Legislature(2007 - 2008)SENATE FINANCE 532
05/07/2007 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB168 | |
| SB80 | |
| SB27 | |
| SB116 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 168 | TELECONFERENCED | |
| + | SB 80 | TELECONFERENCED | |
| + | SB 27 | TELECONFERENCED | |
| + | SB 116 | TELECONFERENCED | |
| + | TELECONFERENCED |
9:11:08 AM CS FOR SENATE BILL NO. 80(RES) "An Act relating to allowable lease expenditures for the purpose of determining the production tax value of oil and gas for the purposes of the oil and gas production tax; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Stedman announced action would not be taken on the bill at this hearing. 9:11:47 AM SENATOR TOM WAGONER, sponsor of the bill, introduced himself and a member of his staff. 9:12:13 AM MARY JACKSON, Staff to Senator Tom Wagoner, testified that this bill would prohibit oil and gas producers from deducting, from the net tax calculation of the Petroleum Profits Tax (PPT), any costs incurred as a result of improper maintenance or lack of maintenance by the producer. By stipulating this in statutes, the Department of Revenue would be allowed to develop regulations to implement the provisions. Ms. Jackson explained that Section 1 of the bill would amend AS 43.55.165(e), providing for exclusions from lease expenditures, by adding a new subparagraph (19) on page 3, lines 19 through 30. This subparagraph "set out who's responsible for determining improper maintenance." Currently, the commissioner of the Department of Revenue in consultation with the commissioners of the Department of Environmental Conservation and the Alaska Oil and Gas Conservation Commission (AOGCC), had the responsibility. This bill would provide that the commissioner of the Department of Revenue would make determinations in consultation with the commissioner of the Department of Natural Resources and the "newly formed" Petroleum System Integrity Office (PSIO) within the Department of Natural Resources. The PSIO was not specifically named in the provision in the event the title of the office was changed; instead a description of the Office's purpose was provided. Ms. Jackson acknowledged the possible duplicity of requiring consultation with both the Department of Natural Resources' commissioner and PSIO. However inclusion of both would demonstrate legislative intent that the PSIO was "charged with … overseeing the pipeline systems in the state of Alaska." 9:14:43 AM Ms. Jackson informed that the existing statute utilized the term "standard practices of the industry" and would be changed to "good oil field practice", a term that was "recognized" by the industry. Ms. Jackson reported that the "affected agencies" supported all the amendments adopted in the Senate Resources Committee substitute. Some were proposed by the departments. 9:15:15 AM Ms. Jackson pointed out that the committee substitute deleted the language of (19)(B) from the existing statute, which Senator Wagoner would speak to. 9:15:32 AM Ms. Jackson stated that Section 2 of the bill provided that the changes made in Section 1 would have a retroactive applicability date for oil and gas produced after March 31, 2006. This was the effective date of the original statute. 9:16:12 AM Senator Wagoner objected to the Senate Resources Committee substitute because of the deletion of unallowable expenses described in AS43.55.165(e)(19)(B) from the original version of the bill and which read as follows. (B) incurred to maintain the operational capability of facilities or equipment shut down because of improper maintenance of property or equipment Senator Wagoner informed that this language was deleted by an amendment offered in the Senate Resources Committee by a vote of five yeas, two nays. The argument employed in this effort was the same argument presented by Senator Ben Stevens to the Senate Special Committee on Natural Gas Development during the special legislative session held in August 2006 pertaining to the PPT. Senator Wagoner "found that connection to be at least curious in the sight of the ongoing investigation of PPT." Senator Wagoner read further from a prepared statement as follows. I was not a supporter of the net system. I worked very hard to keep the net system at a higher level than it came in at. I did finally vote for the net system, but I prefer the gross system at all times. And I still at this time prefer a gross system. I think we're starting to see some of the reasons why a gross system is less controversial. I resign myself to the net system and made numerous attempts to amend that system. Those attempts were successful except for one instance and that was done at this table and that's why we're here at this table now. The one amendment that failed is the bill before you today. It failed by a vote of five yeas, seven nays. Obviously, had it not failed we wouldn't be here discussing it today. More importantly, all those concerns now connected with the bill, the retroactive implementation, the lack of standards or regulations of the Department of Revenue, which would have followed the passage of the amendment, all those concerns would be nonexistent. But they are existence and how to implement this provision to put a tourniquet on the potential revenue bleed from deductions is at issue. 9:18:40 AM Senator Huggins commented that the amendment Senator Wagoner referred to was brought to him as chair of the Senate Resources Committee by John Norman, Chair, AOGCC. Mr. Norman pointed out the advantages and disadvantages of "what it represented". A policy call was necessary to determine whether to provide "an incentive to keep a facility operating when it could be dangerous." Mr. Norman analogized an aircraft that required maintenance yet continued to fly. 9:20:03 AM Senator Wagoner affirmed the account of Mr. Norman's testimony before the Senate Resources Committee was correct. However, not mentioned was that Kevin Banks of the Department of Natural Resources was available but not provided an opportunity to speak to the amendment. Additionally, John Iverson was available but not provided an opportunity to testify to the amendment. These two people would be involved in the drafting of the regulations to implement this legislation and they disagreed with Mr. Norman's summary of the bill. Senator Wagoner opined, "Let's face it, John Norman through the Oil and Gas Conservation Commission, he's a brilliant man and everything else, but his responsibility stops at the wellhead." By contrast, the Department of Natural Resources and the Department of Revenue had responsibility for actions from the point of the wellhead to transfer to an oil freighter for shipment out of the state. 9:21:38 AM JUDY BRADY, Executive Director, Alaska Oil and Gas Association, testified via teleconference from an offnet location about the trade association that represented oil and gas producers in the state. This bill reflected a topic of discussion and "controversy" and she appreciated the co-chair's stated objective to hold the bill in Committee at this time. All parties must avoid "a reaction that ends in a bad bill." Ms. Brady reminded that the amendment offered during the August 2006 special session by Senator Wagoner was done so after the closure of BP's operations on the North Slope due to leakage in the oil transit line. However the question of the definitions of "properly maintained" and "diminished capacity" remained, as well as identification of the appropriate party qualified to make such determinations. She detailed the considerations, including whether an auditor would make determinations and whether an event such as an oil spill must occur before the determination could be made. She remarked "If so, it's already taken care of." Ms. Brady surmised that the original amendment was defeated due to an understanding at the time that "the concerns of improper maintenance were already taken care of" through "other pieces of the Act". The Association continued to hold this opinion. Pedro Van Meurs who served as an oil and gas consultant to the former Murkowski Administration, suggested as an alternative "to trying to look at every single incidence of capital expenditure, a three-cent deduction that would act as a proxy for decisions on every single capital expenditure." Ms. Brady continued as follows. Expenditures related to actual leaks or incidents are already taken care of. You cannot deduct those. So what you're talking about here in this bill is having an auditor have to make the decision on every single capital expenditure for every time there is a shut down, taking a look to see if that was related to improper maintenance. That simply is not done anywhere. It's not done anywhere in the world; it's not done between operators on a field. All of the main concerns that legislators had are already incorporated in the Act. Lease expenditures would not include costs arising from fraud, willful misconduct or gross negligence. Lease expenditures - costs incurred for containment, control, cleanup or removal in connection with any unpermitted release of oil or hazardous substance would not be included in the lease expenditures. There seems to be a conversation here going on in the background that legislators at the time were not paying attention to what happened at Prudhoe Bay [and] were not concerned that the State's interests were being protected. Not only were the State's interests being protected by the legislators at the time, Governor Murkowski at the time and the director of DEC put 120 hour notification of fund access to the response account for $8 million for a study for the Department of Law and DEC to take a look at the State's interests in the spill. That study is still ongoing. We found out about it just recently when we realized that the $50 million response fund and the "470 fund" was open again for the one-cent per barrel money from Prudhoe Bay. Let me read you what the State is looking at right now. This is an ongoing study going on right now, I would suggest, Mr. Chairman that perhaps the people from Law and DEC could come in and talk about where they are. "The purpose of this was to investigate the maintenance corrosion management practices and to recover all State costs and lost revenues including fines and penalties." They asked for the $8 million because they talked about the amount of work that was going to be required to go through all of the investigations, to hire engineer companies to do all of the things that were going to be required for them. And they said that "the State has incurred costs for response oversight mitigation assessment repair replacement of corroded pipeline. Moreover the State incurred substantial losses in revenue from royalty, severance tax and corporate income tax from the loss of crude oil production as a result." So if anybody is implying or believes that legislators and people in DEC and Department of Law last year were not paying attention to the State's interests, they're wrong with respect, because the State was taking all the actions you would expect the State to take to make sure its interests were covered. The reason that this amendment last year was voted down was because the people - because there was a good showing that in fact all of the concerns that were expressed in this amendment were already taken care of, and as a matter of fact the language in the amendment was unworkable. …when this bill was introduced again this year, both DEC, DNR, AOGCC, all wrote letters saying that the language was not workable. Some changes have been made now to try to move it in a direction that it is workable, but you've still got a couple of issues. One is that … there is no incident that kicks off an investigation or kicks of a red flag to the auditor. It's going to have to be every capital expense. That's going to be a huge issue. The other thing I'm hoping that you will have time to do is have someone from Department of Revenue talk to you who is familiar with the audit process; someone who knows the audit process. It's at least a three-year process. Commissioner John Norman when he was talking earlier about how difficult this is going to be to implement, was saying if an auditor red flags a cost, and they're going to have to look at every one of them, it's going to be three years before you know - before the company knows, what costs are approved and what costs aren't approved. By that time, the likelihood is you're going to be in either court or in some kind of administrative action and we are going to be in exactly the same situation that we were with the gross production tax because it was not thought out at the very beginning and we ended up with billions of dollars in tax revenues in dispute. Once that happens, neither the companies nor the State could make a move to resolve the issues because everybody was afraid of influencing or losing money on both sides. I think there was a commitment made when PPT passed, that this not happen again - that the regulations would be clear; that there would be a process that worked for everybody, because everybody was concerned about the process, that we would not get into this backed up billion dollar tax unbreakable dead end again. It makes for terrible relationships between the State and the companies and influences everything that happens because its right there, like this black cloud in the background. We have expressed some other legal concerns with this and I will with your permission not take your time now. I will send you a copy of our testimony. The main points are these. We believe the State is already protected. We believe that this bill is going to affect Cook Inlet as well as it will affect the whole state. It will affect every capital expenditure. It adds a convoluted process that has not happened in any other taxing jurisdiction as far as we know in the world. The two things I would hope you would do is talk to Department of Law and DEC about how their investigation is going to make sure you are comfortable the State's interests are covered; to go over again the first 18 exclusions in the bill to reconfirm to yourself that you believe that the State's interests are protected. And to have a discussion of the audit process so you can see what's going to happen automatically with this kind of hang-up with every capital expenditure that is requested. What this does of course is make it almost impossible for the PPT tax system to work. And if that was the intent, it's very successful intent. Co-Chair Stedman requested the witness summarize her testimony. Ms. Brady continued. The hope now would be again that Department of Law and DEC come in and talk about the $8 million of study they're undertaking as well as the audit process. Our hope is that the legislature will come to the conclusion that the State's rights and interests are protected. 9:34:13 AM JOHN IVERSON, Director, Tax Division, Department of Revenue, testified via teleconference from an offnet location. 9:34:38 AM Co-Chair Stedman requested Mr. Iverson speak to the fiscal notes. 9:34:46 AM Mr. Iverson stated that the Department of Revenue fiscal note reflected that the Department did not know what the actual fiscal impact of this legislation would be. A petroleum engineer was currently contracted by the Department to provide expertise on oil and gas industry practices. Passage of this legislation would likely require that a second engineer be contracted to assist in determinations of proper maintenance and other matters. Mr. Iverson, addressing the issue of auditing, informed that each capital expenditure would not be audited. Rather a "sampling" method would be employed. 9:38:20 AM Senator Thomas identified the impetuous of this provision as the oil spill that occurred the previous summer as a result of corrosion. He understood that tax filings made by BP indicate that the company intended to "write off" the costs to repair the system. 9:39:02 AM Mr. Iverson referenced a media report published February 16, 2007 by the Anchorage Daily News that indicated that BP would seek tax relief for pipeline repairs. He could not provide details of taxpayer returns because the information was statutorily confidential. 9:39:42 AM Co-Chair Stedman asked the date the Department would have the ability to inform the Committee of the claimed deductions, including those that were rejected. 9:40:17 AM Mr. Iverson estimated the information could either be available in one year's time or two year's time. The process in establishing an audit system of the PPT required recruitment and training of auditors. The normal audit process would last one year once the system was operational. 9:40:53 AM Senator Thomas asked if the tax returns were filed for a 12 month calendar year period. 9:41:02 AM Mr. Iverson affirmed. 9:41:14 AM Co-Chair Stedman established no additional testimony was forthcoming and that members had no further questions. Co-Chair Stedman ordered the bill HELD in Committee. AT EASE 9:41:28 AM / 9:42:51 AM
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