                                                               
fiscal year  2015, which  the chart  depicts, credit  refunds are                                                               
higher in  Cook Inlet than  the North  Slope - $[404]  million in                                                               
Cook  Inlet  versus  $224  million  on the  North  Slope.    "The                                                               
difference  in those  two situations,"  he continued,  "is a  key                                                               
reason for the  difference in those two impacts of  the two areas                                                               
in terms of what this bill does."                                                                                               
                                                                                                                                
2:49:34 PM                                                                                                                    
                                                                                                                                
MR. MAYER moved  to slide 4, "GVR RAISES NOL  CREDIT ABOVE 35% OF                                                               
ACTUAL LOSS,"  to discuss  the North  Slope changes  and impacts.                                                               
One of  the two  key areas on  the North Slope,  he said,  is the                                                               
question of the interaction of  the gross value reduction and the                                                               
net operating loss.   The aim of the gross  value reduction is to                                                               
lower the effective tax rate on  new production.  It does that by                                                               
focusing on  the gross revenue  part of the equation  rather than                                                               
the actual  tax rate  itself.  Because  Alaska's tax  system does                                                               
not  ring  fence,  does  not distinguish  on  the  project  level                                                               
between  different  projects, it  is  very  hard  to take  a  new                                                               
development  and  say  it  should   receive  a  lower  tax  rate.                                                               
However,  those  differences  can  be tracked  at  the  level  of                                                               
production out of revenue.   The surprising and counter-intuitive                                                               
effect  [of the  gross  value  reduction is  that  it raises  the                                                               
effective rate  of the  NOL credit].   Current  statute describes                                                               
the NOL  as the ability  to deduct costs against  production tax,                                                               
and  that production  tax  level is  calculated  using the  gross                                                               
value  reduction.   The effect  is  to cascade  that gross  value                                                               
reduction  into  the  way  the   net  operating  loss  credit  is                                                               
calculated, which means that rather  than 35 percent of an actual                                                               
operating  loss  it  is  possible in  some  circumstances  for  a                                                               
company  to  be  reimbursed  for 35  percent  of  a  gross-value-                                                               
reduction-enhanced operating loss, one that  exists as a function                                                               
of that allowance, not because it is an actual loss.                                                                            
                                                                                                                                
MR. MAYER provided  an example of the  aforementioned by bringing                                                               
attention to  the two graphs on  slide 4.  He  explained that the                                                               
left chart looks at the after-tax  cash flow of a new development                                                               
at a price  of $70 per barrel  and the right chart  looks at that                                                               
same development  at a price  of $40 per  barrel.  In  both these                                                               
cases there  is a small  difference in  the cash flows  under the                                                               
current law of  Senate Bill 21 versus Version P.   The difference                                                               
in the  two lines on the  chart is the impact  of addressing this                                                               
issue with the  interaction of the gross value  reduction and the                                                               
net operating  loss.  This  is something  that applies at  a wide                                                               
range of prices,  but is particularly exacerbated  at low prices.                                                               
The issue  here is that in  the early years of  a new development                                                               
by a  new company  with no  existing tax  liability, there  is no                                                               
effect of  the gross value  reduction because the company  has no                                                               
production and no  revenue.  The gross value  reduction goes into                                                               
effect  once production  starts,  once the  company has  revenue.                                                               
During the  early years  of production  with ongoing  drilling, a                                                               
company's  costs  are  greater   than  the  revenue  the  company                                                               
receives from production, making a  net operating loss.  However,                                                               
the effect of  the gross value reduction is to  further lower the                                                               
gross value  of that  production, the  production tax  value, and                                                               
all the  rest, and when that  flows on into the  NOL it increases                                                               
the value  of the NOL.   So, the  difference in the  dotted lines                                                               
between what Version P would do  rather than current law, is that                                                               
the NOL  would remain in place  but would be strictly  35 percent                                                               
support  for government  spending and  is the  same as  any other                                                               
company.   He added that  this would  be consistent with  what he                                                               
thinks was  the legislative aim of  Senate Bill 21, which  was to                                                               
say uniform 35 percent government support for all actors.                                                                       
                                                                                                                                
2:53:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON, regarding  the graph at the  price of $40,                                                               
observed that  the difference between  the lines for  Senate Bill                                                               
21  and Version  P goes  both  above and  below zero.   He  asked                                                               
whether  zero is  the  point at  which a  net  operating loss  is                                                               
generated so that everything above zero is no effect at all.                                                                    
                                                                                                                                
MR. MAYER replied that things  are counter-intuitive here because                                                               
a few  pieces affect this  picture.   One is how  state, federal,                                                               
and corporate income tax are  treated; these are applied "further                                                               
down the stack"  after calculation of production tax  and the net                                                               
operating loss there.  Most  of enalytica's modeling assumed that                                                               
a company with a new  development still had other broader federal                                                               
tax liability  and that  therefore losses  a company  makes could                                                               
possibly be  of benefit  to the  rest of  its operations,  and so                                                               
from  an   overall  company  perspective  that   it  is  possible                                                               
essentially to receive negative federal  income tax.  Thus, there                                                               
may  be times  when from  a  production tax  value perspective  a                                                               
company is at a net operating  loss but may be very slightly cash                                                               
flow  positive after  considering the  impacts of  federal income                                                               
tax on the overall operations.  So,  zero is not a strict line in                                                               
terms of  the way things on  this graph are represented  at which                                                               
an NOL is no longer payable, but  it is very close to that and is                                                               
something  slightly  above zero  at  which  a company  no  longer                                                               
becomes NOL eligible.   Exactly how far depends  on the direction                                                               
of numerous different bases of the system.                                                                                      
                                                                                                                                
REPRESENTATIVE SEATON  understood the graphs  represent after-tax                                                               
cash  flow for  a  new  development and  are  from the  company's                                                               
perspective, not the state's perspective  for losses of revenues.                                                               
The  graphs are  from the  company's  perspective as  far as  the                                                               
company's  cash flow  instead of  this interaction  with the  net                                                               
operating loss and the gross value reduction.                                                                                   
                                                                                                                                
MR.  MAYER responded  correct,  although  the difference  between                                                               
these two things is attributed to  one thing only - the treatment                                                               
of the  gross value reduction.   The point of  slide 4 is  to say                                                               
that the  impact of this  is much greater  at low prices  than at                                                               
higher prices.   The new development depicted in  these graphs is                                                               
of the  sort that enalytica  modeled and previously  presented to                                                               
the committee, which  is $1-$1.5 billion in  capital spending and                                                               
peak production  around 20,000  barrels a  year.   At a  price of                                                               
$40, the  impact of this  difference is  less than $10  million a                                                               
year for  most years  and is  limited to  those years  of ongoing                                                               
drilling  in the  early  years of  production.   That  difference                                                               
across the  time period is sort  of between $0 and  $10 million a                                                               
year, and  in most cases  between $0 and $5  million a year.   In                                                               
the graph for $40, the difference  between those two lines is the                                                               
additional revenue  to the state  that would come from  a project                                                               
such as this.                                                                                                                   
                                                                                                                                
2:57:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  commented that  due to the  X axis  being in                                                               
increments of $50 million it  is hard to determine the difference                                                               
between the  two lines.   She understood  Mr. Mayer to  be saying                                                               
that generally that is about $5 million.                                                                                        
                                                                                                                                
MR. MAYER answered that broadly speaking  it is between $0 and $6                                                               
million for this  particular model at these prices.   He directed                                                               
attention to the  fifth line of text on the  slide that states an                                                               
impact of less than $10 million a year.                                                                                         
                                                                                                                                
2:58:19 PM                                                                                                                    
                                                                                                                                
MR.  MAYER  resumed his  presentation.    He addressed  slide  5,                                                               
"REFUNDABILITY  LIMIT FOCUSED  ON FUTURE  LIABILITIES," regarding                                                               
the second of the two key areas  on the North Slope.  He said the                                                               
key aim  of the refundable net  operating loss is to  provide the                                                               
same benefit  to new developers  that existing producers  have in                                                               
the way they are impacted by the  tax system.  What this means in                                                               
the vast majority  of circumstances is that the impacts  of a new                                                               
development on the  producer, as well as the state,  are the same                                                               
as  if  that  new  development  had been  done  by  an  incumbent                                                               
producer.   For example, if  the hypothetical project  modeled by                                                               
enalytica  of  $1-$1.5  billion in  capital  costs,  800  million                                                               
barrels in recovered resources, and  20,000 barrels a day at peak                                                               
production was undertaken by an  incumbent producer, all of those                                                               
costs would  be deducted against  the producer's  liabilities and                                                               
would  reduce the  producer's taxes  paid  to the  state by  that                                                               
amount.  If a completely  new company developed that hypothetical                                                               
project, the state  would instead pay the  company the refundable                                                               
net operating  loss credit.   In the  vast majority  of potential                                                               
price circumstances  those two  things are  completely equivalent                                                               
to the state.  The cash  payment to the small producer is exactly                                                               
the  same as  the reduction  in  taxes for  the larger  producer.                                                               
Elaborating,   Mr.   Mayer  noted   that   the   big  impact   of                                                               
refundability [on the  North Slope], particularly in  a low price                                                               
environment when the  budget is strained, is a  timing issue much                                                               
more  than  an  absolute  spending  issue.    For  instance,  the                                                               
original version of HB 247 provided  a very tight cap on how much                                                               
could  be refunded.    But  a bill  could  provide  that the  net                                                               
operating loss is not refundable at  all.  If, over the course of                                                               
the entire  project life, prices  were sufficient to  enable that                                                               
credit to  be recovered  from project  revenues further  down the                                                               
line,  the total  cost to  the  state (not  considering the  time                                                               
value of  money) for an  upfront refund versus a  deferred credit                                                               
taken against future  taxes is identical in the  vast majority of                                                               
price cases.   In that  sense, this is  a question of  timing and                                                               
when those costs  occur, and the fact that for  a new development                                                               
they occur  now versus a number  of years into the  future.  This                                                               
has a big  impact essentially on who can make  development on the                                                               
North Slope work.                                                                                                               
                                                                                                                                
3:01:36 PM                                                                                                                    
                                                                                                                                
MR. MAYER  illustrated the  aforementioned by  bringing attention                                                               
to the  left chart on slide  5 depicting cumulative cash  flow of                                                               
this  hypothetical new  development with  and without  refundable                                                               
credits [on  the North Slope  at a price of  $70 per barrel].   A                                                               
company developing this project under  the current system of a 35                                                               
percent refunded net operating loss  credit might need about $300                                                               
million in  total capital to enable  the project to occur.   But,                                                               
if the NOL  is non-refundable, a company might  need $500 million                                                               
or more  to make the  project occur.   Because this is  all about                                                               
the timing of cash flows, not  the total value across the project                                                               
life, the fact  that for a new developer these  come early rather                                                               
than later  at the tail of  the project means that,  although the                                                               
total  cash flows  are  identical, the  internal  rate of  return                                                               
(IRR) is much  higher under the current  refundable scenario than                                                               
under a non-refundable scenario.                                                                                                
                                                                                                                                
MR. MAYER  stressed that  those cash flows  coming early  lead to                                                               
substantial impacts.   Making the NOL  non-refundable or lowering                                                               
the limit  to $25  million per company,  and making  it effective                                                               
immediately or very  soon, would have a major  impact on projects                                                               
that  are presently  being  developed.   There  are two  possible                                                               
solutions to  that, he advised:   one  would be to  take stricter                                                               
action  but find  ways to  grandfather in  existing developments;                                                               
the other  would be to  do something that  does not place  such a                                                               
tight  limit on  refundability.   Tight limits  on refundability,                                                               
whether that  is a  low per  company cap  or no  refundability at                                                               
all, have  a big impact on  what sort of companies  can undertake                                                               
investments  on the  North Slope.   In  particular, smaller  less                                                               
well  capitalized companies  and companies  that rely  on private                                                               
equity participation  for a substantial part  of their investment                                                               
structure,  require  solid  rates  of  return.    Some  of  those                                                               
companies are currently  able to make projects work  on the North                                                               
Slope, but would be much less likely  to be able to do so without                                                               
the refundable credits.                                                                                                         
                                                                                                                                
3:04:18 PM                                                                                                                    
                                                                                                                                
MR. MAYER  noted that the approach  in Version P of  $200 million                                                               
is a very high limit relative  to the $25 million proposed in the                                                               
original bill.   This would effectively avoid  impacts on current                                                               
investment while, in principle,  offering some protection against                                                               
future outlier projects.  There  is an important discussion to be                                                               
had as to what exactly that limit  is and should be and what sort                                                               
of project there is concern about  in the future, he said.  There                                                               
was  discussion earlier  in committee  about  a hypothetical  new                                                               
development roughly  the magnitude  of another Kuparuk,  which to                                                               
date  has   recovered  more   than  2.5   billion  barrels.     A                                                               
hypothetical new  development of 2 billion  barrels that required                                                               
as low as  $12 per barrel of  reserves to develop would  be a $24                                                               
billion  development.   If  one-fourth of  that  spending was  on                                                               
facilities capital expenditures that  would be spent before major                                                               
drilling  started and  before this  field began  production, then                                                               
that  would be  $6 billion  in pure  net operating  loss refunds.                                                               
Thirty-five percent of  that $6 billion would be  $2.1 billion in                                                               
total credits,  which is  a big  number and  one to  be concerned                                                               
about in  terms of potential future  impact.  That would  not all                                                               
be in one year.  For  example, spread across three years it would                                                               
be $700  million a year, which  is about the same  number the Tax                                                               
Division talked about when it  foresaw $800 million as a possible                                                               
future  risk,  and  in  which  case the  question  is,  How  many                                                               
companies is that split between and  what is the optimal level of                                                               
a limit  that seeks to  minimize its impacts on  current projects                                                               
but constrains  some of the  state's potential liability  in that                                                               
scenario?    That   is  an  important  discussion   to  have,  he                                                               
reiterated.                                                                                                                     
                                                                                                                                
3:06:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  asked  whether  the purpose  of  the  net                                                               
operating loss is  to deform the market so that  companies do not                                                               
have  to take  other  partners and  can  proceed without  needing                                                               
other  capitalization, but  that  the limit  would  be the  exact                                                               
opposite which  would force companies  to take other  partners so                                                               
that they could get the  $200 million limit in multiple partners.                                                               
He  further asked  whether these  two  objectives are  a kind  of                                                               
juxtaposition.                                                                                                                  
                                                                                                                                
MR. MAYER  replied he would not  say that the net  operating loss                                                               
credit and its  refundability distorts the market.   In principle                                                               
it exists to make the economics  of a new development, the impact                                                               
of the  tax system  and the  actual tax that  is received  by the                                                               
state, the same for a new  developer without a liability as it is                                                               
for  a larger  developer with  a liability.   The  alternative of                                                               
protecting  the state  by not  offering the  NOL in  a refundable                                                               
form is to say that the  state understands that the economics are                                                               
substantially more difficult for projects  to be developed by new                                                               
companies than by  incumbent ones.  That  the economics naturally                                                               
look much  better for incumbent  companies than for new  ones and                                                               
that  the support,  the cash  that  is provided  through the  tax                                                               
system, is effectively higher for  incumbent companies than it is                                                               
for new ones.  That is certainly  a policy call that can be made,                                                               
he said,  and he  does not  think there is  an absolute  right or                                                               
wrong on  that.  The purpose  of refundability is not  to distort                                                               
the  system as  much as  it  is to  make  the impact  as even  as                                                               
possible.  It  certainly mean that projects  by smaller companies                                                               
are possible that might not  be otherwise.  An important question                                                               
to consider  if this  were to  be changed is,  What would  be the                                                               
impacts in  terms of the resource  base on the North  Slope to be                                                               
developed?  Who  might come in?  Would things  that are currently                                                               
being  developed  or  might potentially  be  developed  still  be                                                               
developed in those  scenarios?  Regarding the  possibility that a                                                               
limit  of  $200 million  could  encourage  splitting up  a  major                                                               
project  between more  companies, Mr.  Mayer said  that when  the                                                               
really low  limit [of  $25 million] was  being discussed,  he was                                                               
less  concerned about  this because  it would  be really  hard to                                                               
bring in enough companies to make that  work.  But, at a limit of                                                               
$200 million,  he can  certainly see a  case where  a development                                                               
that  might otherwise  be undertaken  by two  or three  companies                                                               
could end  up being done by,  say, four or  five.  It is  a valid                                                               
question to raise,  he advised.  A further look  in statute could                                                               
be taken as to whether there  are ways to protect against that or                                                               
whether the amount of the limit needs to be considered further.                                                                 
                                                                                                                                
3:10:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR addressed the right  chart on slide 5 showing                                                               
the internal rate  of return (IRR) sensitivity  under the current                                                               
law of GVR  with refundable NOL versus a nonrefundable  NOL.  She                                                               
interpreted the  graph as  showing that to  achieve a  15 percent                                                               
IRR would push it  out from [a price of $70  under current law to                                                               
a price of] $80 under Version P.                                                                                                
                                                                                                                                
MR. MAYER responded no, this would  be if a stricter approach was                                                               
taken  on refundability.   So,  if  there are  no companies  with                                                               
existing development that are meeting  that $200 million limit at                                                               
this moment,  "then you're still on  the solid black line  of the                                                               
refundable net operating  loss world."  The purpose  of these two                                                               
[graphs]  is to  say if  one took  a stricter  approach, whatever                                                               
that   stricter  approach   is,  whether   that  was   completely                                                               
nonrefundable or  some type of cap,  one is starting to  push out                                                               
along those lines.                                                                                                              
                                                                                                                                
3:11:54 PM                                                                                                                    
                                                                                                                                
MR. MAYER returned his presentation.   Showing slide 6, "COMPOUND                                                               
INTEREST AND  CREDIT WITHHOLDING,"  he explained that  the bill's                                                               
key feature  of moving  to compound  interest rather  than simple                                                               
interest would  increase the  penalty for  delinquent taxes.   At                                                               
the current effective interest rate  of 4 percent and the current                                                               
six-year  statute of  limitations,  that impact  would be  pretty                                                               
small, a couple of million dollars.   However, it would be a very                                                               
big difference  under a timeframe  of multiple decades.   He said                                                               
he  agrees with  Mr. Alper  that  going from  compound to  simple                                                               
interest  was an  oversight in  the drafting  of Senate  Bill 21;                                                               
compound interest is  almost standard and makes  much more sense.                                                               
Mr.  Mayer  said another  key  feature  of  the bill  relates  to                                                               
concerns  around   refunding  credits  to  taxpayers   that  have                                                               
existing  liabilities  related to  oil  and  gas production,  for                                                               
example on royalties.  It would  not be that no refundable credit                                                               
would be given, but rather  that that liability would be withheld                                                               
from  any certificate  issued and  the taxpayer  presumably would                                                               
have the option  to then say that that withholding  is the way in                                                               
which that liability will be discharged.                                                                                        
                                                                                                                                
REPRESENTATIVE  JOSEPHSON questioned  what would  actually change                                                               
here if in the state's view  there is a delinquency or a contest.                                                               
He  argued that  a  taxpayer  would not  agree  to the  discharge                                                               
because in not  paying it the taxpayer is  clearly contesting it.                                                               
He  surmised that  the advantage  to the  state is  that this  is                                                               
essentially a sort  of escrow system where  monies are subtracted                                                               
and held in abeyance pending resolution of the contest.                                                                         
                                                                                                                                
MR. MAYER agreed  the aforementioned seems like  a reasonable way                                                               
to characterize it.                                                                                                             
                                                                                                                                
3:14:44 PM                                                                                                                    
                                                                                                                                
MR.  MAYER  continued  his presentation.    Addressing  slide  7,                                                               
"REDUCTION IN COOK  INLET SPENDING SUPPORT," he  said the biggest                                                               
impact of Version  P is in terms of the  level of overall support                                                               
for spending in Cook Inlet.   He reminded members that support on                                                               
the North Slope primarily means  how much can be deducted against                                                               
an existing  tax rate.   However, he  continued, support  in Cook                                                               
Inlet  is much  more about  credits that  are a  form of  subsidy                                                               
provided to incentivize  investment against a number  of aims, in                                                               
particular security of supply of  gas to Anchorage, not effective                                                               
investment that  will be recouped  through the tax system.   Cook                                                               
Inlet  [currently]  has  three  credits:    the  25  percent  net                                                               
operating loss (NOL) credit that  is then stackable with either a                                                               
20 percent  qualified capital  expenditure (QCE)  credit or  a 40                                                               
percent well lease expenditure (WLE)  credit that is applied to a                                                               
subset of  capital expenditures specifically related  to drilling                                                               
wells.   That means a  company receives  either 45 or  55 percent                                                               
support, depending on how much of  its spending qualifies at a 20                                                               
percent  level  capital  credit  and how  much  of  its  spending                                                               
qualifies at the 40 percent well  lease expenditure level.  If an                                                               
even split  is assumed, then  on average, total support  is about                                                               
55  percent under  the status  quo assuming  that the  company is                                                               
eligible  for all  of these  things including  the net  operating                                                               
loss.  For  an incumbent producer not eligible  for net operating                                                               
loss, support  is about 20,  30, or  40 percent depending  on how                                                               
much  of  the producer's  spending  is  QCE-eligible versus  WLE-                                                               
eligible.    Version  P  would  change this  to  10  percent  net                                                               
operating  loss credit  for  the  carried-forward annual  losses,                                                               
stackable with  effectively just  a 20 percent  QCE credit.   The                                                               
intervening year of  2017 would have a 30 percent  WLE credit and                                                               
after that  the only credit  remaining other than the  10 percent                                                               
NOL is a 20 percent qualified capital expenditure credit.                                                                       
                                                                                                                                
3:17:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON  recalled   that  there  was  testimony                                                               
limited to  the question of  the WLE [credit] being  redundant in                                                               
terms of  what it covers or  subsumed into the QCE  [credit].  He                                                               
expressed his concern about the  effective phase out, noting that                                                               
[Version P]  does not technically  phase it out in  language, but                                                               
says it becomes  20 percent in 2018.   Given he is  not an expert                                                               
in what a WLE is and has only  been told that it has something to                                                               
do with  deep water in the  middle of the inlet,  he inquired how                                                               
he is to know the WLE [credit]  is going to be phased out because                                                               
it covers the same thing as the QCE [credit].                                                                                   
                                                                                                                                
MR. MAYER  answered he understands  an amendment will  be offered                                                               
that would  sunset the  WLE credit  after 2018 or  in 2018.   The                                                               
reason  is  because  expenses  that  are  eligible  for  the  WLE                                                               
[credit] are a  strict subset of those that are  eligible for the                                                               
QCE  [credit].     To  be  eligible  for  the   QCE  [credit]  an                                                               
expenditure has to  be a qualified capital  expenditure and there                                                               
are definitions  under the tax  code as to what  that is.   To be                                                               
eligible  for  the WLE  [credit]  it  must  be both  a  qualified                                                               
capital expenditure and meet some  other definition of intangible                                                               
drilling costs under  the Internal Revenue Service tax  code.  By                                                               
definition one is a subset of the other.                                                                                        
                                                                                                                                
MR.  ALPER   suggested  that  Representative  Josephson   may  be                                                               
confusing  this  with  the  so-called  jack-up  rig  credit,  the                                                               
deepwater Cook  Inlet credit.   He explained that the  well lease                                                               
expenditure is a broad credit  for all well related expenditures.                                                               
The term of art used  in statutes is "intangible drilling costs."                                                               
The key point is that to  qualify for the 40 percent WLE [credit]                                                               
a  qualified capital  expenditure must  otherwise qualify  for it                                                               
plus meet these additional criteria.   The intent of Version P is                                                               
to step-down the  WLE [credit].  Ms. Delbridge was  trying to say                                                               
that  at  the  moment  where  it  hits  that  20  percent  level,                                                               
effectively there is  no difference; to be a WLE  it must already                                                               
be a  QCE, so whether it  is kept in statute  or repealed becomes                                                               
immaterial at that point.                                                                                                       
                                                                                                                                
REPRESENTATIVE JOSEPHSON asked whether  Mr. Alper agrees with Ms.                                                               
Delbridge.                                                                                                                      
                                                                                                                                
MR. ALPER responded,  "Ms. Delbridge and I have  discussed and we                                                               
agree that to be  a WLE ... it is a subset  and must also qualify                                                               
for a QCE; so if the intent  is to maintain 20 percent support it                                                               
shouldn't  matter  whether or  not  we  repeal  and it  would  be                                                               
cleaner for  statutory purposes to  simply repeal the WLE  at the                                                               
point when it hits 20 percent."                                                                                                 
                                                                                                                                
3:21:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SEATON  surmised   that   if   the  well   lease                                                               
expenditure  is a  subset of  the qualified  capital expenditure,                                                               
then  when the  40  percent well  lease  expenditure [credit]  is                                                               
eliminated at the  start of the fiscal year, all  of the projects                                                               
would still  qualify at  that point  in time  for 45  percent tax                                                               
credit because they  would have the 20  percent qualified capital                                                               
expenditure  [credit]  plus the  25  percent  net operating  loss                                                               
[credit],  which  are  stackable.   He  inquired  whether  he  is                                                               
correct in his understanding.                                                                                                   
                                                                                                                                
MR.  MAYER  asked  whether Representative  Seaton's  question  is                                                               
meaning if one maintained the NOL [credit] at its current level.                                                                
                                                                                                                                
REPRESENTATIVE SEATON replied yes, if at  the start of the July 1                                                               
date the NOL  [credit] was maintained at 25 percent  and would be                                                               
stackable with  the qualified capital expenditure  [credit], then                                                               
that would  be 45 percent state  support for the project  at that                                                               
point in time.                                                                                                                  
                                                                                                                                
MR. MAYER  responded that  if there were  no WLE  [credit], then,                                                               
yes, that is correct.                                                                                                           
                                                                                                                                
3:23:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON restated his  question for Ms. Delbridge to                                                               
answer.  He  posed a scenario in which the  40 percent well lease                                                               
expenditure  [credit] goes  away because  it is  a subset  of the                                                               
qualified capital expenditure  [credit], and there is  still a 25                                                               
percent  net  operating  loss  [credit]  and  a  20  percent  QCE                                                               
[credit] on  July 1, the  start of the  state's fiscal year.   He                                                               
asked whether  the state would  still at that point  be providing                                                               
45 percent support for a project.                                                                                               
                                                                                                                                
MS.  DELBRIDGE  replied  she realizes  the  state's  fiscal  year                                                               
starts  in July,  but explained  that  Version P  would not  have                                                               
things effective until January 1,  2017, to coincide with the new                                                               
tax year.  If in fact the WLE  [credit] is not in place, and a 25                                                               
percent NOL  [credit] is retained  and a 20 percent  QCE [credit]                                                               
is retained, then  under her understanding a  taxpayer could have                                                               
up  to 45  percent state  support  if that  taxpayer actually  is                                                               
eligible for a loss.  It would be a company-specific situation.                                                                 
                                                                                                                                
REPRESENTATIVE  SEATON understood,  then, that  if a  company was                                                               
making money and  did not have a net operating  loss, it would at                                                               
that point  in time  qualify for a  20 percent  qualified capital                                                               
expenditure [credit].                                                                                                           
                                                                                                                                
MS. DELBRIDGE  responded that  if a company  is not  eligible for                                                               
the NOL then it would have the  ability to use the 20 percent QCE                                                               
[credit]  for   certain  lease  expenditures.     Rephrasing  her                                                               
statement, she said there are ways  that a company "might be able                                                               
to be making money  and still have a loss in  the sense of making                                                               
money is one thing and having production tax ..."                                                                               
                                                                                                                                
REPRESENTATIVE SEATON restated  his question by noting  that if a                                                               
company has  a net operating loss  it is not making  money.  "You                                                               
could be making money and ..."                                                                                                  
                                                                                                                                
MS. DELBRIDGE  answered that if a  company is eligible for  a net                                                               
operating loss, it has losses.                                                                                                  
                                                                                                                                
3:26:05 PM                                                                                                                    
                                                                                                                                
MR.  MAYER  resumed  his presentation  and  summarized  slide  7,                                                               
"REDUCTION IN  COOK INLET SPENDING  SUPPORT."  He  explained that                                                               
for new  developments the  producer would be  eligible for  a net                                                               
operating  loss  [credit], particularly  in  the  early years  of                                                               
capital spending when there is  not yet production or spending is                                                               
greater than  the production  revenue that  is occurring.   Under                                                               
Version  P, support  for new  developments in  most circumstances                                                               
would be  30 percent -  20 percent qualified  capital expenditure                                                               
[credit]  plus 10  percent  net operating  loss  [credit].   That                                                               
compares to  55 percent in  those circumstances under  the status                                                               
quo  or 25  percent  in  the original  bill.    Under Version  P,                                                               
support for current production which  in almost all circumstances                                                               
is not  eligible for  a net  operating loss  credit, would  be 20                                                               
percent.   That compares to  the status quo of  somewhere between                                                               
20 and  40 percent, say  30 percent on  average, or 0  percent in                                                               
the  original  bill  because  the  original  bill  would  provide                                                               
ongoing support  only through the  25 percent net  operating loss                                                               
[credit] versus  the qualified capital credit.   Elaborating, Mr.                                                               
Mayer said the  approach taken by the original bill  was that any                                                               
ongoing amount  that is spent  should only be effectively  on new                                                               
developments by new  taxpayers.  The approach taken  by Version P                                                               
is that  this should be  broad-based, that there should  be 20-30                                                               
percent support for  all companies undertaking this  sort of work                                                               
regardless of  whether they  are eligible  for the  net operating                                                               
loss  [credit].    So,  it  is  not  that  new  developments  are                                                               
disadvantaged  in  Version  P,  they  would  receive  30  percent                                                               
support  for spending  versus 25  percent in  the original  bill.                                                               
Version  P would  also  provide spending  support  for those  not                                                               
eligible for a net operating loss  credit, which was not the case                                                               
in the original version of HB 247.                                                                                              
                                                                                                                                
3:28:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON surmised  that enalytica's  recommendation                                                               
or analysis  here, even in  these times  of the state  not having                                                               
the  money and  having to  raise other  taxes to  do it,  is that                                                               
state support should be given  on an equity basis between ongoing                                                               
production  that is  making  money and  new  operations that  are                                                               
having  a  net operating  loss;  not  because it  is  necessarily                                                               
needed, but because it is an equity kind of situation.                                                                          
                                                                                                                                
MR. MAYER replied that this  is not something enalytica is making                                                               
a recommendation on, but simply  enalytica's analysis of what the                                                               
original  bill  did  and  what  Version P  would  do.    He  said                                                               
enalytica's previously  presented analysis looked at  three types                                                               
of  projects  in Cook  Inlet,  as  do  [slides 8-13]  in  today's                                                               
presentation.  One  type is completely new  developments that are                                                               
being  developed   to  produce  and   sell  gas  into   a  highly                                                               
constrained  market  that is  currently  well  matched in  supply                                                               
capacity  and that  is only  going  to change  slowly over  time.                                                               
Projects in a highly constrained  market have difficult economics                                                               
in almost  all circumstances; credits make  that slightly better,                                                               
but they  are still  much challenged projects.   Another  type is                                                               
unconstrained demand  for such  a new  project, either  because a                                                               
major new  use of gas is  found, such as export,  or because some                                                               
other major customer comes into  existence.  In this instance the                                                               
economics  of a  new  development look  pretty  workable in  most                                                               
circumstances.   If there is a  need for support it  is much less                                                               
in this type of environment and  high prices can probably go much                                                               
of the  way to  making those  projects work.   The third  type of                                                               
project  is ongoing  infill drilling  and other  capital work  in                                                               
existing mature fields  and enalytica's analysis is  that this is                                                               
pretty solidly economic in most imaginable circumstances.                                                                       
                                                                                                                                
MR. MAYER continued  his answer, advising that  the next question                                                               
is really  a policy call.   Given the importance of  gas security                                                               
to  Southcentral  Alaska,  given the  state's  limited  financial                                                               
resources, and  given the desire to  write a new regime,  he said                                                               
the question  is how  quickly to  withdraw support,  whether that                                                               
should  be  done   across  the  board,  and   whether  to  target                                                               
specifically for  new development.   Clearly,  there is  a strong                                                               
argument  to  be  made  that   completely  new  development  will                                                               
ultimately be what is needed to  bring online the next tranche of                                                               
supply that is  most difficult to develop at the  moment but will                                                               
be  most  essential in  five  or  ten years'  time.    That is  a                                                               
difficult policy  call to make.   One could have  the alternative                                                               
view that presently most of the  supply is being met from ongoing                                                               
investment in the  mature fields, but be  concerned about whether                                                               
that will  continue to the extent  it has in the  past if support                                                               
is cut  off too quickly.   That work is solidly  economic in most                                                               
imaginable  circumstances, according  to  enalytica's high  level                                                               
economic analysis.  However, Mr.  Mayer cautioned, he cannot tell                                                               
the  committee that  therefore  it will  continue  on an  ongoing                                                               
basis  if  there  is  much less  support,  particularly  if  that                                                               
support is  withdrawn immediately.   Also, there is  no certainty                                                               
as to  what the ongoing  fiscal terms  are, at least  for another                                                               
year.   The  sponsors of  the committee  substitute have  taken a                                                               
cautious approach  here, but this  is all about a  judgement call                                                               
as to what one thinks the right balance is.                                                                                     
                                                                                                                                
3:33:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked whether  his understanding is correct                                                               
that the balance, or maintaining  qualified investment credits as                                                               
a larger  portion of this  mix, would  enable credits to  flow to                                                               
profitable companies, whereas if it  was more net operating loss,                                                               
then profitable companies would not receive the credits.                                                                        
                                                                                                                                
MR. MAYER  responded that broadly speaking  this characterization                                                               
is  correct.   If support  is  channeled solely  through the  net                                                               
operating  loss  credit, then  only  companies  that make  a  net                                                               
operating loss  would be  eligible to receive  that support.   If                                                               
support is  channeled through  the qualified  capital expenditure                                                               
credit,  then all  companies that  spend,  regardless of  whether                                                               
they have  substantial production  and profits, would  receive it                                                               
and that is spent more broadly on a wider range of activities.                                                                  
                                                                                                                                
3:34:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR,  in  regard  to  avoiding  the  picking  of                                                               
winners and losers between new  entrants and producers, asked why                                                               
not have  a 25 percent  NOL [credit] and a  phase out of  the WLE                                                               
[credit], but have  the QCE [credit] be 25 percent.   She posited                                                               
that  this would  make the  opportunity match  up better  for the                                                               
company not in production as well as the company that is.                                                                       
                                                                                                                                
MR. MAYER  answered that there  are difficult trade-offs  to make                                                               
and many  good arguments  for numerous  possible structures.   He                                                               
said  he does  not see  this as  picking winners.   The  proposed                                                               
level of support for new developments  is higher in Version P (30                                                               
percent) than  in the  original version of  HB 247  (25 percent).                                                               
The  original  bill's  approach   of  solely  channeling  support                                                               
through  the  net  operating  loss credit  was  very  much  about                                                               
picking winners  and losers because  only companies making  a net                                                               
operating loss would receive support,  although this approach may                                                               
have some  merit.   The effect in  Version P is  to make  this be                                                               
broader based, to less pick  winners, because the overall support                                                               
is more similar  between companies that make a  loss because they                                                               
are developing  new projects versus  companies not making  a loss                                                               
because they have substantial existing production.                                                                              
                                                                                                                                
3:37:0 5 PM                                                                                                                   
                                                                                                                                
MR. MAYER  recommenced his presentation, noting  that slides 8-13                                                               
are updates of the modeling work  for the three types of projects                                                               
that enalytica  previously presented to  the committee.   He said                                                               
slide  8,  "COOK  INLET #1:  MARKET  CONSTRAINED  (ASSUMPTIONS),"                                                               
models a  new development in  a constrained market.   [Because of                                                               
the limited  ability to  sell gas],  a well  can only  be drilled                                                               
every few  years.  Referring to  the left chart, he  said that in                                                               
this  model the  developer drills  four wells,  two in  the early                                                               
years and then  another two to maintain the  plateau.  Production                                                               
in the  early years is  15 million  cubic feet per  day (Mmcf/d),                                                               
rising  to  40  Mmcf/d  in  the later  years.    This  is  really                                                               
difficult  economics to  make work,  he said.   Referring  to the                                                               
cash flow  chart on the  right, he  noted that the  [purple] bars                                                               
represent the  spending of  about $400  million in  total capital                                                               
expenditure  for a  big facility  to produce  the gas.   However,                                                               
because  only a  few wells  can  be drilled,  this large  initial                                                               
capital spending is only very  marginally recovered even at a gas                                                               
price  of $6  per thousand  cubic feet  (Mcf).   Even though  the                                                               
economics of this are pretty  marginal, a net operating loss only                                                               
occurs  for those  first three  years.   What this  means in  net                                                               
operating loss credits  versus capital credits is that  for a new                                                               
project being done  by a completely new  developer, the developer                                                               
would  be  eligible  in  those  first three  years  for  the  net                                                               
operating loss credit, whether that  is 25 percent or 10 percent.                                                               
In the subsequent years, additional  spending is primarily on the                                                               
drilling of  wells when the company  is no longer eligible  for a                                                               
net operating loss  [credit].  If the only support  that is given                                                               
is through the net operating  loss [credit], then that additional                                                               
work does  not receive any  support.   If the support  is through                                                               
the  qualified  capital  credit,  that  work  would  continue  to                                                               
receive 20 percent  support.  Under the original  bill, a project                                                               
like  this would  receive 25  percent through  the net  operating                                                               
loss [credit]  just for those  first three years.   Under Version                                                               
P, a project  like this would receive 30 percent  for all of this                                                               
work rather than just the first three years.                                                                                    
                                                                                                                                
MR. MAYER  turned to the six  graphs on slide 9,  "COOK INLET #1:                                                               
MARKET CONSTRAINED  (RESULTS)."   He pointed  out that  under the                                                               
status quo  the level of government  take is low with  a negative                                                               
value to the  State of Alaska, yet still a  very strained project                                                               
in terms  of ability to  generate value  for the company.   Under                                                               
the original  HB 247 with  just a  25 percent NOL  [credit], this                                                               
project  would  become much  more  strained;  only at  very  high                                                               
prices of $8.59/Mcf or more  does this project become net present                                                               
value (NPV) positive in terms of  internal rate of return.  Under                                                               
Version  P,  this  project  would   be  slightly  better  due  to                                                               
(indisc.) and  the fact that  it would be  30 percent for  all of                                                               
the spending, not just the first three years in development.                                                                    
                                                                                                                                
3:41:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON referred  to the top row  of charts showing                                                               
the  net present  value split  for the  status quo,  the original                                                               
version of  HB 247, and  Version P of HB  247.  He  observed that                                                               
the state would have a net  operating loss at prices up to $7/Mcf                                                               
under HB  247 and up to  $9.50/Mcf under Version P.   He inquired                                                               
whether  he is  correct in  concluding  that at  the current  gas                                                               
price of $8.19/Mcf which goes  through the year 2023, there would                                                               
be a net operating loss to  the state for any project development                                                               
in a constrained market.                                                                                                        
                                                                                                                                
MR. MAYER clarified  that these charts are about  the net present                                                               
value  to each  of the  parties.   It  is not  talking about  net                                                               
operating losses,  but rather whether the  overall value received                                                               
in discounted terms  is positive or negative.   He confirmed that                                                               
Representative  Seaton is  correct.   Under the  status quo,  the                                                               
credits that  are spent on a  project like this are  pure subsidy                                                               
and are a net  cash flow loss in terms of the  value of that cash                                                               
over time  to the state.   The credits are provided  as a subsidy                                                               
for other  purposes, not as a  means of recouping revenue  in the                                                               
future.   Under both  the original  bill and  Version P,  that is                                                               
moderated to some extent insofar  as there are prices under which                                                               
it  could eventually  be present  value positive  for the  state.                                                               
Because the  credits are slightly  higher in  the CS than  in the                                                               
original bill,  the price at  which that occurs  is substantially                                                               
higher under the CS than under the original bill.                                                                               
                                                                                                                                
3:43:20 PM                                                                                                                    
                                                                                                                                
MR. MAYER  resumed his presentation.   Moving to slide  10, "COOK                                                               
INLET #2:  UN-CONSTRAINED (ASSUMPTIONS)," he explained  that this                                                               
model  is  for  the  same  project, but  in  a  hypothetical  un-                                                               
constrained world.   If there were the ability to  sell gas to an                                                               
additional  customer, then  this  project with  the same  upfront                                                               
facilities investment could go ahead  with full field development                                                               
and produce an  optimal amount of gas, in this  case a plateau of                                                               
around 140  or 130 Mmcf/d.   Drawing attention to the  six charts                                                               
on  slide  11,  "COOK  INLET #2:  UN-CONSTRAINED  (RESULTS),"  he                                                               
continued his discussion of this  project.  Under the status quo,                                                               
he  noted, this  project would  be a  net present  value positive                                                               
investment for  a company.   The rate  of return would  be solid,                                                               
especially with all the currently  existing support for spending.                                                               
[Under the  provisions of the  original version of HB  247], most                                                               
of that support  would be withdrawn and would be  limited only to                                                               
the 25  percent net  operating loss  [credit], which  would occur                                                               
only in  those first three years  or so of development.   In this                                                               
case the  project would be  less highly valuable but  would still                                                               
look like  an investment  that could work  across a  fairly broad                                                               
range of  prices in  that environment.   Under the  provisions of                                                               
the CS, Version  P, things would be similar.   The economics look                                                               
very marginally better for the  company and very marginally worse                                                               
for the state.   It is all differences at the  margin and that is                                                               
because the  core difference between  Version P and  the original                                                               
bill is 30  percent support rather 25 and  support throughout all                                                               
of  the years  of ongoing  drilling  as opposed  to support  only                                                               
during the  first three  years of new  project development  for a                                                               
company that does not already have production.                                                                                  
                                                                                                                                
3:45:40 PM                                                                                                                    
                                                                                                                                
MR. MAYER  reviewed slide 12,  "COOK INLET #3:  DRILLING EXISTING                                                               
FIELD (ASSUMPTIONS)," explaining that this  type of project is an                                                               
existing mature  field where there  is already  infrastructure so                                                               
no money needs to be spent  for starting capital.  Expenditure is                                                               
limited  to the  cost  of drilling  and  higher operating  costs.                                                               
Moving  to slide  13,  "COOK INLET  #3:  DRILLING EXISTING  FIELD                                                               
(RESULTS)," he  continued his  review of an  existing field.   He                                                               
said this  type of project  would be  solidly economic in  a wide                                                               
range  of  gas price  environments,  with  double digit  internal                                                               
rates of  return.  The original  version of HB 247  would provide                                                               
no  credits  for this  type  of  project  because in  almost  any                                                               
circumstance drilling in an existing  field would not be making a                                                               
net  operating loss,  but according  to  enalytica's analysis  it                                                               
would still be  solid economic work to undertake.   Under the CS,                                                               
Version P, there would be a  20 percent capital credit [and again                                                               
would be economic to undertake].                                                                                                
                                                                                                                                
3:47:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON compared  slide 9,  constrained market,                                                               
to  slide 13,  drilling  existing field,  and  understood that  a                                                               
constrained market is the world of Cook Inlet today.                                                                            
                                                                                                                                
MR. MAYER replied correct.                                                                                                      
                                                                                                                                
REPRESENTATIVE  JOSEPHSON surmised  that  at  today's prices  and                                                               
lower,  the  companies that  are  producing  would enjoy  a  [net                                                               
operating loss (NOL) credit].                                                                                                   
                                                                                                                                
MR. MAYER responded that slide 9  is not about any given year for                                                               
eligibility of an  NOL.  The charts on slide  9, particularly the                                                               
top row of charts, are about  total value to the company, federal                                                               
government, and state government over  the entire lifespan of the                                                               
project.   In regard to  the eligibility  for an NOL,  he brought                                                               
attention to the  right chart on slide  8 for the cash  flow at a                                                               
price of $6/Mcf  and noted that a company  is definitely eligible                                                               
for an NOL  for those first three years in  which it has strongly                                                               
negative cash flow  from having spent $400 million  on building a                                                               
facility.   After that point  the company probably does  not have                                                               
negative  cash flow  and  may  well not  be  eligible  for a  net                                                               
operating loss at any point after  that point in time.  That does                                                               
not change the fact that under  the status quo at $6/Mcf, this is                                                               
still a value  destroying project if the cash  flow is discounted                                                               
at a 10 percent rate of return.                                                                                                 
                                                                                                                                
3:50:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON directed  attention to  the top  middle                                                               
graph  on slide  9 and  observed  that [for  a new  project in  a                                                               
constrained market  under the  original version  of HB  247], the                                                               
company would  enjoy an  NOL of  20 percent.   In the  top middle                                                               
graph on  slide 13 [for drilling  in an existing field  under the                                                               
original version  of HB 247],  there would be no  credits because                                                               
the project  would be in  the black.   He requested Mr.  Mayer to                                                               
explain further.                                                                                                                
                                                                                                                                
MR. MAYER  pointed out that slides  9, 11, and 13  are presenting                                                               
the  same  series of  charts  for  three different  scenarios  of                                                               
development.  The  left column on all three slides  is the status                                                               
quo, the  middle column is  the original  version of HB  247, and                                                               
the  right column  is the  CS for  HB 247,  Version P.   Slide  9                                                               
depicts the development  of a completely new project  in a market                                                               
constrained environment.  In that  circumstance a developer would                                                               
have a  net operating loss  credit in  the first three  years and                                                               
under the  original bill  that is the  only credit  the developer                                                               
would  have.   Slide 13  depicts drilling  in an  existing field,                                                               
which  means  drilling  wells  but never  having  to  spend  $400                                                               
million of  capital up front  to build an entirely  new platform,                                                               
pipelines, and all the rest.   They have very different economics                                                               
because  they are  very different  projects.   The middle  column                                                               
depicts the projects under the original  version of HB 247.  This                                                               
column on  slide 13  says no  credits because  this is  a company                                                               
that  would under  most circumstances  have substantial  existing                                                               
production and  substantial existing profits, and  would never be                                                               
eligible for  the NOL credits.   This column on slide  9 includes                                                               
the NOL  credits because  it is  a new  development and  that new                                                               
development would be eligible for  the net operating loss credits                                                               
in those first three years of spending on all those facilities.                                                                 
                                                                                                                                
3:53:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR addressed slide 8  and noted that in year two                                                               
[the  capital  expenditure] reaches  almost  $200  million.   She                                                               
observed  that in  this  type of  development  the company  would                                                               
approach [Version  P's] proposed  $200 million cap,  whereas that                                                               
cap was  $25 million in the  original bill.  She  asked Mr. Mayer                                                               
for  his thoughts  on what  the impact  would be  if the  cap was                                                               
somewhere in between those two numbers.                                                                                         
                                                                                                                                
MR. MAYER answered that the thing  to remember is that the cap is                                                               
on the  refundability of the credit  and the credit itself  is 25                                                               
percent under existing  statute and under the  original bill, and                                                               
is 10 percent  under Version P.   If it is assumed  that the peak                                                               
spending year,  the second  year, of  development is  almost $200                                                               
million, then  a 25  percent net operating  loss credit  would be                                                               
$50 million and  a 10 percent net operating loss  credit would be                                                               
$20 million.                                                                                                                    
                                                                                                                                
MR. MAYER  noted that  he had finished  his presentation  and was                                                               
available for questions.                                                                                                        
                                                                                                                                
3:54:57 PM                                                                                                                    
                                                                                                                                
CO-CHAIR NAGEAK  advised that committee members  have until March                                                               
21,  at  5:00  p.m.  to  review  and  propose  amendments.    All                                                               
amendments  must be  drafted by  Legislative  Legal Services  and                                                               
Research Services  based on  [Version P], and  given to  both co-                                                               
chair's offices.                                                                                                                
                                                                                                                                
3:55:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CHENAULT asked whether  the committee will meet at                                                               
1:00 p.m. on Monday to hear from the administration.                                                                            
                                                                                                                                
CO-CHAIR NAGEAK  agreed, and said  the committee is  scheduled to                                                               
hear from the Department of Revenue on [Version P].                                                                             
                                                                                                                                
3:55:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON requested that  at some point the committee                                                               
give consideration as  to whether the state would  really want to                                                               
invest its limited  resources in a scenario of no  market for the                                                               
gas.   The state would be  expending tons of money  that it would                                                               
never recover in  any price scenario.  In his  opinion, this type                                                               
of project [a new development  in a constrained market] should be                                                               
taken off the list.  If there  is not a market identified for the                                                               
gas so  that once  the wells  are drilled  the producer  can sell                                                               
that gas,  then he does not  think the state, in  its constrained                                                               
fiscal  system, can  be  putting money  into  a development  from                                                               
which the state will never recover its resources.                                                                               
                                                                                                                                
CO-CHAIR NAGEAK responded, "So noted."                                                                                          
                                                                                                                                
3:57:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR remarked that under  Version P there would be                                                               
great  variability  in  the  provisions  depending  upon  if  the                                                               
location is  the North Slope, Middle  Earth, or Cook Inlet.   She                                                               
asked Mr. Mayer whether that  variability is a cause for concern,                                                               
given  it   is  often  heard   that  it  is  important   to  have                                                               
predictability and durability in the state's systems.                                                                           
                                                                                                                                
MR. MAYER  replied that  having two  different fiscal  regimes by                                                               
itself is  not a cause  for concern.   Many places  have distinct                                                               
defined regimes  that apply to either  distinct geographic areas,                                                               
distinct types of production, or  other distinctions.  It is very                                                               
clear, he  said, that the  basic fiscal  regime in Cook  Inlet is                                                               
not sustainable  and is  unresolved, and  trying to  resolve that                                                               
sooner  rather  than  later  is very  important  to  the  ongoing                                                               
ability to attract investment into that basin.                                                                                  
                                                                                                                                
3:59:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  understood that  Mr. Mayer  just stated                                                               
it  is not  sustainable in  Cook  Inlet and  then said  something                                                               
about incentivizing  development into  that basin.   He requested                                                               
Mr. Mayer to restate what he said.                                                                                              
                                                                                                                                
MR. MAYER  noted that slide  3 shows  the picture of  revenue and                                                               
spending  in  Cook  Inlet  versus  the  picture  of  revenue  and                                                               
spending on  the North Slope.   He said he does  not think anyone                                                               
can  look at  that picture  and think  that it  is a  sustainable                                                               
picture.   A  certain amount  can be  done at  the moment  simply                                                               
through trying  to lay  back some  of those  credits, but  in the                                                               
long run for the health  of ongoing investment, producers need to                                                               
understand that all  of these questions are resolved  not just in                                                               
terms of  marginal changes  here or  marginal changes  there, but                                                               
from an  overall look  at the  Cook Inlet  fiscal regime  and the                                                               
ability to  set a regime for  the long term that  everyone thinks                                                               
is both fair and stable and durable.                                                                                            
                                                                                                                                
[HB 247 was held over.]                                                                                                         

Document Name Date/Time Subjects
2.3.16 - HSE RES - HB247 ver A.pdf HRES 3/19/2016 1:00:00 PM
HB 247
2.3.16 - HSE RES - HB247 Sponsor Statement - Governor's Transmittal Letter.pdf HRES 3/19/2016 1:00:00 PM
HRES 3/21/2016 1:00:00 PM
HB 247
2.3.16 - HSE RES - HB247 Fiscal Note #1-DNR-DOG-01-11-16.pdf HRES 3/19/2016 1:00:00 PM
HB 247
2.3.16 - HSE RES - HB247 Fiscal Note #2-DOR-TAX-01-13-16.pdf HRES 3/19/2016 1:00:00 PM
HB 247
2.3.16 - HSE RES - HB 247 Sectional Analysis.pdf HRES 3/19/2016 1:00:00 PM
HRES 3/21/2016 1:00:00 PM
HB 247
2.3.16 - HSE RES - HB 247 - DOR Summary of Key Features of Oil Credit Bill.pdf HRES 3/19/2016 1:00:00 PM
HRES 3/21/2016 1:00:00 PM
HB 247
HB 247 Production Tax Credits FY07-FY25 Excel Table_Figure 8-4_Fall 15 RSB.pdf HRES 3/19/2016 1:00:00 PM
HB 247
HSE RES CS for HB 247 - 29-GH2609 - ver P.pdf HRES 3/19/2016 1:00:00 PM
HB 247
HSE RES - CS HB 247 enalytica analysis 3-19-16.pdf HRES 3/19/2016 1:00:00 PM
HB 247
HSE RES CS for HB 247, ver P - Summary of Changes.pdf HRES 3/19/2016 1:00:00 PM
HB 247
HSE RES CS for HB 247, ver P - Sectional Analysis 3.19.16.pdf HRES 3/19/2016 1:00:00 PM
HB 247