Legislature(2005 - 2006)SENATE FINANCE 532

04/22/2006 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to a Call of the Chair --
+= SB 305 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Moved CSSB 305(FIN) Out of Committee
+ HB 357 STATUTORY REFERENCES TO DISABILITIES TELECONFERENCED
Moved CSHB 357(FIN) Out of Committee
+ HB 394 INSURANCE POLICIES IN FOREIGN LANGUAGES TELECONFERENCED
Moved CSHB 394(L&C) am Out of Committee
+ HB 400 CONFISCATION OF FIREARMS TELECONFERENCED
Moved SCS CSHB 400(JUD) Out of Committee
+ HB 408 DEFINITION OF CHILD ABUSE AND NEGLECT TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                                                                                                                                
     CS FOR SENATE BILL NO. 305(RES)                                                                                            
     "An  Act providing  for a  production  tax on  oil and  gas;                                                               
     repealing  the  oil  and  gas  production  (severance)  tax;                                                               
     relating to the calculation of  the gross value at the point                                                               
     of production of oil or gas  and to the determination of the                                                               
     value of oil  and gas for purposes of the  production tax on                                                               
     oil and gas;  providing for tax credits against  the tax for                                                               
     certain   expenditures   and   losses;   relating   to   the                                                               
     relationship of the  production tax on oil and  gas to other                                                               
     taxes, to  the dates those  tax payments and  surcharges are                                                               
     due,  to interest  on overpayments  of the  tax, and  to the                                                               
     treatment of  the tax  in a  producer's settlement  with the                                                               
     royalty owners; relating  to flared gas, and to  oil and gas                                                               
     used  in the  operation of  a  lease or  property under  the                                                               
     production tax; relating  to the prevailing value  of oil or                                                               
     gas  under the  production  tax; relating  to surcharges  on                                                               
     oil; relating  to statements  or other  information required                                                               
     to be filed with or  furnished to the Department of Revenue,                                                               
     to the penalty  for failure to file certain  reports for the                                                               
     tax, to the powers of the  Department of Revenue, and to the                                                               
     disclosure of  certain information required to  be furnished                                                               
     to  the   Department  of  Revenue   as  applicable   to  the                                                               
     administration of  the tax;  relating to  criminal penalties                                                               
     for  violating conditions  governing  access to  and use  of                                                               
     confidential  information relating  to the  tax, and  to the                                                               
     deposit  of  tax  money  collected   by  the  Department  of                                                               
     Revenue;  amending  the  definitions of  'gas,'  'oil,'  and                                                               
     certain other terms for purposes  of the production tax, and                                                               
     as the  definition of the  term 'gas' applies in  the Alaska                                                               
     Stranded   Gas   Development   Act,   and   adding   further                                                               
     definitions;  making  conforming amendments;  and  providing                                                               
     for an effective date."                                                                                                    
                                                                                                                                
                                                                                                                                
This was the sixteenth hearing for this bill in the Senate                                                                      
Finance Committee. Committee substitute, CSSB 305, Version 24-                                                                  
GS2053\P was the working draft before the Committee.                                                                            
                                                                                                                                
9:17:21 AM                                                                                                                    
                                                                                                                                
Amendment  #7: This  amendment  inserts  "or explorer"  following                                                               
"producer" where it appears in  subsection (i) of Sec. 43.55.024.                                                               
Tax  credits  for  certain losses  and  expenditures.,  added  in                                                               
Section 12 on page 9 line 26 through page 10, line 21.                                                                          
                                                                                                                                
This amendment also inserts a new subsection to Sec. 43.55.024                                                                  
on page 10, following line 21 to read as follows.                                                                               
                                                                                                                                
          (j) A producer or explorer that does not produce an                                                                   
     amount of oil and gas in  a taxable year under AS 43.20 that                                                               
     is  more than  50,000 barrels  of oil  equivalent may  apply                                                               
     against  the  producer's  or explorer's  tax  due  for  that                                                               
     taxable year under AS 43.20  a tax credit under this section                                                               
     that would otherwise  be applicable against a  tax due under                                                               
     AS 43.55.011(e)  but for  the limitation set  out in  (e) of                                                               
     this section. An  amount of a tax credit may  not be applied                                                               
     against both  a tax due under  AS 43.20 and a  tax due under                                                               
     AS 43.55.011(e).  For purposes of this  subsection, a barrel                                                               
     of oil equivalent is                                                                                                       
               (1) one barrel of oil, in the case of oil;                                                                       
               (2) 6,000 cubic feet of gas, in the case of gas.                                                                 
                                                                                                                                
This amendment  also inserts ", or  in lieu of," to  the language                                                               
of  subsection  (d)(1)(B)  of Sec.  43.55.160.  Determination  of                                                               
production tax  value of  oil and  gas., added  by Section  26 on                                                               
page 20, line 17. The amended language reads as follows.                                                                        
                                                                                                                                
    (d) For purposes of (c) of this section, "direct costs"                                                                     
               (1) includes                                                                                                     
          …                                                                                                                     
                    (B) payments of, or in lieu of, property                                                                    
          taxes, sales and use taxes, motor taxes, motor fuel                                                                   
          taxes, and excise taxes;                                                                                              
                                                                                                                                
This amendment also inserts ",  other than tax credits under this                                                               
chapter," following  "credits" in subsection (e)  Sec. 43.55.160.                                                               
Determination of production  tax value of oil and  gas., added by                                                               
Section 26  on page  22, line  1. The  amended language  reads as                                                               
follows.                                                                                                                        
                                                                                                                                
          (e) … The payments or credits that a producer shall                                                                   
     subtract  from the  producer's lease  expenditures, or  from                                                               
     zero, under  this subsection are payments  or credits, other                                                               
     than  tax  credits  under  this  chapter,  received  by  the                                                               
     producer for                                                                                                               
                                                                                                                                
This   amendment  also   deletes  "number   of  barrels   of  oil                                                               
equivalent"  and  inserts  "amount  of  oil  and  gas"  following                                                               
"average"; inserts  "barrels of oil equivalent  following "5,000"                                                               
and again following  "more"; and deletes "number  of" and inserts                                                               
"amount  of oil  and gas,  expressed as"  following "average"  in                                                               
subsection (a) of Sec.  43.55.170. Additional nontransferable tax                                                               
credit., added in Section 26 on  page 23, line 26 through page 24                                                               
line 6. The amended language reads as follows                                                                                   
                                                                                                                                
          (a) For a month that ends before July 1, 2016, and for                                                                
     which  a  producer's  tax liability  under  AS  43.55.011(e)                                                               
     exceeds zero  before application  of any credits  under this                                                               
     chapter,  a  producer  that  qualifies  under  (c)  of  this                                                               
     section  may  take  a  credit under  this  section.  If  the                                                               
     average amount  of oil  and gas produced  a day  during that                                                               
     month and taxable under AS 43.55.011(e) is                                                                                 
               (1) not more than 5,000 barrels of oil                                                                           
     equivalent, the amount of the  credit is 22.5 percent of the                                                               
     producer's  production tax  value  for that  month under  AS                                                               
     43.55.160(a);                                                                                                              
               (2) 5,000 or more barrels of oil equivalent, the                                                                 
     amount  of the  credit  is 22.5  percent  of the  producer's                                                               
     production tax  value for that  month under  AS 43.55.160(a)                                                               
     multiplied by the  quotient of 5,000 divided  by the average                                                               
     amount  of  oil  and  gas,   expressed  as  barrels  of  oil                                                               
     equivalent, produced a day during that month and taxable.                                                                  
                                                                                                                                
This amendment also deletes "under AS 43.55.024(d)" from Sec.                                                                   
43.55.170 (b)(3), on page 24, line 10. The amended language                                                                     
reads as follows.                                                                                                               
                                                                                                                                
               (3) is not transferable and may not be carried                                                                   
     forward or used in a different month;                                                                                      
                                                                                                                                
This amendment also inserts a new section to AS 43.55 article 1                                                                 
in Section 26, on page 24, following line 26 to read as follows.                                                                
                                                                                                                                
          Sec. 43.55.185. Tax credits for gas treatment                                                                         
     facilities.  (a)  a producer  that  incurs  a gas  treatment                                                               
     investment expenditure on or after  July 1, 2006, may take a                                                               
     tax credit in the amount  of 35 percent of that expenditure.                                                               
     A credit  under this  section may be  applied against  a tax                                                               
     due  under  AS   43.20  or  against  a  tax   due  under  AS                                                               
     43.55.011(e). an amount  of a tax credit may  not be applied                                                               
     against both  a tax due under  AS 43.20 and a  tax due under                                                               
     AS 43.55.011(e).                                                                                                           
          (b) For a calendar year for which the producer makes                                                                  
     an election under  AS 43.55.160(f), instead of  taking a tax                                                               
     credit at a  rate authorized by (a) of this  section as to a                                                               
     gas  treatment  investment  expenditure after  it  has  been                                                               
     incurred, a producer that incurs  a gas treatment investment                                                               
     expenditure during  that year and  wished to apply  a credit                                                               
     based  on  that  expenditure  against a  tax  due  under  AS                                                               
     43.55.011(e)  shall  calculate  and  apply  every  month  an                                                               
     annualized tax credit in an  amount equal to 2 11/12 percent                                                               
     of that expenditure.                                                                                                       
          (c) A credit or portion of a credit under this section                                                                
     may not be  used to reduce a producer's  tax liability under                                                               
     AS 43.20  for any  taxable year below  zero or  a producer's                                                               
     tax  liability under  AS 43.55.011(e)  for  any month  below                                                               
     zero.  Any unused  credit or  portion of  a credit  not used                                                               
     under this subsection may be  applied in a later year, under                                                               
     AS 43.20, or a later month, under AS 43.55.011(e).                                                                         
          (d) A tax credit under this section is not                                                                            
     transferable.                                                                                                              
          (e) In this section,                                                                                                  
               (1) "gas treatment facility" means a facility or                                                                 
     portion of  a facility in  the state devoted  exclusively to                                                               
     gas treatment;                                                                                                             
               (2) "gas treatment investment expenditure" means                                                                 
     an expenditure that is                                                                                                     
                    (A) a direct, ordinary, and necessary cost                                                                  
          of acquiring or constructing a new gas treatment                                                                      
          facility or of improving a gas treatment facility;                                                                    
                    (B) treated as a capitalized expenditure                                                                    
          under 26 U.S.C. (Internal Revenue Code), as amended;                                                                  
          and                                                                                                                   
                    (C) treated as a capitalized expenditure for                                                                
          federal income tax reporting purposes by the person                                                                   
          incurring the expenditure;                                                                                            
               (3) "ordinary and necessary" has the meaning                                                                     
     given  to   "ordinary  and  necessary"  in   26  U.S.C.  162                                                               
     (Internal  Revenue   Code),  as  amended,   and  regulations                                                               
     adopted under that section.                                                                                                
                                                                                                                                
This amendment also inserts new  language to subparagraph (19) of                                                               
AS 43.55.900  amended in Section  34, on page 27,  following line                                                               
29 to read as follows.                                                                                                          
                                                                                                                                
                    (C) does not include gas liquefaction;                                                                      
                                                                                                                                
This  amendment also  makes  grammatical  changes and  conforming                                                               
changes.                                                                                                                        
                                                                                                                                
Co-Chair  Green  stated  that this  amendment  was  developed  in                                                               
response  to  the  issues  raised by  Senator  Dyson  during  the                                                               
previous day's  hearing. The amendment also  addressed the manner                                                               
in which remote  gas treatment facilities would  be treated under                                                               
this Petroleum Profits Tax (PPT) legislation.                                                                                   
                                                                                                                                
9:18:07 AM                                                                                                                    
                                                                                                                                
ROBYNN  WILSON, Director,  Tax Division,  Department of  Revenue,                                                               
was available to answer questions.                                                                                              
                                                                                                                                
Co-Chair Wilken moved  for adoption of Amendment  #7 and objected                                                               
for discussion.                                                                                                                 
                                                                                                                                
9:18:34 AM                                                                                                                    
                                                                                                                                
ROBERT MINTZ, Attorney with Preston  Gates Ellis law firm, former                                                               
Assistant   Attorney  General,   Oil,  Gas   &  Mining   Section,                                                               
Department of Law,  secured as a consultant by  the Department of                                                               
Law, testified from an offnet  location to explain the amendment.                                                               
He noted that  in addition to substantive  changes, the amendment                                                               
made  grammatical changes  such  as the  addition  of commas  for                                                               
clarity purposes.                                                                                                               
                                                                                                                                
Mr. Mintz stated that the inclusion  of the term "or explorer" in                                                               
Sec.12 subsection (i)(1) page 9 lines  27, 28, and 30 and page 10                                                               
lines 1 and  2 would further clarify  the transitional investment                                                               
expenditure  credit provision.  Both a  producer and  an explorer                                                               
could  "take  advantage"  of the  qualified  capital  expenditure                                                               
credits and  the net loss  carry forward credits,  also addressed                                                               
in Sec. 12, because those  credits could be transferred through a                                                               
transferable tax credit certificate.                                                                                            
                                                                                                                                
Mr.  Mintz  pointed  out   that  currently  the  non-transferable                                                               
transitional investment expenditure credit  provisions in Sec. 12                                                               
only  specified that  a producer  could  utilize that  particular                                                               
credit, as  "a producer  is the  only type  of entity  that could                                                               
benefit from  that credit. However",  the addition  of subsection                                                               
(j)  as  proposed  in  the   amendment,  allow  the  transitional                                                               
investment expenditure  credit to  be applied against  either the                                                               
production tax or the State  corporate income tax. This expansion                                                               
would  then avail  the benefits  of  the transitional  investment                                                               
expenditure  provision to  either a  small explorer  or producer.                                                               
The term "or  explorer" would also be  added following "producer"                                                               
to language in  Sec. 12 page ten  lines 5, 7, 8, 10,  12, 13, and                                                               
19 for the same reason.                                                                                                         
                                                                                                                                
9:25:32 AM                                                                                                                    
                                                                                                                                
Mr. Mintz expressed that subsection  (j) would also allow a small                                                               
producer or  an explorer  producing less  than 50,000  barrels of                                                               
oil  equivalent  (BOE)   on  an  annual  basis   to  apply  their                                                               
transitional investment expenditure tax  credit against their PPT                                                               
tax or  their income tax. He  noted that 6,000 cubic  feet of gas                                                               
would be equivalent to one barrel of oil.                                                                                       
                                                                                                                                
9:26:52 AM                                                                                                                    
                                                                                                                                
Senator  Stedman  noted  that   the  Senate  Resources  Committee                                                               
eliminated the  ability of  a producer or  explorer to  apply the                                                               
credits specified in Sec. 12  against their corporate income tax.                                                               
Continuing, he  questioned whether the addition  of this language                                                               
would  affect   the  lookback  provisions  pertaining   to  major                                                               
producers.                                                                                                                      
                                                                                                                                
9:27:27 AM                                                                                                                    
                                                                                                                                
Mr.  Mintz  stated  that  this   would  be  a  policy  call.  His                                                               
understood that  the reason  that previous  versions of  the bill                                                               
only allowed  the credits to  be applied to  the PPT tax  was "to                                                               
protect State  revenues against unduly  large hits".  The thought                                                               
was  that were  the State  to experience  a dramatic  decrease in                                                               
revenue  under  the PPT,  then  the  corporate income  tax  would                                                               
assist in supporting the State's  budget. However, this amendment                                                               
would  not affect  the  income  tax revenues  to  a great  degree                                                               
because  it was  limited  to small  producers  or explorers  with                                                               
"very small  production". Subsection (j) was  intended to provide                                                               
"the  benefits of  the  tax credits  to  small producers  without                                                               
opening up the income tax to large hits".                                                                                       
                                                                                                                                
9:28:41 AM                                                                                                                    
                                                                                                                                
Senator  Stedman continued  to  be puzzled  about  the intent  of                                                               
subsection  (j). The  bill already  contained transitional  look-                                                               
back provisions geared to benefit  larger producers and the 5,000                                                               
barrel per day exclusion for  smaller producers. He asked whether                                                               
the 50,000  barrel provision  proposed in  subsection (j)  was an                                                               
annual limit.                                                                                                                   
                                                                                                                                
9:29:16 AM                                                                                                                    
                                                                                                                                
Mr. Mintz  affirmed it  was. The original  thought was  that this                                                               
provision would apply to "someone  who was not producing at all".                                                               
While the  transition investment expenditure  lookback provisions                                                               
contained in  the bill  would benefit  "large producers  who have                                                               
already made  a lot  of investment  in the  State", there  was at                                                               
least one company, which while  making significant investments in                                                               
the  State during  the last  few years,  had not  yet experienced                                                               
production or a  significant level of production  to benefit from                                                               
the transitional  investment expenditure credits.  Subsection (j)                                                               
would ensure they could benefit from their investment.                                                                          
                                                                                                                                
9:30:18 AM                                                                                                                    
                                                                                                                                
Ms.  Wilson  agreed  that  that   was  the  rational  for  adding                                                               
subsection (j).  A 50,000 BOE  would equate to  approximately 150                                                               
barrels  a day.  Small  producers might  have  "credits that  are                                                               
unused in  the production  tax area but  are paying  State income                                                               
tax". A  producer might be paying  a State income tax  because of                                                               
production  they experienced  in other  areas of  the country  as                                                               
Alaska "taxes a piece" of  a company's worldwide business. Thus a                                                               
company  might  have  "a corporate  income  tax  liability  while                                                               
having these credits unused on the production tax side".                                                                        
                                                                                                                                
9:31:26 AM                                                                                                                    
                                                                                                                                
Senator  Stedman recalled  that  an extensive  analysis had  been                                                               
conducted  regarding the  affect of  the look  back provision  on                                                               
State revenue.  He asked  whether the cost  of this  proposal had                                                               
been analyzed.                                                                                                                  
                                                                                                                                
9:31:43 AM                                                                                                                    
                                                                                                                                
Ms. Wilson stated  that if the question was "how  much of assumed                                                               
capital expenditures over the last five  years had to do with the                                                               
small  companies",   then  the  answer  was   approximately  $250                                                               
million. That  was a "small  amount compared to  the expenditures                                                               
of the major producers".                                                                                                        
                                                                                                                                
9:32:31 AM                                                                                                                    
                                                                                                                                
Mr. Mintz stated  that the inclusion of the  word "and" following                                                               
the word "transportation;"  in Sec. 24 subsection  (a)(2) page 17                                                               
line 6 "would  clarify" rather than "change existing  law" as the                                                               
intent was  that all three of  the criteria specified in  Sec. 24                                                               
subsection (a)(1),(2)  and (3) must  be present in order  for the                                                               
Department of Revenue to exclude  a cost from being considered an                                                               
actual cost of transporting oil or gas.                                                                                         
                                                                                                                                
9:33:49 AM                                                                                                                    
                                                                                                                                
Mr. Mintz stated  that the next component of  the amendment would                                                               
address language in  Sec. 26 subsection (d) beginning  on page 20                                                               
line 11 through page 21 line  20; specifically that the term ",or                                                               
in  lieu  of,"  would  be inserted  following  "payments  of"  in                                                               
(d)(1)(B) page  20, line 17 in  the listing of "examples  of what                                                               
costs are considered 'direct costs'".  The revised language would                                                               
read as follows.                                                                                                                
                                                                                                                                
               (B) payments of, or in lieu of, property taxes,                                                                  
     sales and use taxes, motor fuel taxes, and excise taxes;                                                                   
                                                                                                                                
Mr. Mintz stated that this  language would be more appropriate as                                                               
there "are  situations where a  producer makes a payment  in lieu                                                               
of taxes.  It does the  same function  it's just not  literally a                                                               
tax". This practice  has occurred in relation to  the North Slope                                                               
Borough. It  was not the intent  of the bill to  exclude payments                                                               
in lieu of taxes from being considered a direct cost.                                                                           
                                                                                                                                
9:35:09 AM                                                                                                                    
                                                                                                                                
Senator Hoffman asked for examples of this occurrence.                                                                          
                                                                                                                                
Mr. Mintz stated  that producers have made payments  to the North                                                               
Slope  Borough "in  lieu  of taxes  for  certain services".  Upon                                                               
further  questioning from  Senator Hoffman,  he could  not recall                                                               
specifics.                                                                                                                      
                                                                                                                                
Senator Hoffman stated  that the addition of  this language would                                                               
"leave a pretty  wide open field" as the question  was "who would                                                               
be determining this".                                                                                                           
                                                                                                                                
9:36:11 AM                                                                                                                    
                                                                                                                                
Ms. Wilson  understood that a  tax was  "paid to the  North Slope                                                               
Borough  in lieu  of property  tax".  The amendment  specifically                                                               
identified payments in  lieu of property tax, as  did language in                                                               
the original  PPT bill,  SB 305.  Version "P"  did not  make that                                                               
distinction. Thus, this language would clarify that intent.                                                                     
                                                                                                                                
Ms.  Wilson  stated that  the  direct  costs  listed in  Sec.  23                                                               
subsection (d) should not be  considered "inclusive". They simply                                                               
addressed "specific  areas where  there might be  confusion". For                                                               
instance the question might arise as  to whether "a tax direct to                                                               
a lease"  would be considered  deductible. "This list  includes a                                                               
clarification  that  payments  for  property taxes  are  in  fact                                                               
deductible direct  expenses and  this amendment  simply clarifies                                                               
that a payment made in lieu of  that tax will be treated the same                                                               
as an actual property tax".                                                                                                     
                                                                                                                                
Senator  Hoffman acknowledged  but reiterated  his concern  as to                                                               
who "would be making this determination of this tax".                                                                           
                                                                                                                                
9:37:39 AM                                                                                                                    
                                                                                                                                
Mr. Mintz corrected his remarks.  Rather than the payment in lieu                                                               
of specifically  applying to  property taxes,  it would  apply to                                                               
each of the elements listed in subsection (d)(1)(B).                                                                            
                                                                                                                                
Mr.  Mintz expressed  that the  concept  of payments  in lieu  of                                                               
taxes was  not a "novel" idea.  The concept has been  utilized by                                                               
"tax exempt institutions that are  not obligated to pay taxes but                                                               
do anyway" such as universities and churches.                                                                                   
                                                                                                                                
Mr. Mintz  stated that in  this instance, a producer  might agree                                                               
to pay something  that would substitute "for a tax,  but it's not                                                               
literally a  tax". However,  "since it  serves the  same function                                                               
economically it  seems appropriate to  make clear that  it should                                                               
get the same treatment for purposes of lease expenditures".                                                                     
                                                                                                                                
9:38:52 AM                                                                                                                    
                                                                                                                                
Senator  Olson  asked  whether Mr.  Mintz  "was  retracting"  his                                                               
statement that  producers had made  payments "to the  North Slope                                                               
Borough for services".                                                                                                          
                                                                                                                                
9:39:14 AM                                                                                                                    
                                                                                                                                
Mr. Mintz  apologized for being  unfamiliar with  this situation.                                                               
He had heard  Dan Dickinson, the PPT consultant to  the Office of                                                               
the  Governor,  mention this.  To  that  point, however,  he  was                                                               
unsure  whether it  was "tied  to  specific services"  or was  "a                                                               
substitute for a general tax".                                                                                                  
                                                                                                                                
Senator  Olson  could not  determine  whether  the payment  being                                                               
discussed would  be paid  to the  State or  to the  Borough. This                                                               
should be clarified.                                                                                                            
                                                                                                                                
9:40:00 AM                                                                                                                    
                                                                                                                                
Mr.  Mintz  stated  that  the  taxes  listed  in  (d)  "would  be                                                               
considered direct costs, regardless  of what jurisdiction they're                                                               
paid to, whether it's local or State".                                                                                          
                                                                                                                                
9:40:23 AM                                                                                                                    
                                                                                                                                
Co-Chair Wilken understood  therefore that the payment  made by a                                                               
producer to  the North Slope Borough  in lieu of taxes,  would be                                                               
"deducted from the  exposure to the PPT. Therefore  the people of                                                               
Alaska participate in that".                                                                                                    
                                                                                                                                
9:40:53 AM                                                                                                                    
                                                                                                                                
Mr.  Mintz stated  that  "the  short answer  would  be yes".  The                                                               
intent of subsection (d) would be  to specify what would or would                                                               
not  be  considered direct  costs.  In  order to  be  deductible,                                                               
"costs must be  direct ordinary and necessary".  Thus, in theory,                                                               
a cost "would not automatically  be deductible" solely because it                                                               
was direct.  He would "expect  that taxes that are  directly tied                                                               
to oil and gas exploration,  production or development activities                                                               
would  be deductible".  The  22.5 percent  tax  rate proposed  in                                                               
Version "P" "would be shared 22.5 percent by the State".                                                                        
                                                                                                                                
9:41:49 AM                                                                                                                    
                                                                                                                                
Co-Chair Wilken asked  which State entity had the  listing of any                                                               
such "payments  that were  made from the  producers to  the North                                                               
Slope Borough" over the past five years.                                                                                        
                                                                                                                                
Mr.  Mintz did  not know,  but  thought the  most logical  entity                                                               
would be the Department of Revenue.                                                                                             
                                                                                                                                
9:42:21 AM                                                                                                                    
                                                                                                                                
Ms. Wilson  was unaware  of whether the  Property Tax  section in                                                               
the Department of Revenue "formally" kept those records.                                                                        
                                                                                                                                
Co-Chair  Wilken  asked that  the  Department  research this.  He                                                               
would appreciate having a five  year history of the payments made                                                               
by the  producers to the  North Slope Borough;  specifically "the                                                               
amounts and the purpose" of those  payments. If the State did not                                                               
have this  information, he requested  he be provided  the contact                                                               
information of the entity that would.                                                                                           
                                                                                                                                
9:43:19 AM                                                                                                                    
                                                                                                                                
Mr. Mintz next  addressed the insertion of the  language ", other                                                               
than  tax  credits  under  this   chapter,"  following  the  word                                                               
"credits" in Sec.  26 subsection (e) page 22 line  1 as specified                                                               
in Amendment  #7. Subsection (e) addressed  provisions pertaining                                                               
to adjustments to lease expenditures.  "In order to implement the                                                               
idea of  only allowing  net costs to  be deducted,  producers are                                                               
required  to make  adjustments to  their lease  expenditures once                                                               
they get reimbursements and when  they sell assets and so forth."                                                               
This calculation  would include subtracting "payments  or credits                                                               
received  by  the  producer".  The   industry's  concern  was  to                                                               
"whether the term  credits could be interpreted  as including the                                                               
tax credits that  are provided for under the bill"  as that would                                                               
eliminate "part of the benefit of the credit".                                                                                  
                                                                                                                                
Mr. Mintz opined  that the insertion of  this clarifying language                                                               
was made  in "an abundance  of caution  because" he did  not deem                                                               
the  industry's  concern  "a reasonable  interpretation"  of  the                                                               
language.                                                                                                                       
                                                                                                                                
9:44:50 AM                                                                                                                    
                                                                                                                                
Mr. Mintz  stated that to  address the concern raised  during the                                                               
previous day's hearing regarding  Sec. 43.55.170. Additional non-                                                               
transferable tax credit.  in Sec. 26 page 23 and  24 of the bill.                                                               
The insertion of the "amount of  oil and gas" and "barrels of oil                                                               
equivalent" language  specified in  the amendment  would prohibit                                                               
the  language  in  those  sections   from  being  interpreted  as                                                               
allowing a  separate credit for up  to 5,000 barrels each  of oil                                                               
or 5,000 BOE of  gas as the credit would be  for a combined total                                                               
of oil and gas.                                                                                                                 
                                                                                                                                
Co-Chair Green  stated that  the language  in Sec.  26 subsection                                                               
(c)(2)  page 24  line  3  had been  amended  during the  previous                                                               
hearing.  She  questioned  whether  further  revisions  might  be                                                               
required.                                                                                                                       
                                                                                                                                
Mr. Mintz affirmed that the language had been changed.                                                                          
                                                                                                                                
Co-Chair  Green  concluded that  the  intent  was for  subsection                                                               
(c)(2) to read  "more than 5,000 barrels of  oil equivalent". The                                                               
bill drafters would make the appropriate changes.                                                                               
                                                                                                                                
9:47:12 AM                                                                                                                    
                                                                                                                                
Mr.  Mintz then  addressed the  deletion of  the words  "under AS                                                               
43.55.024(d)" in Sec. 26 subsection  (b)(3) page 24 line 10. When                                                               
he was  drafting another  portion of  the amendment  dealing with                                                               
gas treatment  credits, he determined  that the language  in this                                                               
subsection  must be  altered as  otherwise, it  could imply  that                                                               
those  credits might  be  transferable  under another  provision.                                                               
Thus, removal of  this language would clarify  that gas treatment                                                               
credits could not be transferable at all.                                                                                       
                                                                                                                                
9:48:10 AM                                                                                                                    
                                                                                                                                
Mr.  Mintz next  addressed  the amendment's  proposal to  replace                                                               
language  in Sec.  26 subsection  (c) page  24 line  26 with  new                                                               
language.  This  "slight  rearranging" of  the  definition  would                                                               
further clarify  the term BOE  to ensure  there would be  "only a                                                               
single credit for oil and gas".                                                                                                 
                                                                                                                                
9:48:43 AM                                                                                                                    
                                                                                                                                
Mr.  Mintz viewed  the section  that would  be added  to Sec.  26                                                               
following line 26 on page 24 to be "a very substantive change".                                                                 
                                                                                                                                
Mr.  Mintz  reminded  the  Committee   that  "under  the  revised                                                               
definitions  of gross  value at  the point  of production  in the                                                               
bill the point of production  for gas would be further downstream                                                               
than it is under current  law". Currently, "gas processing, which                                                               
is the extraction of hydrocarbon  liquids from gas, is downstream                                                               
of the  point of  production, but,  under the  bill, it  would be                                                               
upstream, and  therefore, investments in gas  processing would be                                                               
eligible for the usual capital credit".                                                                                         
                                                                                                                                
Mr. Mintz noted  that "gas treatment, which  is basically getting                                                               
gas in  a condition to be  shipped in a pipeline"  would continue                                                               
to  be  a downstream  process  and,  while being  ineligible  for                                                               
upstream  credits, would  receive "deductions  for transportation                                                               
costs as under current law".                                                                                                    
                                                                                                                                
Mr. Mintz stated that subsection  (a) of Sec. 43.55.185 reflected                                                               
"a policy judgment that there should  be a credit to encourage or                                                               
incentivize  the   building  of  gas  treatment   facilities"  by                                                               
providing  a  35 percent  credit  for  future investment  in  gas                                                               
treatment.  This  credit  could  be applied  either  against  the                                                               
income tax or the production tax.                                                                                               
                                                                                                                                
Mr. Mintz continued  that subsection (b) of  Sec. 43.55.185 would                                                               
allow  the  gas  treatment  facility   investment  credit  to  be                                                               
annualized  and divided  by  12. The  resulting  amount could  be                                                               
applied each month in lieu of  the actual month to month expense.                                                               
This  would  be  similar  to existing  practice  that  allowed  a                                                               
producer to  annualize lease expenditures  in the  calculation of                                                               
their production  tax. This  credit would  be subject  to certain                                                               
restrictions,  including  being  non-transferable.  It  could  be                                                               
carried  forward and  used in  later  periods "if  that would  be                                                               
necessary to avoid reducing the tax below zero".                                                                                
                                                                                                                                
Mr. Mintz detailed  the types of expenditures  that would qualify                                                               
for the  credit: it must  be an  expense related to  acquiring or                                                               
constructing  a  new gas  treatment  facility  or to  improve  an                                                               
existing  one;  it  must  meet   the  existing  definition  of  a                                                               
capitalized  expenditure as  specified in  Internal Revenue  code                                                               
rules; and it  must adhere to the concept of  direct ordinary and                                                               
necessary as specified under lease expenditure in Sec. 160.                                                                     
                                                                                                                                
9:52:30 AM                                                                                                                    
                                                                                                                                
Mr.  Mintz  identified a  gas  treatment  definition change  that                                                               
would  also  be made  by  Sec.  43.55.185.  Language in  Sec.  34                                                               
subsection (19) page  27 lines 24 though 29 of  Version "P" would                                                               
be altered  to clarify that  gas treatment does not  include "gas                                                               
liquefaction".  It would  be limited  "to conditioning  gas in  a                                                               
gaseous state for transportation through a pipeline".                                                                           
                                                                                                                                
9:52:57 AM                                                                                                                    
                                                                                                                                
Mr. Mintz  informed the Committee  that an amendment  relating to                                                               
this section  would also  be required to  address "the  fact that                                                               
the  first year  of  implementation  would be  less  than a  full                                                               
calendar  year,  so  the  percentages that  are  referred  to  in                                                               
subsection (b)"  must be  adjusted; specifically  those regarding                                                               
the annualizing of the gas treatment expenditure.                                                                               
                                                                                                                                
Mr.  Mintz  stated  that  this  consideration  had  already  been                                                               
addressed in  other areas of  the bill. An amendment  specific to                                                               
this section was being developed.                                                                                               
                                                                                                                                
Co-Chair  Green acknowledged.  She  noted that  the bill  drafter                                                               
could be directed "to fractionalize" the first year.                                                                            
                                                                                                                                
9:53:50 AM                                                                                                                    
                                                                                                                                
Senator Bunde, noting  that since the effective date  of the bill                                                               
had previously been  amended, the July 1, 2006  effective date in                                                               
Sec. 43.55.185 would also require changing.                                                                                     
                                                                                                                                
Mr. Mintz  expressed that the  language in Amendment #7  had been                                                               
made to  the existing committee  substitute and would  be changed                                                               
to  conform to  other amendment  changes, such  as the  effective                                                               
date amendment.                                                                                                                 
                                                                                                                                
9:54:18 AM                                                                                                                    
                                                                                                                                
Senator  Bunde  asked regarding  the  decision  to provide  a  35                                                               
percent credit for gas treatment investment expenditures.                                                                       
                                                                                                                                
Mr. Mintz stated  that the percent level would be  a policy call.                                                               
He was "asked to  draft it this way" and was  unaware of how that                                                               
decision  was  made.  This  issue could  be  addressed  with  Dan                                                               
Dickinson, a consultant to the Office of the Governor.                                                                          
                                                                                                                                
9:55:00 AM                                                                                                                    
                                                                                                                                
Co-Chair  Wilken  asked  regarding   the  fiscal  impact  of  the                                                               
amendment.                                                                                                                      
                                                                                                                                
9:55:28 AM                                                                                                                    
                                                                                                                                
Ms. Wilson advised that this information would be provided.                                                                     
                                                                                                                                
9:55:37 AM                                                                                                                    
                                                                                                                                
Senator Stedman  declared this  amendment to  be "a  large policy                                                               
call"; particularly  as he thought  "the potential impact  of the                                                               
credits in the  potential stimulation of the North  Slope and the                                                               
desirability to  producers of that  particular benefit"  had been                                                               
"understated". The credit would "make  it more expensive for them                                                               
to take their capital and leave  the State. It's going to be more                                                               
advantageous  for  them  to  reinvest it  into  the  State".  The                                                               
credits provided  in this  bill were  intended to  "stimulate our                                                               
production that's been in decline".                                                                                             
                                                                                                                                
Senator Stedman noted however that  the credits would "impact the                                                               
PPT  tax  to  an  unknown amount"  depending  on  the  industry's                                                               
expenditures. Thus  he was  "rather reluctant  to allow  them to"                                                               
apply  that credit  against their  corporate  income tax  without                                                               
more thoroughly  understanding "the  potential impacts"  it might                                                               
have on State revenue.                                                                                                          
                                                                                                                                
Senator Stedman suggested that consideration  instead to given to                                                               
allowing a "35 percent credit  on the gas treatment". The credits                                                               
should  be limited  to the  PPT  tax and  "restricted from  being                                                               
applied to the  corporate income tax, just in case  this piece of                                                               
economic stimulus  that we're putting  together in this  tax bill                                                               
works better than some of us anticipate …"                                                                                      
                                                                                                                                
9:57:31 AM                                                                                                                    
                                                                                                                                
In response  to a question  from Co-Chair Green,  Senator Stedman                                                               
stated that his concern was to  the section in the amendment that                                                               
would allow  a 35  percent tax credit  pertinent to  a producer's                                                               
expenditures  relating to  "the construction  and upgrades"  of a                                                               
gas treatment facility. Allowing  this expenditure to affect both                                                               
the PPT tax and the  corporate income tax could "potentially have                                                               
a detrimental impact" on State revenues.                                                                                        
                                                                                                                                
9:58:33 AM                                                                                                                    
                                                                                                                                
Ms.  Wilson advised  that the  gas treatment  facility investment                                                               
credit  would  be "inconsistent  with  rest  of  bill as  far  as                                                               
application".  The  potential impact  of  that  provision on  the                                                               
corporate income tax was as of yet undetermined.                                                                                
                                                                                                                                
9:58:53 AM                                                                                                                    
                                                                                                                                
Senator Stedman stressed that the  operations of the State depend                                                               
on revenue generated on the  North Slope. The State's royalty tax                                                               
would continue to  generate revenue "regardless of  the amount of                                                               
credits that  are applied against  construction of  facilities on                                                               
the  North Slope".  The  State would  also  receive property  tax                                                               
revenue, and efforts should be  made "to ensure the collection of                                                               
income tax".                                                                                                                    
                                                                                                                                
Senator Stedman stressed  that risk would be  associated with the                                                               
PPT tax, depending  on "market conditions, not only  in price and                                                               
volume  but  the  amount  of   credits  being  generated  by  the                                                               
industry". The  situation could be  "very volatile". It  would be                                                               
"in the  best interests of  the State to compartmentize  that" by                                                               
allowing credits to be applied solely in the PPT arena.                                                                         
                                                                                                                                
10:00:01 AM                                                                                                                   
                                                                                                                                
Senator  Olson interpreted  Senator  Stedman's  remarks to  imply                                                               
that the  adoption of  this section would  allow the  industry to                                                               
"double  dip against  the PPT  as  well as  the corporate  income                                                               
tax".  However,  he  thought  the  language  specified  that  the                                                               
credits could not be applied to both.                                                                                           
                                                                                                                                
10:00:26 AM                                                                                                                   
                                                                                                                                
Senator  Stedman agreed  that the  amendment  specified that  the                                                               
credit  could   not  be  used   twice.  However,   "once  they've                                                               
eradicated and/or  they're better off  to apply it  against their                                                               
corporate  income tax,  they'll do  that". He  would prefer  that                                                               
these credits "be  compartmentalized" so that were  the amount of                                                               
credits not  completely utilized,  they could be  carried forward                                                               
and used the following year,  "knowing that we have the corporate                                                               
income  tax  protected  from  any   type  of  development  credit                                                               
generation on the  North Slope, 'cause we have no  idea what kind                                                               
of stimulus  this package  is going  to generate".  He reiterated                                                               
his  belief  that  "the  impact  of  those  credits  …  has  been                                                               
underestimated".                                                                                                                
                                                                                                                                
Senator Hoffman agreed with Senator Stedman.                                                                                    
                                                                                                                                
AT EASE 10:01:21 AM / 10:04:41 AM                                                                                           
                                                                                                                                
Co-Chair  Wilken  offered a  motion  to  amend the  amendment  to                                                               
delete the  insertion of ",  or in lieu of,"  following "payments                                                               
of" on  page 20, line  17, and to delete  the insertion of  a new                                                               
Sec. 43.55.182.,  Tax credits for  gas treatment  facilities., on                                                               
page 24, following line 26.                                                                                                     
                                                                                                                                
Without objection, the amendment was AMENDED.                                                                                   
                                                                                                                                
Co-Chair  Green  noted  that  the  language  being  deleted  from                                                               
Amendment #7 would be reworked.                                                                                                 
                                                                                                                                
Co-Chair  Wilken  asked   Ms.  Wilson  to  alert   him  were  the                                                               
Department of  Revenue to determine  that the  remaining language                                                               
in the amendment would have "significant fiscal impact".                                                                        
                                                                                                                                
Co-Chair  Wilken removed  his objection  to the  adoption of  the                                                               
amendment, as amended.                                                                                                          
                                                                                                                                
Senator  Stedman  also requested  the  Department  of Revenue  to                                                               
determine the impact to the  State's corporate income tax revenue                                                               
that might  be incurred  by the addition  of subsection  (j) into                                                               
Sec.  12.  This  provision  applied  to  producers  or  explorers                                                               
producing less than 50,000 barrels BOE annually.                                                                                
                                                                                                                                
Ms. Wilson concurred.                                                                                                           
                                                                                                                                
There being no further objection, the amended amendment was                                                                     
ADOPTED.                                                                                                                        
                                                                                                                                
AT EASE 10:06:58 AM / 10:08:07 AM                                                                                           
                                                                                                                                
Amendment   #8:   This   amendment  deletes   the   language   of                                                               
subparagraphs (g)  and (h) of  AS 43.55.011 amended by  Section 5                                                               
on page  4, lines 7 through  21 and inserts new  language to read                                                               
as follows.                                                                                                                     
                                                                                                                                
          (g) In addition to the taxes levied under (e) and (f)                                                                 
     of this  section, if  the average ANS  West Coast  price per                                                               
     barrel of oil during the  month exceeds $50, there is levied                                                               
     on the  producer of oil a  tax for oil produced  during that                                                               
     month from  each least  or property in  the state,  less any                                                               
     oil  the  ownership  or  right   to  which  is  exempt  from                                                               
     taxation. The tax levied under this subsection is equal to                                                                 
        [((ANS West  Coast price -  $50) x .002) x  [ANS wellhead                                                               
     price x (1 - PPT rate)]]  x (total taxable barrels of oil at                                                               
     the point of production)                                                                                                   
     where                                                                                                                      
               (1) "ANS wellhead price" means the prevailing                                                                    
     value for oil produced in the Alaska North Slope area; and                                                                 
               (2) the PPT, or production profit tax, rate is                                                                   
     the tax rate described in (e) of this section.                                                                             
          (h) For purposes of (g) of this section, the                                                                          
     department  may  calculate  the average  price  or  may,  by                                                               
     regulation, specify  the method  by which the  average price                                                               
     shall be calculated with reference  to one or more published                                                               
     sources  of price  information on  Alaska North  Slope crude                                                               
     oil cease, or appear likely  to soon cease, to be available,                                                               
     or if,  in the  department's judgment,  the price  of Alaska                                                               
     North  Slope crude  oil ceases,  or appears  likely to  soon                                                               
     cease,  to be  a  reliable indicator  of  the general  price                                                               
     level of  crude oils,  the department shall,  by regulation,                                                               
     specify  a substitute  formula for  computing the  oil price                                                               
     index. The  substitute formula  specified by  the department                                                               
     under this subsection must bear,  as nearly as is reasonable                                                               
     possible, the  same relationship to the  general price level                                                               
     of crude  oil as did the  price of Alaska North  Slope crude                                                               
     oil.                                                                                                                       
                                                                                                                                
Senator Hoffman  moved for adoption. This  amendment would change                                                               
the Progressivity provision to that  proposed in CSSB 305(Res) in                                                               
that  the  Progressivity multiplier  would  revert  from the  .01                                                               
percent  multiplier   specified  in   Version  "P"  to   the  .02                                                               
multiplier. Progressivity  would be triggered at  an Alaska North                                                               
Slope (ANS) West Coast $50 barrel price.                                                                                        
                                                                                                                                
Co-Chair Green objected.                                                                                                        
                                                                                                                                
10:08:52 AM                                                                                                                   
                                                                                                                                
Senator  Bunde asked  the Department  of Revenue  to provide  the                                                               
fiscal impact of that change.                                                                                                   
                                                                                                                                
Ms. Wilson stated that the information would be forthcoming.                                                                    
                                                                                                                                
Co-Chair  Green interjected  to  note that  that information  had                                                               
previously been  provided to  the Committee.  It was  included on                                                               
the  chart titled  "Per Barrel  Progressivity Surcharge  2010" on                                                               
page 3  of the  "PPT Revenue Studies"  presentation of  April 20,                                                               
2006 [copy on file].                                                                                                            
                                                                                                                                
AT EASE 10:09:37 AM / 10:12:21 AM                                                                                           
                                                                                                                                
Co-Chair  Green   spoke  to  her  objection.   She  reminded  the                                                               
Committee  that the  effort  in the  development  of the  Finance                                                               
committee substitute  was to  provide "an  in between"  bill; one                                                               
that  would offer  a person  something to  like and  something to                                                               
feel uncomfortable about". The decision  to specify a $70 trigger                                                               
point for Progressivity,  rather than a lower price,  was made in                                                               
consideration of the current price of a barrel of oil.                                                                          
                                                                                                                                
Co-Chair Green stated  that, at this point in time,  a $40 or $50                                                               
trigger point would  "essentially add on six or  eight dollars to                                                               
our tax  rate". She considered  this "disingenuous" for  it could                                                               
be seen  as masking the effort  to impose the equivalent  of a 30                                                               
percent tax rate.  The State should present the  mechanics of the                                                               
PPT in "a factual" manner.                                                                                                      
                                                                                                                                
Co-Chair Green  pointed out  that the  implementation of  the PPT                                                               
bill   had  already   been  delayed   three  months.   She  "very                                                               
uncomfortable"  at  the effort  "to  continually  hack away"  and                                                               
increase the tax rate to a point that might be regrettable.                                                                     
                                                                                                                                
10:14:02 AM                                                                                                                   
                                                                                                                                
Senator  Stedman   asked  Senator  Hoffman  to   provide  further                                                               
information about the amendment.                                                                                                
                                                                                                                                
10:14:13 AM                                                                                                                   
                                                                                                                                
Senator Hoffman considered  the provisions of Amendment  #8 to be                                                               
"in the  middle" of the  numerous Progressivity  discussions that                                                               
have occurred  in both the House  and the Senate. Basing  the tax                                                               
on  gross dollars  would result  in fewer  legal challenges.  Too                                                               
many calculations would  be involved in arriving  at net dollars.                                                               
This  would result  in  a  bill that  would  be  must simpler  to                                                               
calculate.                                                                                                                      
                                                                                                                                
Senator Hoffman  stated that this  amendment would support  a PPT                                                               
tax rate  of 22.5 percent  and increase the credit  provisions to                                                               
25 percent. This would provide the  State its "fair share" as oil                                                               
prices increase.                                                                                                                
                                                                                                                                
Senator Hoffman  stated that the  price of oil was  currently $75                                                               
per barrel. Exxon Oil Company, on  a worldwide basis, had made in                                                               
excess of $34 billion and  British Petroleum had earned more than                                                               
$20 billion this  year. They would continue to  earn money. Under                                                               
his proposal the total government  take would be approximately 60                                                               
percent at a $60 barrel price.                                                                                                  
                                                                                                                                
Senator Bunde  asked Ms.  Wilson what  the Department  of Revenue                                                               
Spring 2006 forecast was for oil prices.                                                                                        
                                                                                                                                
10:17:19 AM                                                                                                                   
                                                                                                                                
Ms. Wilson did not readily have that information.                                                                               
                                                                                                                                
Co-Chair Green  recalled the  short term forecast  for oil  to be                                                               
slightly less than $60 a barrel.                                                                                                
                                                                                                                                
Senator Bunde and  Co-Chair Wilken thought that  the forecast was                                                               
for oil to be approximately $58 a barrel.                                                                                       
                                                                                                                                
Senator   Bunde  thought   that  the   long  term   forecast  was                                                               
approximately $40  per barrel. Were that  the case, Progressivity                                                               
would not be triggered.                                                                                                         
                                                                                                                                
10:18:40 AM                                                                                                                   
                                                                                                                                
Co-Chair Wilken  spoke in  support of  the amendment.  The effort                                                               
"to seek a  middle ground" in the bill by  decreasing the PPT tax                                                               
rate  from 25  to 22.5  percent  and increasing  the credit  rate                                                               
would serve to  reduce the government share.  After reviewing the                                                               
Progressivity modeling  charts that had been  provided during the                                                               
hearings on  this bill, he  was comfortable that the  language in                                                               
this  amendment  would support  a  government  share goal  of  60                                                               
percent. "That's  where we want to  be." While he was  in support                                                               
of  the  amendment,  he  would like  to  have  the  Progressivity                                                               
modeling charts updated to reflect the affects of the amendment.                                                                
                                                                                                                                
10:19:39 AM                                                                                                                   
                                                                                                                                
Senator  Stedman recounted  that the  Senate Resources  Committee                                                               
had  spent a  great  deal of  time  discussing the  Progressivity                                                               
issue.  Originally  Progressivity  was based  on  gross  dollars.                                                               
Subsequently it evolved to West  Texas Intermediary prices to ANS                                                               
West Coast  Los Angeles prices  and then to ANS  wellhead prices.                                                               
The discussion also  addressed whether the price  should be after                                                               
or  before  tax.  The  equation  in  both  the  Senate  Resources                                                               
committee  substitute and  this amendment  had the  affect of  an                                                               
after tax rate.                                                                                                                 
                                                                                                                                
Senator  Stedman  continued that  after  the  development of  the                                                               
Senate Resources committee  substitute Progressivity element, the                                                               
testimony from the  industry was that the impact  of rising costs                                                               
on  them   was  not  considered   in  the  equation.   Thus,  the                                                               
Progressivity feature  was changed to  a net basis rather  than a                                                               
gross basis. That approach was included in Version "P".                                                                         
                                                                                                                                
Senator Stedman stated that "the pros  and cons of using the net"                                                               
have been  widely discussed by  this Committee. "Clearly  the net                                                               
would move  forward in time with  the cost of production  and the                                                               
cost of doing business in the  State of Alaska." A fairly flat or                                                               
slight   decline   in   government  take   would   occur   absent                                                               
Progressivity.  The   language  in   Version  "P"   without  this                                                               
amendment would  "neutralize the  leverage the industry  may have                                                               
over  the  State on  advancing  prices".  Therefore, he  did  not                                                               
support this amendment.                                                                                                         
                                                                                                                                
10:21:56 AM                                                                                                                   
                                                                                                                                
Co-Chair Green  asked the  impact of  subtracting "one  minus the                                                               
PPT rate"  in the  Progressivity calculation;  specifically since                                                               
the PPT rate had been adjusted.                                                                                                 
                                                                                                                                
Senator Stedman  responded that the  effect would be  to decrease                                                               
the  tax  rate.  "This  would  be in  effect  be  an  after  tax"                                                               
situation.                                                                                                                      
                                                                                                                                
10:22:43 AM                                                                                                                   
                                                                                                                                
Senator Stedman  recalled a previous Committee  discussion it was                                                               
determined that including  the language "one less  the tax rate",                                                               
as proposed  in this amendment  as well as language  allowing the                                                               
Progressivity  tax to  be deducted,  would have  the effect  of a                                                               
double deduction. "That would not be  in the best interest of the                                                               
State." Therefore, were the amendment  adopted, efforts should be                                                               
taken to ensure that the language  "that it can't not be directly                                                               
deducted" be  included because  "the effect  of the  deduction is                                                               
embedded in the formula".                                                                                                       
                                                                                                                                
Co-Chair  Green  asked  whether   additional  language  would  be                                                               
required  were  the  effect  of  this  amendment  to  change  the                                                               
Progressivity  element  "from  a  gross value  to  a  net  value"                                                               
system.                                                                                                                         
                                                                                                                                
Senator Hoffman stated that he  had discussed that issue with the                                                               
bill  drafter. His  understanding  was that  this language  would                                                               
suffice.                                                                                                                        
                                                                                                                                
Co-Chair Green thought that other changes would be required.                                                                    
                                                                                                                                
10:23:52 AM                                                                                                                   
                                                                                                                                
Senator Bunde opined that the  language might be sufficient since                                                               
it was specific to Progressivity.                                                                                               
                                                                                                                                
Co-Chair Green remarked that "the  whole reason for doing the net                                                               
value  though was  to build  in  with Progressivity"  consistency                                                               
regarding the  adjustments for  costs among  different producers.                                                               
That approach was preferred to a "one size fits all" approach.                                                                  
                                                                                                                                
Senator Stedman determined  that this language would  be all that                                                               
would be required to "revert  the bill back" to the Progressivity                                                               
language included in CSSB 305(RES).  A Progressivity factor based                                                               
on gross  would be  based on  price and  would ignore  changes in                                                               
cost.  The effect  of  Progressivity  built on  net  would be  to                                                               
adjust the  trigger point upwards.  The trigger point in  a gross                                                               
formula would be "stationary". The  $50 trigger point proposed in                                                               
this amendment  would be "a point  in time", and sometime  in the                                                               
future "depending  on costs" and  field expansions,  the industry                                                               
might request that that figure be revisited.                                                                                    
                                                                                                                                
10:25:48 AM                                                                                                                   
                                                                                                                                
Senator  Bunde opined  that several  issues have  been raised  by                                                               
this  amendment.  One   option  would  be  "to  go   back  to"  a                                                               
Progressivity  factor  based on  gross;  the  other would  be  to                                                               
address Progressivity "pegged at $50  and at .002" as proposed in                                                               
the  amendment. The  Progressivity language  included in  Version                                                               
"P"  would  peg the  trigger  point  at  $60  per barrel  with  a                                                               
multiplier of .001.                                                                                                             
                                                                                                                                
Senator  Bunde  understood  that Senator  Stedman  supported  the                                                               
Progressivity language in Version "P".                                                                                          
                                                                                                                                
10:26:37 AM                                                                                                                   
                                                                                                                                
Senator Stedman responded  that he did not  support the amendment                                                               
as presented.                                                                                                                   
                                                                                                                                
Senator Bunde asked  whether Senator Stedman' concern  was to the                                                               
change in the  Progressivity trigger or to the  gross rather than                                                               
net approach or a combination thereof.                                                                                          
                                                                                                                                
Senator Stedman identified  his concern to be to  the "net affect                                                               
of  the entire  package  we're working  with". The  Progressivity                                                               
element  was  "one  piece  of   the  pie".  All  pieces  must  be                                                               
considered "when baking the cake".                                                                                              
                                                                                                                                
10:27:40 AM                                                                                                                   
                                                                                                                                
Senator  Bunde  asked  whether  Senator  Hoffman  would  consider                                                               
dividing  the  amendment  to  address  the  Progressivity  factor                                                               
separately  from the  change  back  to a  gross  rather than  net                                                               
system.                                                                                                                         
                                                                                                                                
Senator  Hoffman would  concur with  dividing the  amendment were                                                               
that the will of the Committee.                                                                                                 
                                                                                                                                
10:28:04 AM                                                                                                                   
                                                                                                                                
Senator Olson  remarked that the Progressivity  component and the                                                               
bill  in   general  were  complicated.   He  asked   whether  the                                                               
Progressivity concept  would be "simpler" "were  the final bottom                                                               
number that the State gets" based on gross rather than net.                                                                     
                                                                                                                                
10:28:36 AM                                                                                                                   
                                                                                                                                
Senator  Stedman understood  that "going  to the  gross would  be                                                               
simpler  and   a  system  that   would  be  less  likely   to  be                                                               
manipulated"; however, "there's  pros and cons of  each one". The                                                               
net system appeared "to be more  complex, but with the net, we've                                                               
got  to  remember the  calculation  of  taking into  account  the                                                               
expenses are already  done anyway to get to the  PPT tax. The net                                                               
would be  before the PPT  tax is  applied." Credits could  not be                                                               
utilized "to dilute the dollar amount of the net".                                                                              
                                                                                                                                
Senator Olson reasoned  therefore that "going to  the gross would                                                               
make this complicated bill less complicated".                                                                                   
                                                                                                                                
Senator  Green  pointed out  that  utilizing  a net  value  would                                                               
"address  the  problem  of  the  cost.  Were  costs  to  increase                                                               
exponentially beyond the  price of a barrel,  utilizing net value                                                               
would be a  fairer assessment of what we should  be taxing". That                                                               
consideration "would  be built  in without having  to go  back to                                                               
the drawing board" and readdressing the issue.                                                                                  
                                                                                                                                
Senator  Olson understood  that Co-Chair  Green was  referring to                                                               
the production costs.                                                                                                           
                                                                                                                                
Co-Chair Green affirmed.                                                                                                        
                                                                                                                                
AT EASE 10:30:20 AM / 11:09:43 AM                                                                                           
                                                                                                                                
Co-Chair Green  asked Ms.  Wilson to discuss  the affect  of this                                                               
amendment on  Progressivity and regressivity as  compared to that                                                               
of Version "P".                                                                                                                 
                                                                                                                                
11:10:17 AM                                                                                                                   
                                                                                                                                
Ms. Wilson  first advised that  a Progressivity element  based on                                                               
net  would  be advantageous  because  it  would account  for  the                                                               
expense of  extracting oil,  especially heavy  oil. Progressivity                                                               
based  on  gross would  not  consider  such "costs  or  increased                                                               
costs". The  net approach  included in Version  "P" "is  a better                                                               
plan  …  on its  face"."  Progressivity  based  on net  would  be                                                               
considered "progressive" and "that  takes care of regressivity in                                                               
the long run".                                                                                                                  
                                                                                                                                
Ms.  Wilson  defined  Progressivity  as a  tax  rate  that  would                                                               
increase "based  on what is  measured". The  federal government's                                                               
tax,  which  is based  on  a  person's  net taxable  income,  was                                                               
designed  with a  "stair step"  approach  in that  the tax  would                                                               
increase   as  a   person's  net   income   increased.  The   net                                                               
Progressivity approach taken in Version  "P" "honors that idea of                                                               
progressivity because …  this overall bill measures  tax based on                                                               
net value, that is, after costs".                                                                                               
                                                                                                                                
Ms.  Wilson stated  that a  Progressivity element  that increased                                                               
based  on  the net  would  be  "internally consistent"  with  the                                                               
overall PPT terms.  Progressivity based on gross,  as proposed in                                                               
the amendment, was deemed to  have a "disconnect there" as, while                                                               
the  PPT tax  measured net,  Progressivity would  be measured  on                                                               
gross.                                                                                                                          
                                                                                                                                
11:12:28 AM                                                                                                                   
                                                                                                                                
Ms. Wilson  next addressed  the argument  that a  net calculation                                                               
was "more  difficult" to do. To  that point, she stated  that the                                                               
net  calculation  language  crafted   in  Version  "P"  was  "not                                                               
difficult".  A  determination would  be  made  regarding the  net                                                               
value that  "would be taxed  overall". That number would  then be                                                               
divided  by the  number of  barrels to  achieve a  net value  per                                                               
barrel. Were that  value to exceed the  $45 Progressivity trigger                                                               
point specified in Version "P"  then the amount over that trigger                                                               
would be subject to the Progressivity tax.                                                                                      
                                                                                                                                
In  summary,   Ms.  Wilson  did   not  consider  this  to   be  a                                                               
"troublesome calculation".  Furthermore, a  net value  per barrel                                                               
would not be subject to the PPT credit provisions.                                                                              
                                                                                                                                
Ms. Wilson reiterated  that the net value  per barrel calculation                                                               
could be  likened to a  person's net income which  was determined                                                               
by  subtracting  deductions  such  as  charitable  contributions.                                                               
However,  unlike   a  person's  personal  income   tax  to  which                                                               
education and child care credits  could be applied, credits would                                                               
not  be allowed  in the  Progressivity calculation.  This "was  a                                                               
straightforward    calculation    and     very    readable    and                                                               
understandable".                                                                                                                
                                                                                                                                
11:14:33 AM                                                                                                                   
                                                                                                                                
Ms.   Wilson   respectfully   stated   that   the   Progressivity                                                               
"calculation in  the amendment  is a  little awkward".  While its                                                               
terms were technically "workable"  in terms of "understandability                                                               
and  … consistency  with  the  idea of  taxing  on  net, I  would                                                               
suggest that what is in the current bill is preferable".                                                                        
                                                                                                                                
Senator  Bunde  agreed  that  a net  calculation  might  be  more                                                               
complex  than one  based on  gross; however,  "there was  nothing                                                               
simple about this  bill". While he was in support  of "the notion                                                               
of the adjustment  that the math makes for  increased costs" that                                                               
might occur over time, he  did not consider the PPT Progressivity                                                               
element to  be similar to  "a progressive income tax".  He viewed                                                               
the Progressivity  element in  this bill to  be a  "windfall tax"                                                               
when prices were in the $70 and $80 per barrel range.                                                                           
                                                                                                                                
Amendment  #8(a):   This  amendment   deletes  the   language  of                                                               
subparagraph (g) of AS 43.55.011 amended  by Section 5 on page 4,                                                               
lines 7 through 21 and inserts new language to read as follows.                                                                 
                                                                                                                                
          (g) In addition to the taxes levied under (e) and (f)                                                                 
     of this  section, if  the average ANS  West Coast  price per                                                               
     barrel of oil during the  month exceeds $50, there is levied                                                               
     on the  producer of oil a  tax for oil produced  during that                                                               
     month from  each least  or property in  the state,  less any                                                               
     oil  the  ownership  or  right   to  which  is  exempt  from                                                               
     taxation. The tax levied under this subsection is equal to                                                                 
        [((ANS West  Coast price -  $50) x .002) x  [ANS wellhead                                                               
     price x (1 - PPT rate)]]  x (total taxable barrels of oil at                                                               
     the point of production)                                                                                                   
     where                                                                                                                      
               (1) "ANS wellhead price" means the prevailing                                                                    
     value for oil produced in the Alaska North Slope area; and                                                                 
               (2) the PPT, or production profit tax, rate is                                                                   
     the tax rate described in (e) of this section.                                                                             
                                                                                                                                
Amendment  #8(b):   This  amendment   deletes  the   language  of                                                               
subparagraph (h) of AS 43.55.011 amended  by Section 5 on page 4,                                                               
lines 7 through 21 and inserts new language to read as follows.                                                                 
                                                                                                                                
     (h) For purposes of (g)  of this section, the department may                                                               
     calculate the  average price or may,  by regulation, specify                                                               
     the method  by which the  average price shall  be calculated                                                               
     with reference  to one  or more  published sources  of price                                                               
     information  on  Alaska  North Slope  crude  oil  cease,  or                                                               
     appear likely to soon cease, to  be available, or if, in the                                                               
     department's  judgment,  the  price of  Alaska  North  Slope                                                               
     crude oil ceases,  or appears likely to soon cease,  to be a                                                               
     reliable  indicator  of the  general  price  level of  crude                                                               
     oils,  the  department  shall,   by  regulation,  specify  a                                                               
     substitute formula  for computing  the oil price  index. The                                                               
     substitute formula  specified by  the department  under this                                                               
     subsection must  bear, as nearly as  is reasonable possible,                                                               
     the same  relationship to the  general price level  of crude                                                               
     oil as did the price of Alaska North Slope crude oil.                                                                      
                                                                                                                                
Senator Bunde  moved to  divide Amendment  #8. One  portion would                                                               
address whether to base Progressivity  on a gross calculation and                                                               
the  other would  address whether  to  "change the  Progressivity                                                               
factor" in Version  "P" "to a level similar" as  that proposed in                                                               
Amendment #8.                                                                                                                   
                                                                                                                                
Senator  Hoffman did  not consider  the  amendment divisible.  He                                                               
suggested that a  vote be taken on Amendment #8  and in the event                                                               
it were to fail, Senator Bunde could offer an amendment.                                                                        
                                                                                                                                
Senator Hoffman noted that a  variety of Progressivity approaches                                                               
had been  discussed. "Probably  the best  one that  was discussed                                                               
hasn't been  considered and  that was  looking at  the Governor's                                                               
original 20/20  plan and  have it stair  step with  dollars". The                                                               
discussion could  include implementing a Progressivity  factor at                                                               
barrel prices as  low as $20. Increasing  Progressivity as prices                                                               
increased might  provide the  State a  "straighter line".  All of                                                               
the previous  committees that discussed Progressivity  applied it                                                               
"on  the gross  and it  wasn't until"  Version "P"  was developed                                                               
"that another option was considered".                                                                                           
                                                                                                                                
Senator  Hoffman  stated  that  the effort  "all  along"  was  to                                                               
"simplify"  the legislation,  and basing  Progressivity on  gross                                                               
would further that effort.                                                                                                      
                                                                                                                                
11:18:36 AM                                                                                                                   
                                                                                                                                
Without objection,  Senator Bunde  WITHDREW the motion  to divide                                                               
Amendment #8.                                                                                                                   
                                                                                                                                
Co-Chair  Green maintained  her  objection to  Amendment #8.  She                                                               
repeated   Ms.  Wilson's   remarks   to  the   effect  that   the                                                               
Progressivity  language in  Version "P"  was "workable"  and that                                                               
reverting to  a gross calculation  as proposed in  this amendment                                                               
"was not preferable".                                                                                                           
                                                                                                                                
11:19:22 AM                                                                                                                   
                                                                                                                                
A roll call was taken on the motion to adopt Amendment #8.                                                                      
                                                                                                                                
IN FAVOR: Senator  Hoffman, Senator Dyson, Senator  Olson and Co-                                                               
Chair Wilken                                                                                                                    
                                                                                                                                
OPPOSED: Senator Stedman, Senator Bunde and Co-Chair Green                                                                      
                                                                                                                                
The motion PASSED (4-3)                                                                                                         
                                                                                                                                
Amendment #8 was ADOPTED.                                                                                                       
                                                                                                                                
11:20:22 AM                                                                                                                   
                                                                                                                                
Co-Chair Wilken  distributed two graphs [copy  on file] pertinent                                                               
to Version "P" that were developed  by Econ One Research Inc, the                                                               
consulting  firm  secured by  the  Legislature.  In addition,  he                                                               
noted  he  would  be  offering   one  or  two  amendments.  Those                                                               
amendments were currently being drafted.                                                                                        
                                                                                                                                
Senator Dyson also had an amendment to offer.                                                                                   
                                                                                                                                
Co-Chair Green would  accept the amendments "out  of respect" for                                                               
the  sponsors; however,  she was  disappointed that  the deadline                                                               
for amendments had not been adhered to.                                                                                         
                                                                                                                                
Amendment #9:  This amendment deletes  "that ends before  July 1,                                                               
2016,  and"  following  "month"   from  subsection  (a)  of  Sec.                                                               
43.55.170.  Additional  nontransferable  tax  credit.,  added  by                                                               
Section 26  on page  23, lines  26 and  27. The  amended language                                                               
reads as follows.                                                                                                               
                                                                                                                                
          (a) For a month for which a producer's tax liability                                                                  
     under  AS 43.55.011(e)  exceeds zero  before application  of                                                               
     any credits  under this chapter,  a producer  that qualifies                                                               
     under  (c) of  this section  may  take a  credit under  this                                                               
     section. …                                                                                                                 
                                                                                                                                
This amendment  also deletes  "5,000 or  more" and  inserts "more                                                               
than 5,000" in  subparagraph (2) of Sec. 43.55.170(a)  on page 24                                                               
line 3. The amended language reads as follows.                                                                                  
                                                                                                                                
               (2) more than 5,000, the amount of the credit is                                                                 
     22.5  percent of  the producer's  production  tax value  for                                                               
     that month under AS 43.55.160(a)  multiplied by the quotient                                                               
     of 5,000  divided by  the average number  of barrels  of oil                                                               
     equivalent  produced a  day during  that  month and  taxable                                                               
     under AS 43.55.130(e).                                                                                                     
                                                                                                                                
This amendment also inserts  language following "AS 43.55.011(e)"                                                               
in subparagraph  (1) of Sec. 43.55.170(b)  on line 8, to  read as                                                               
follows.                                                                                                                        
                                                                                                                                
          (b) A tax credit under this section                                                                                   
               (1) may by applied only against the tax levied                                                                   
     under AS 43.55.011(e), and may  be applied only for a period                                                               
     of  10 years  from the  date that  the oil  or gas  is first                                                               
     produced in paying quantities;                                                                                             
                                                                                                                                
This amendment also  deletes the language of  subparagraph (5) of                                                               
Sec. 43.55.170(b) on lines 15 and  16 and inserts new language to                                                               
read as follows.                                                                                                                
                                                                                                                                
               (5) may not be applied by a producer                                                                             
                    (A) during the year in which the oil or gas                                                                 
          is  first produced  in paying  quantities in  an amount                                                               
          that would cause  the total of the  tax credits applied                                                               
          by   the  producer   under  this   section  to   exceed                                                               
          $1,666,667 for  each month from  the date that  the oil                                                               
          or  gas is  first produced  in paying  quantities until                                                               
          the last day of that calendar year; or                                                                                
                    (B) during the last year for which a credit                                                                 
          may be  claimed under  this section  in an  amount that                                                               
          would cause  the total  of the  tax credits  applied by                                                               
          the   producer    under   this   section    to   exceed                                                               
          $140,000,000.                                                                                                         
                                                                                                                                
This amendment also  deletes the language of  subparagraph (e) of                                                               
TRANSITIONAL PROVISIONS., added to  the uncodified law by Section                                                               
38, on page 29, lines 27  through 30, and inserts new language to                                                               
read as follows.                                                                                                                
                                                                                                                                
          (e) For oil and gas being produced in paying                                                                          
     quantities from  a lease or  unit that  is in effect  on the                                                               
     effective  date of  sec.  26 of  this Act,  the  oil or  gas                                                               
     producer may  apply the credit  authorized by  AS 43.55.170,                                                               
     enacted by sec. 26 of this Act,                                                                                            
               (1) for a period of 10 years from the effective                                                                  
     date of sec. 26 of  this Act, notwithstanding the provisions                                                               
     of AS  43.55.170(b)(1) that limit application  of the credit                                                               
     authorized by AS 43.55.170 to a  period of 10 years from the                                                               
     date the oil or gas  is first produced in paying quantities;                                                               
     and                                                                                                                        
               (2) during the calendar year in which sec. 26 of                                                                 
     this Act  takes effect,  in an amount  that would  cause the                                                               
     total of the tax credits  applied by the producer under this                                                               
     section  to  exceed  $1,666,667  for  each  month  from  the                                                               
     effective date of sec. 26 of  this Act until the last day of                                                               
     that  calendar year,  notwithstanding the  provisions of  AS                                                               
     43.55.170(b)(5)(A)  that  limit  application of  the  credit                                                               
     during the year of the initial  production of the oil or gas                                                               
     in paying quantities.                                                                                                      
                                                                                                                                
This amendment was NOT OFFERED.                                                                                                 
                                                                                                                                
AT EASE 11:21:41 AM / 11:24:30 AM                                                                                           
                                                                                                                                
Amendment #10:  This amendment inserts language  following "equal                                                               
to"  and  before "22.5  percent"  in  AS 43.55.011(e),  added  by                                                               
Section 5,  on page  3, line  15. The  amended language  reads as                                                               
follows.                                                                                                                        
                                                                                                                                
          (e) There is levied on the producer of oil or gas a                                                                   
     tax for all oil and gas  produced each month from each lease                                                               
     or  property  in  the  state,  less  any  oil  and  gas  the                                                               
     ownership  or right  to  which is  exempt  from taxation  or                                                               
     constitutes a  lessor's royalty interest  under and  oil and                                                               
     gas lease. The tax is equal to                                                                                             
               (1) for oil that is produced in the Cook Inlet                                                                   
     sedimentary basin,  as that term  is defined  by regulations                                                               
     adopted  to implement  AS 38.05.180(f)(4),  five percent  of                                                               
     the production  tax value of  the taxable oil  as calculated                                                               
     under AS 43.55.160; and                                                                                                    
               (2) except as to oil described in (1) of this                                                                    
     subsection, 22.5 percent of the  production tax value of the                                                               
     taxable oil and gas as calculated under AS 43.55.160.                                                                      
                                                                                                                                
This amendment also inserts new language following "equal to" to                                                                
AS 43.55.011(f)(3)(A) added by Section 5, on page 4, following                                                                  
line 3, to read as follows.                                                                                                     
                                                                                                                                
                    (A) notwithstanding (1) of this subsection,                                                                 
          the tax is equal to                                                                                                   
                         (i) for oil that is produced in the                                                                    
               Cook  Inlet sedimentary  basin,  as  that term  is                                                               
               defined  by regulations  adopted  to implement  AS                                                               
               38.05.180(f)(4), five  percent of the  gross value                                                               
               at the production of the oil; and                                                                                
                         (ii) for oil, except oil described in                                                                  
               (i) of this subparagraph,  and gas 22.5 percent of                                                               
               the gross value at the  point of production of the                                                               
               gas.                                                                                                             
                                                                                                                                
This  amendment also  deletes the  language of  subparagraphs (1)                                                               
and  (2)   of  subsection  (a)  of   Sec.  43.55.170.  Additional                                                               
nontransferable  tax credit.,  added by  Section 26  on page  24,                                                               
lines 1 through 6, and inserts new language to read as follows.                                                                 
                                                                                                                                
               (1) not more than 5,000, the amount of the credit                                                                
                    (A) for oil subject to tax under AS                                                                         
          43.55.011(e)(1)  is  five  percent  of  the  producer's                                                               
          production   tax  value   for  that   month  under   AS                                                               
          43.55.160(a); and                                                                                                     
                    (B) for oil and gas subject to tax under AS                                                                 
          43.55.011(e)(2)  is  22.5  percent  of  the  producer's                                                               
          production   tax  value   for  that   month  under   AS                                                               
          43.55.160(a); and                                                                                                     
         (2) more than 5,000, the amount of the credit                                                                          
                    (A) for oil subject to tax under AS                                                                         
          43.55.011(e)(1)  is  five  percent  of  the  producer's                                                               
          production   tax  value   for  that   month  under   AS                                                               
          43.55.160(a)  multiplied  by   the  quotient  of  5,000                                                               
          divided  by  the  average  number  of  barrels  of  oil                                                               
          equivalent  produced  a  day   during  that  month  and                                                               
          taxable under AS 43.55.011(e)(1); and                                                                                 
                    (B) for oil and gas subject to tax under AS                                                                 
          43.55.011(e)(2)  is  22.5  percent  of  the  producer's                                                               
          production   tax  value   for  that   month  under   AS                                                               
          43.55.160(a)  multiplied  by   the  quotient  of  5,000                                                               
          divided  by  the  average  number  of  barrels  of  oil                                                               
          equivalent  produced  a  day   during  that  month  and                                                               
          taxable under AS 43.55.011(e)(2).                                                                                     
                                                                                                                                
Senator Dyson moved for adoption.                                                                                               
                                                                                                                                
Co-Chair Green objected.                                                                                                        
                                                                                                                                
Senator Dyson explained that the  "net effect" of this" amendment                                                               
would  be "to  reduce the  tax rate  on the  oil portion  on Cook                                                               
Inlet".  The area  is "very  challenged"  and "has  a 90  percent                                                               
water  cut".  The  vitality of  the  industry,  particularly  gas                                                               
production,  in Cook  Inlet is  important  to communities  there.                                                               
Efforts should be  made to maintain gas production  in Cook Inlet                                                               
until a gas spur line to the area was available.                                                                                
                                                                                                                                
11:25:22 AM                                                                                                                   
                                                                                                                                
Senator  Stedman noted  that Cook  Inlet  had been  the focus  of                                                               
numerous discussions. He  asked that a royalty  estimate for Cook                                                               
Inlet,  in  terms  of  percentages  as  opposed  to  dollars,  be                                                               
provided.                                                                                                                       
                                                                                                                                
Senator  Stedman referencing  Senator  Dyson's  comment that  the                                                               
water  cut in  Cook Inlet  was  90 percent,  understood that  the                                                               
platforms  in Cook  Inlet "were  pumping  a lot  more water  than                                                               
oil".  A review  of  the  "intricacies" of  Cook  Inlet would  be                                                               
appreciated.                                                                                                                    
                                                                                                                                
Co-Chair Green  advised that information pertinent  to Cook Inlet                                                               
had  been  included  in  a handout  previously  provided  to  the                                                               
Committee.                                                                                                                      
                                                                                                                                
11:26:42 AM                                                                                                                   
                                                                                                                                
Co-Chair  Green  informed  the   Committee  that  the  total  oil                                                               
production in  Cook Inlet  was less than  20,000 barrels  BOE per                                                               
day.                                                                                                                            
                                                                                                                                
11:26:56 AM                                                                                                                   
                                                                                                                                
Senator Stedman stated  that there were many moving  parts to the                                                               
PPT bill.  One of the  parts that had been  successfully resolved                                                               
was  the  5,000 barrel  per  day  exclusion.  While most  of  the                                                               
production in Cook  Inlet would qualify for  that exclusion, some                                                               
of  the  producers  operating  there   would  not  due  to  their                                                               
statewide volume.                                                                                                               
                                                                                                                                
Senator Stedman thought that a  refresher on the barrel exclusion                                                               
and  how it  might  apply  to Cook  Inlet  would  be timely.  The                                                               
information  could also  address  whether there  was  a need  for                                                               
royalty  reduction  in  Cook  Inlet.  "In  the  event  that  this                                                               
amendment" failed, it was his  understanding that "this law would                                                               
be a general law of application  in Cook Inlet" and therefore the                                                               
Legislature could  revisit it "and respond  to potential shutdown                                                               
in Cook Inlet". The desire would  be for activities in Cook Inlet                                                               
to "expand" rather than collapse.                                                                                               
                                                                                                                                
A roll call was taken on the motion.                                                                                            
                                                                                                                                
IN FAVOR: Senator Hoffman, Senator  Olson, Senator Dyson, Senator                                                               
Bunde and Co-Chair Wilken                                                                                                       
                                                                                                                                
OPPOSED: Senator Stedman and Co-Chair Green                                                                                     
                                                                                                                                
The motion PASSED (5-2)                                                                                                         
                                                                                                                                
Amendment #10 was ADOPTED.                                                                                                      
                                                                                                                                
AT EASE 11:29:14 AM / 11:30:47 AM                                                                                           
                                                                                                                                
Co-Chair Green ordered the bill HELD in Committee.                                                                              
                                                                                                                                
[NOTE: This  legislation was brought  before the  Committee again                                                               
later in the hearing. See Time Stamp 2:37:11 PM]                                                                              
                                                                                                                                
11:31:06 AM                                                                                                                   
                                                                                                                                
                                                                                                                                
     CS FOR SENATE BILL NO. 305(RES)                                                                                            
     "An  Act providing  for a  production  tax on  oil and  gas;                                                               
     repealing  the  oil  and  gas  production  (severance)  tax;                                                               
     relating to the calculation of  the gross value at the point                                                               
     of production of oil or gas  and to the determination of the                                                               
     value of oil  and gas for purposes of the  production tax on                                                               
     oil and gas;  providing for tax credits against  the tax for                                                               
     certain   expenditures   and   losses;   relating   to   the                                                               
     relationship of the  production tax on oil and  gas to other                                                               
     taxes, to  the dates those  tax payments and  surcharges are                                                               
     due,  to interest  on overpayments  of the  tax, and  to the                                                               
     treatment of  the tax  in a  producer's settlement  with the                                                               
     royalty owners; relating  to flared gas, and to  oil and gas                                                               
     used  in the  operation of  a  lease or  property under  the                                                               
     production tax; relating  to the prevailing value  of oil or                                                               
     gas  under the  production  tax; relating  to surcharges  on                                                               
     oil; relating  to statements  or other  information required                                                               
     to be filed with or  furnished to the Department of Revenue,                                                               
     to the penalty  for failure to file certain  reports for the                                                               
     tax, to the powers of the  Department of Revenue, and to the                                                               
     disclosure of  certain information required to  be furnished                                                               
     to  the   Department  of  Revenue   as  applicable   to  the                                                               
     administration of  the tax;  relating to  criminal penalties                                                               
     for  violating conditions  governing  access to  and use  of                                                               
     confidential  information relating  to the  tax, and  to the                                                               
     deposit  of  tax  money  collected   by  the  Department  of                                                               
     Revenue;  amending  the  definitions of  'gas,'  'oil,'  and                                                               
     certain other terms for purposes  of the production tax, and                                                               
     as the  definition of the  term 'gas' applies in  the Alaska                                                               
     Stranded   Gas   Development   Act,   and   adding   further                                                               
     definitions;  making  conforming amendments;  and  providing                                                               
     for an effective date."                                                                                                    
                                                                                                                                
                                                                                                                                
This bill was again before the Committee.                                                                                       
                                                                                                                                
Co-Chair Green noted that following  the adoption of Amendment #7                                                               
as  Amended, earlier  in the  meeting, it  was determined  that a                                                               
section  that should  have been  removed from  the bill  had been                                                               
overlooked.                                                                                                                     
                                                                                                                                
Co-Chair  Wilken  offered a  motion  to  rescind the  Committee's                                                               
action in adopting this amendment.                                                                                              
                                                                                                                                
There was no objection and  the earlier adoption of the amendment                                                               
was RESCINDED.                                                                                                                  
                                                                                                                                
Amendment to  Amendment #7 as Amended:  This conceptual amendment                                                               
deletes the insertion of new  subsection (j) to Sec. 43.55.024 on                                                               
page 10, following line 21 as  added by the adoption of Amendment                                                               
#7 as amended. The language being deleted reads as follows.                                                                     
                                                                                                                                
          (j) A producer or explorer that does not produce an                                                                   
     amount of oil and gas in  a taxable year under AS 43.20 that                                                               
     is  more than  50,000 barrels  of oil  equivalent may  apply                                                               
     against  the  producer's  or explorer's  tax  due  for  that                                                               
     taxable year under AS 43.20  a tax credit under this section                                                               
     that would otherwise  be applicable against a  tax due under                                                               
     AS 43.55.011(e)  but for  the limitation set  out in  (e) of                                                               
     this section. An  amount of a tax credit may  not be applied                                                               
     against both  a tax due under  AS 43.20 and a  tax due under                                                               
     AS 43.55.011(e).  For purposes of this  subsection, a barrel                                                               
     of oil equivalent is                                                                                                       
               (1) one barrel of oil, in the case of oil;                                                                       
               (2) 6,000 cubic feet of gas, in the case of gas.                                                                 
                                                                                                                                
Co-Chair  Wilken offered  the  motion to  amend  Amendment #7  as                                                               
amended. He objected  for purposes of clarification  and read the                                                               
language that would be eliminated by the motion.                                                                                
                                                                                                                                
Co-Chair Wilken removed his objection.                                                                                          
                                                                                                                                
Without further objection, the amended amendment was AMENDED.                                                                   
                                                                                                                                
The amendment as twice amended was ADOPTED with no objection.                                                                   
                                                                                                                                
Amendment  #11:  This amendment  inserts  a  new subparagraph  to                                                               
subsection (d)(2) of Sec.  43.55.160. Determination of production                                                               
tax  value of  oil and  gas., added  by Section  26, on  page 21,                                                               
following line 20, to read as follows.                                                                                          
                                                                                                                                
          (d) For purposes of (c) of this section, "direct                                                                      
     costs"                                                                                                                     
     …                                                                                                                          
               (2) does not include                                                                                             
          …                                                                                                                     
                    (P) the portion of costs incurred for                                                                       
          dismantlement, removal, surrender,  or abandonment of a                                                               
          well,   facility,   pipeline,    platform,   or   other                                                               
          structure, or  for the restoration  of a  lease, field,                                                               
          unit,  area,   body  of   water,  or   right-of-way  in                                                               
          conjunction with dismantlement,  removal, surrender, or                                                               
          abandonment that  is attributable to production  of oil                                                               
          or  gas occurring  before the  effective  date of  this                                                               
          section;  the  portion  is calculated  as  a  ratio  of                                                               
          production  of oil  or gas  associated  with the  well,                                                               
          facility,  pipeline,  platform,   or  other  structure,                                                               
          lease, field,  unit, area, body of  water, or right-of-                                                               
          way  occurring  before  the   effective  date  of  this                                                               
          section  to all  production  of oil  or gas  associated                                                               
          with that well, facility,  pipeline, platform, or other                                                               
          structure, lease, field, unit,  area, body of water, or                                                               
          right-of-way  through the  end  of  the calendar  month                                                               
          before  commencement  of  the  dismantlement,  removal,                                                               
          surrender, or abandonment.                                                                                            
                                                                                                                                
Co-Chair Wilken moved for adoption.                                                                                             
                                                                                                                                
Co-Chair Green objected for discussion.                                                                                         
                                                                                                                                
Co-Chair  Wilken stated  that this  amendment  would address  the                                                               
issue of abandonment. The language  being proposed had previously                                                               
been "contemplated" in regards to  the State's existing severance                                                               
tax regime,  the Economic Limit  Factor (ELF), and had  also been                                                               
discussed  by   the  Senate  Resources   Committee  in   its  PPT                                                               
deliberations.                                                                                                                  
                                                                                                                                
Co-Chair  Wilken asked  that the  Committee  consider adding  the                                                               
language to this bill. To that  point, he asked that Senator Gene                                                               
Therriault  be  allowed  to  provide  further  detail  about  the                                                               
amendment.                                                                                                                      
                                                                                                                                
Co-Chair Green  preferred that the Department  of Revenue address                                                               
the issue.                                                                                                                      
                                                                                                                                
Ms. Wilson explained that the  amendment would allow for costs of                                                               
abandonment.  The  issue  of   abandonment  had  been  previously                                                               
discussed by the  Committee; however, it was  determined that the                                                               
phrase   "extended    period   of   disuse"    required   further                                                               
clarification.  That language  was eliminated  from the  language                                                               
being  proposed.  Thus,  the   amendment  would  "simply  address                                                               
abandonment … removal costs".                                                                                                   
                                                                                                                                
Co-Chair Green asked how CSSB 305(RES) addressed this issue.                                                                    
                                                                                                                                
2:40:36 PM                                                                                                                    
                                                                                                                                
Co-Chair Wilken stated that after  discussing this issue with the                                                               
Administration  and a  representative of  British Petroleum,  "it                                                               
became  clear that  the words  'extended period  of disuse'  were                                                               
problematic  when  it  comes  to   administering  the  tax".  Mr.                                                               
Dickinson and  Ms. Wilson indicated  that the language  needed to                                                               
change or  they would ask for  the provision to be  removed. They                                                               
also indicated  they would work  on "language to  effectuate that                                                               
change". That language has not yet been provided.                                                                               
                                                                                                                                
2:41:11 PM                                                                                                                    
                                                                                                                                
Senator  Stedman was  confused as  to whether  the amendment  was                                                               
complete.                                                                                                                       
                                                                                                                                
2:41:36 PM                                                                                                                    
                                                                                                                                
Co-Chair  Green   asked  Ms.  Wilson   to  expand  on   the  term                                                               
abandonment.                                                                                                                    
                                                                                                                                
2:41:50 PM                                                                                                                    
                                                                                                                                
Ms.  Wilson expressed  that  "abandonment would  be  the cost  of                                                               
closing up  the well. … The  problem with the language"  that had                                                               
previously  been considered  was that,  regardless of  whether it                                                               
would  be a  credit or  deduction, the  costs associated  with an                                                               
extended  period  of  disuse  were   denied.  There  are  several                                                               
facilities  on the  North Slope  which, while  not being  in use,                                                               
might  be called  upon  for  "backup purposes  in  case the  main                                                               
facility is down". Thus, the question  was how to treat the costs                                                               
for that backup  facility. Similar questions arose  in regards to                                                               
facilities  which  were  "mothballed"   or  not  intended  to  be                                                               
permanently  abandoned.  That  "troublesome"  language  has  been                                                               
removed from the language in this amendment.                                                                                    
                                                                                                                                
Co-Chair   Green  asked   how  the   current  Statute   addressed                                                               
abandonment.                                                                                                                    
                                                                                                                                
Ms. Wilson  responded that  abandonment was  currently considered                                                               
an  upstream  cost and  therefore  did  not affect  the  existing                                                               
production tax.                                                                                                                 
                                                                                                                                
Co-Chair   Green  concluded   therefore   that  abandonment   was                                                               
considered a legitimate necessary business expense.                                                                             
                                                                                                                                
Ms. Wilson affirmed.                                                                                                            
                                                                                                                                
Co-Chair  Green  understood   that  abandonment  was  "generally"                                                               
addressed as part of a lease or contract.                                                                                       
                                                                                                                                
Ms.  Wilson affirmed,  and  noted  that the  Alaska  Oil and  Gas                                                               
Conservation  Commission   (AOGCC)  might  also   apply  specific                                                               
abandonment requirements.                                                                                                       
                                                                                                                                
Co-Chair  Green concluded  that  the adoption  of this  amendment                                                               
would add abandonment costs to the  list of things that would not                                                               
be included as a direct cost.                                                                                                   
                                                                                                                                
Ms. Wilson concurred.                                                                                                           
                                                                                                                                
2:44:28 PM                                                                                                                    
                                                                                                                                
Ms.  Wilson stated  that CSSB  305(RES) contained  "a prohibition                                                               
against  taking  credits  for   abandonment".  The  exclusion  of                                                               
abandonment   provisions  in   Version   "P"   "means  it's   not                                                               
addressed".  Therefore,  the  adoption of  this  amendment  would                                                               
exclude  the  costs specified  in  the  amendment as  abandonment                                                               
costs from being applied "against  the production tax values". In                                                               
other words, "you could not deduct abandonment costs".                                                                          
                                                                                                                                
In  response  to  a  question from  Co-Chair  Green,  Ms.  Wilson                                                               
communicated that even though abandonment  could be viewed as "an                                                               
ordinary and necessary  part of doing business in  the oil field,                                                               
whether that's a acceptable deductible  expense would be a policy                                                               
call".                                                                                                                          
                                                                                                                                
2:45:53 PM                                                                                                                    
                                                                                                                                
Senator Bunde  pointed out that  because abandonment is  "a usual                                                               
business  expense",  it  would be  deductible  from  a  company's                                                               
income  tax.  However,  because  "abandonment  obviously  doesn't                                                               
increase production", which  is "the goal" of the  credits in the                                                               
PPT, "then the  abandonment costs could not be taken  as a credit                                                               
under PPT".                                                                                                                     
                                                                                                                                
Ms.  Wilson affirmed  that abandonment  costs  were a  deductible                                                               
expense  on  an  entity's  income   tax.  The  adoption  of  this                                                               
amendment would include  abandonment costs in "the  list of items                                                               
for which  a deduction  is not allowed"  under the  provisions of                                                               
this bill.                                                                                                                      
                                                                                                                                
2:47:01 PM                                                                                                                    
                                                                                                                                
Senator  Bunde reiterated  that  the adoption  of this  amendment                                                               
would  not "prohibit  abandonment  expenses  from being  deducted                                                               
from an income tax".                                                                                                            
                                                                                                                                
Ms. Wilson agreed.                                                                                                              
                                                                                                                                
In  response  to  a  question from  Co-Chair  Green,  Ms.  Wilson                                                               
expressed  that the  amendment  would  exclude abandonment  costs                                                               
from the  list of direct  costs. This would prohibit  those costs                                                               
from being deductible or creditable under the PPT.                                                                              
                                                                                                                                
2:47:56 PM                                                                                                                    
                                                                                                                                
Senator Stedman  understood that  the amendment would  apply only                                                               
"to assets that are not used  today before the effective date" of                                                               
the PPT. It  would not apply to facilities  constructed after the                                                               
effective date.                                                                                                                 
                                                                                                                                
Ms.  Wilson affirmed  that to  be the  effect of  the amendment's                                                               
language  "attributable to  production  of oil  or gas  occurring                                                               
before the effective date".                                                                                                     
                                                                                                                                
2:48:24 PM                                                                                                                    
                                                                                                                                
Co-Chair Green understood therefore  that the exemption was "only                                                               
relating to things before the effective date of this bill".                                                                     
                                                                                                                                
Ms. Wilson affirmed.                                                                                                            
                                                                                                                                
2:48:36 PM                                                                                                                    
                                                                                                                                
Co-Chair Wilken  stated that the  drafter of the  amendment, Jack                                                               
Chenoweth,  Assistant  Revisor,  Legislative Legal  and  Research                                                               
Services,  Legislative  Affairs  Agency,  could  provide  further                                                               
information about the  amendment if desired. The  amount of money                                                               
that  would  be affected  by  this  "policy  call …""was  not  an                                                               
insignificant amount of money".                                                                                                 
                                                                                                                                
AT EASE 2:48:58 PM / 2:49:16 PM                                                                                             
                                                                                                                                
Co-Chair  Wilken referred  the  Committee to  a  letter [copy  on                                                               
file]  dated  February  27,  2006  to  Senator  Gene  Therriault,                                                               
Chairman  Legislative Budget  and Audit  Committee from  James E.                                                               
Eason,  Oil   and  Gas  Operations   Management  and   Policy,  a                                                               
consultant  to the  Legislature.  The letter  indicated that  the                                                               
cost  associated  with decommissioning  just  the  wells in  Cook                                                               
Inlet would be $1,007,699,000. The  cost of decommissioning wells                                                               
on  the North  Slope  and other  fields in  the  future could  be                                                               
considerable.  The  cost of  that  activity  for the  North  Star                                                               
region could be approximately $75 million.                                                                                      
                                                                                                                                
Co-Chair Wilken stated that this  policy call should consider the                                                               
affect  of not  excluding  these costs.  The expenses  associated                                                               
with  that  activity  in  Cook  Inlet  alone  could  provide  the                                                               
industry "billions  of dollars of  credit". This issue  should be                                                               
addressed.                                                                                                                      
                                                                                                                                
2:50:58 PM                                                                                                                    
                                                                                                                                
In response to  a question from Senator Olson,  Ms. Wilson stated                                                               
that contract provisions never allowed for abandonment costs.                                                                   
                                                                                                                                
Co-Chair Green also noted that this  issue was moot in regards to                                                               
a  proposed gas  pipeline  contract as  that  contract was  still                                                               
being developed.                                                                                                                
                                                                                                                                
2:52:27 PM                                                                                                                    
                                                                                                                                
Senator Bunde stated that the  amendment solely addressed credits                                                               
under the PPT.                                                                                                                  
                                                                                                                                
Co-Chair Green affirmed.                                                                                                        
                                                                                                                                
2:52:38 PM                                                                                                                    
                                                                                                                                
Senator Stedman offered a point  of clarification: this amendment                                                               
would serve "to exclude existing  infrastructure that's not used.                                                               
There's a  sharing relationship if  its not used today,  but used                                                               
in  the future,  and  it really  doesn't  impact anything  built"                                                               
after the effective date of the bill.                                                                                           
                                                                                                                                
Ms. Wilson,  after reviewing the  amendment, agreed  with Senator                                                               
Stedman.                                                                                                                        
                                                                                                                                
Co-Chair  Green summarized  therefore  that  the amendment  would                                                               
prohibit abandonment  costs associated with  facilities predating                                                               
the effective date of the bill.                                                                                                 
                                                                                                                                
2:54:03 PM                                                                                                                    
                                                                                                                                
Ms. Wilson  exampled that  the majority  of the  costs of  a well                                                               
abandoned two  months after  the effective date  of the  PPT bill                                                               
would  be  disallowed,  based  on  "the  formula  specified  here                                                               
comparing  the   production  before   effective  date   to  total                                                               
production".                                                                                                                    
                                                                                                                                
2:54:21 PM                                                                                                                    
                                                                                                                                
Co-Chair Wilken  noted there  being 16  platforms in  Cook Inlet.                                                               
Four of those have been shut  in or converted to lighthouses. The                                                               
decommissioning expenses of those 16  were reflected on page 3 of                                                               
Mr. Eason's letter.                                                                                                             
                                                                                                                                
Co-Chair  Green  asked  whether   this  amendment  would  address                                                               
abandonment costs  on a statewide  basis or were limited  to Cook                                                               
Inlet.                                                                                                                          
                                                                                                                                
2:54:45 PM                                                                                                                    
                                                                                                                                
Ms.  Wilson concluded  that since  no geographic  exclusions were                                                               
specified   in  the   amendment,  its   provisions  would   apply                                                               
statewide.                                                                                                                      
                                                                                                                                
2:55:11 PM                                                                                                                    
                                                                                                                                
Senator Hoffman observed  that the letter from Mr.  Eason had not                                                               
been signed.                                                                                                                    
                                                                                                                                
AT EASE 2:55:26 PM / 2:55:46 PM                                                                                             
                                                                                                                                
A roll call was taken on the motion.                                                                                            
                                                                                                                                
IN FAVOR: Senator Olson, Senator Stedman, Senator Bunde, Senator                                                                
Dyson and Co-Chair Wilken                                                                                                       
                                                                                                                                
OPPOSED: Senator Hoffman and Co-Chair Green                                                                                     
                                                                                                                                
The motion PASSED (5-2)                                                                                                         
                                                                                                                                
The amendment was ADOPTED.                                                                                                      
                                                                                                                                
2:56:24 PM                                                                                                                    
                                                                                                                                
Amendment #12: This amendment deletes the language of Section                                                                   
25, on page 17 line 9 through page 18, line 5, which reads as                                                                   
follows.                                                                                                                        
                                                                                                                                
     Sec. 25. AS 43.55.150 is  amended by adding a new subsection                                                               
     to read:                                                                                                                   
          (d) Under regulations adopted by the department, if                                                                   
     the  department  determines  that  an  election  under  this                                                               
     subsection would  improve the efficiency and  economy of tax                                                               
     administration  and   would  result  in   calculations  that                                                               
     represent  value and  actual  costs  of transportation  with                                                               
     reasonable accuracy  and are not biased  toward understating                                                               
     a  producer's  tax liability,  the  department  may allow  a                                                               
     producer,   subject   to   limitation  prescribed   by   the                                                               
     department  as  to the  frequency  of  making elections,  to                                                               
     elect  prospectively to  calculate  the gross  value at  the                                                               
     point of production of oil or gas based in whole or part on                                                                
               (1) a formula prescribed by the department that                                                                  
     uses, with  adjustments if appropriate,  a royalty  value or                                                               
     valuation methodology accepted by the                                                                                      
                    (A) Department of Natural Resources under AS                                                                
          38.05, in the case of oil  or gas produced from a lease                                                               
          issued  by  the  Department  of  Natural  Resources  or                                                               
          produced from  a lease  or property that  is part  of a                                                               
          unit approved  by the Department of  Natural Resources;                                                               
          or                                                                                                                    
                    (B) United States Department of the Interior                                                                
          under applicable federal oil  and gas leasing statutes,                                                               
          in the case of oil or  gas produced from a lease issued                                                               
          by the  United States  Department of the  Interior that                                                               
          is not  part of  a unit approved  by the  Department of                                                               
          Natural  Resources,   or  produced  from  a   lease  or                                                               
          property that is part of  a unit approved by the United                                                               
          States Department of the Interior but not approved by                                                                 
          the Department of Natural Resources; or                                                                               
               (2) another formula prescribed by the Department                                                                 
     of Natural  Resources that reasonably estimates  a value for                                                               
     the oil  or gas at  a specific geographical  locations, such                                                               
     as the  point of  tender or delivery  into a  common carrier                                                               
     pipeline;  the  formula may  use  factors  such a  published                                                               
     price  indices for  oil  or  gas in  or  outside the  state,                                                               
     quality differentials  for oil or gas,  transportation costs                                                               
     between markets, and inflation adjustments.                                                                                
                                                                                                                                
This  amendment also  makes the  necessary conforming  changes to                                                               
delete references to the deleted language elsewhere in the bill.                                                                
                                                                                                                                
Co-Chair Wilken moved for adoption.                                                                                             
                                                                                                                                
Co-Chair Green objected for discussion.                                                                                         
                                                                                                                                
Co-Chair  Wilken  informed  the  Committee  that  this  amendment                                                               
pertained to  Royalty Settlement Agreements (RSAs).  He requested                                                               
that Senator  Therriault be allowed  to testify on the  effect of                                                               
the amendment.                                                                                                                  
                                                                                                                                
Co-Chair Green denied the request.                                                                                              
                                                                                                                                
Co-Chair Wilken then asked Ms. Wilson for assistance.                                                                           
                                                                                                                                
2:56:50 PM                                                                                                                    
                                                                                                                                
Ms. Wilson  expressed that RSAs were  settlement agreements "with                                                               
a  specific royalty  payor regarding  the royalties".  This issue                                                               
was  addressed  in  this  bill because  both  the  Department  of                                                               
Revenue  and  the  Department  of  Natural  Resources  calculated                                                               
royalty values under  ELF. While the information  utilized by the                                                               
departments was the same, a  difference in methodologies resulted                                                               
in  a  slight difference  in  those  values. Thus,  language  was                                                               
included  in SB  305 to  improve efficiency  and simplicity.  The                                                               
result  was that  the Department  of  Revenue could  rely on  the                                                               
value  determination  calculated  by the  Department  of  Natural                                                               
Resources.  A tremendous  amount of  discussion occurred  in this                                                               
regard during the bill's committee hearing process.                                                                             
                                                                                                                                
2:58:11 PM                                                                                                                    
                                                                                                                                
Mr. Mintz  advised that the  impact of this amendment  on Version                                                               
"P" would  be more extensive  than solely affecting RSAs.  At one                                                               
time,  the   PPT  bill   included  three   valuation  methodology                                                               
alternatives:  one was  RSAs, the  second was  "other valuations,                                                               
and then general provisions for  a simplified formula". RSAs were                                                               
excluded  from the  alternatives in  Version "P".  This amendment                                                               
would remove the remaining options  "so that the department would                                                               
no longer be allowed to authorize  a producer to use a simplified                                                               
formula to calculate gross value at the point of production".                                                                   
                                                                                                                                
Co-Chair Green asked the result of that action.                                                                                 
                                                                                                                                
Mr. Mintz expressed that it would  not have "a material impact on                                                               
revenues  because the  simplified  formulas  themselves were  not                                                               
intended  to  have  material  impact",  they  were  intended  "to                                                               
improve  the economy  and efficiency  of tax  administration" for                                                               
both the producers  and the Department of Revenue,  as they could                                                               
"take  advantage  of  rules  of  thumb or  ways  of  arriving  at                                                               
estimates  of  values  that wouldn't  require  as  much  detailed                                                               
specific  information system  to  be calculated  every month  and                                                               
then be subject  to specific audit in the future".  Thus, "it was                                                               
really an administrative issue".                                                                                                
                                                                                                                                
3:01:44 PM                                                                                                                    
                                                                                                                                
Ms. Wilson stated that Version  "P" contained "specific language"                                                               
that would  only allow the  simplified methods to occur  were the                                                               
Department of  Revenue to  determine "that  it would  improve the                                                               
efficiency  and  economy. And  only  if  it doesn't  systemically                                                               
understate tax liability".                                                                                                      
3:02:26 PM                                                                                                                    
                                                                                                                                
Co-Chair Wilken concluded  that, in effect, an RSA  would allow a                                                               
producer to value their oil differently than another.                                                                           
                                                                                                                                
3:02:48 PM                                                                                                                    
                                                                                                                                
Mr.  Mintz  responded that  that  was  "essentially correct".  He                                                               
noted  that  the  phrase "with  adjustments  if  appropriate"  as                                                               
depicted in  Sec. 25 subsection (d)(1)  page 17, lines 18  and 19                                                               
would  allow the  department to  add 50  cents a  barrel were  it                                                               
determined that  a producer's formula  "understated the  value by                                                               
50 cents a  barrel". Thus, "in detail, there  could be variations                                                               
amongst  producers, but  … the  intent is  that they  wouldn't be                                                               
material over the long term".                                                                                                   
                                                                                                                                
Co-Chair Wilken asked  Mr. Mintz whether he would  agree with the                                                               
Legislature's  consultant,  Econ  One Research  Inc.,  that  "the                                                               
value  of the  RSAs  over  the next  ten  years"  would be  three                                                               
million dollars" under current law.                                                                                             
                                                                                                                                
Mr. Mintz was not qualified in that regard.                                                                                     
                                                                                                                                
Co-Chair  Wilken identified  one issue  with RSAs  as being  that                                                               
some  producers  could lower  their  tax  liability because  they                                                               
could deduct transportation costs.                                                                                              
                                                                                                                                
Mr. Mintz  affirmed that transportation  costs were  "a deduction                                                               
for  royalty values  just as  they are  for the  production tax".                                                               
There  could  be "variations  among  RSAs  in how  transportation                                                               
costs are handled". Nonetheless, "the aim  of the RSA would be to                                                               
have a reasonable and accurate way of stating" those costs.                                                                     
                                                                                                                                
Senator Stedman  asked Ms. Wilson whether  the language reflected                                                               
in  Version "P"  would be  "problematic and  put the  State at  a                                                               
disadvantage in the enforcement and collection of the taxes".                                                                   
                                                                                                                                
3:05:04 PM                                                                                                                    
                                                                                                                                
Ms. Wilson expressed that the  language in Version "P" "would not                                                               
disadvantage the  State". It would  "place the  responsibility on                                                               
the   Department   to   evaluate"  a   producer's   formula   for                                                               
efficiencies and  economies as  well as  to consider  whether the                                                               
formula   might  be   "biased   towards   understating  the   tax                                                               
liability".                                                                                                                     
                                                                                                                                
3:06:04 PM                                                                                                                    
                                                                                                                                
Co-Chair Wilken recalled there being  concern that continuance of                                                               
RSAs  might  result   in  litigation  on  the   basis  of  "equal                                                               
protection under the Constitution".                                                                                             
                                                                                                                                
3:06:29 PM                                                                                                                    
                                                                                                                                
Ms. Wilson deferred to Mr. Mintz.                                                                                               
                                                                                                                                
3:06:38 PM                                                                                                                    
                                                                                                                                
Mr.  Mintz expressed  that "equal  protection  is concerned  with                                                               
[indisc] treatment of similarly  situated persons, and the Courts                                                               
look  at  equal  protection questions  with  different  standards                                                               
depending on the type of  interest that's involved. When it comes                                                               
to taxation, the  Courts have been lenient in  terms of upholding                                                               
distinctions  and  different  treatment".   While  there  was  no                                                               
guarantee that there "could not  be a successful equal protection                                                               
challenge  here", he  doubted  that such  a  challenge "would  be                                                               
successful  …  The  considerations of  tax  administration  would                                                               
probably  be  sufficient  to justify  whatever  relatively  minor                                                               
difference in treatment … might occur under this provision".                                                                    
                                                                                                                                
A roll call was taken on the motion.                                                                                            
                                                                                                                                
IN FAVOR: Co-Chair Wilken and Senator Dyson                                                                                     
                                                                                                                                
OPPOSED:  Senator   Hoffman,  Senator  Olson,   Senator  Stedman,                                                               
Senator Bunde, and Co-Chair Green                                                                                               
                                                                                                                                
The motion FAILED (2-5)                                                                                                         
                                                                                                                                
Amendment #12 FAILED to be adopted.                                                                                             
                                                                                                                                
3:08:49 PM                                                                                                                    
                                                                                                                                
Amendment #13:  This amendment  inserts language  following "this                                                               
section" in  subsection (i) of  Sec. 43.55.160.  Determination of                                                               
production tax  value of  oil and  gas., added  by Section  26 on                                                               
page 23 line 15 to read as follows.                                                                                             
                                                                                                                                
          (i) the department may adopt regulations that                                                                         
     establish  additional standards  necessary  to carrying  out                                                               
     the purposes  of this  section, including  the incorporation                                                               
     of the  concepts of 26  U.S.C. 482 (Internal  Revenue Code),                                                               
     as amended,  and 26 U.S.C. 6662(e)  (Internal Revenue Code),                                                               
     as amended, the related  or accompanying regulations of each                                                               
     of those sections, and any  ruling or guidance issued by the                                                               
     United States Internal Revenue Service  that relates to each                                                               
     of those sections.                                                                                                         
                                                                                                                                
Co-Chair Wilken moved for adoption.                                                                                             
                                                                                                                                
Co-Chair Green objected for explanation.                                                                                        
                                                                                                                                
Co-Chair Wilken  explained that this amendment  would provide the                                                               
Department  of Revenue  the option  "to use  the concepts  of the                                                               
Internal Revenue  Code" 26  U.S.C 482 and  26 U.S.C  6662(e) when                                                               
auditing  producers  to insure  that  the  State would  be  "paid                                                               
properly" under the terms of the PPT bill.                                                                                      
                                                                                                                                
Ms. Wilson stated that this topic  had also been addressed by the                                                               
Senate Resources  Committee. Neither  she nor Dan  Dickinson felt                                                               
that  incorporating this  option into  the bill  "was necessary;"                                                               
however, it may be another tool".                                                                                               
                                                                                                                                
Ms.  Wilson  noted that  the  amendment  might address  potential                                                               
problems   associated  with   inter-company  transfers.   Current                                                               
language  would  disallow  an  inter-company  transfer  exceeding                                                               
current  market value.  Thus, Legislative  consultants questioned                                                               
whether  the  State  might  require   "more  power  in  terms  of                                                               
auditing". 26  U.S.C 482  is primarily  utilized by  the Internal                                                               
Revenue  Service   (IRS)  to  audit  offshore   transfer  pricing                                                               
transactions.  This code  would  assist the  State in  addressing                                                               
situations  where a  producer had  the flexibility  to utilize  a                                                               
range  of possible  values. "No  one expected  the Department  to                                                               
quibble about  a four million  dollar drill bit" that  might cost                                                               
$4.5 million  due to  weather conditions  or timing;  however, it                                                               
would be an issue, were $10 million paid for that drill bit.                                                                    
                                                                                                                                
Ms. Wilson stated that a disadvantage  to 26 U.S.C 482 audits was                                                               
that  they   were  "very  time   consuming  and  …   very  hard";                                                               
specifically as contracts and other material would be reviewed.                                                                 
                                                                                                                                
3:12:14 PM                                                                                                                    
                                                                                                                                
Senator  Bunde understood  that  the adoption  of this  amendment                                                               
would make  the use  of the  Internal Revenue  Codes "permissive"                                                               
but not required.                                                                                                               
                                                                                                                                
Ms. Wilson affirmed.                                                                                                            
                                                                                                                                
Co-Chair Wilken considered  this one of the times  when "you look                                                               
down the  wrong end  of the binoculars".  The provisions  in this                                                               
bill  could be  in effect  for 30  years. During  that time,  the                                                               
producers would  become "more sophisticated in  their analysis in                                                               
their efforts  to pay  correctly". With that  in mind,  the State                                                               
should endeavor  to include  "every tool in  the toolbox  that we                                                               
have  should  we need  it".  This  amendment would  further  that                                                               
effort.                                                                                                                         
                                                                                                                                
3:13:24 PM                                                                                                                    
                                                                                                                                
Senator  Stedman  asked  how  changes made  to  the  federal  tax                                                               
statutes at  the federal level  might affect the State  were this                                                               
language incorporated into  the bill. He allowed  that changes at                                                               
the federal level  would likely continue to be  applicable to the                                                               
State regardless.                                                                                                               
                                                                                                                                
3:14:03 PM                                                                                                                    
                                                                                                                                
Ms.  Wilson agreed  that changes  to the  federal codes  could be                                                               
possible. There  were other references to  Internal Revenue codes                                                               
in  the PPT  bill, including  in the  definition of  ordinary and                                                               
necessary. She reminded that  this amendment was "discretionary":                                                               
the State  could revise  any regulations  pertaining to  the Code                                                               
were changes at the federal level deemed not applicable.                                                                        
                                                                                                                                
3:15:00 PM                                                                                                                    
                                                                                                                                
Co-Chair  Green  asked  whether the  State  could  utilize  these                                                               
federal codes without adopting this amendment.                                                                                  
                                                                                                                                
Ms. Wilson  disclosed that  she would tend  to use  these federal                                                               
codes as  "a reference" on  transfer pricing issues,  even absent                                                               
this  amendment. The  federal code  would provide  starting point                                                               
guidelines.                                                                                                                     
                                                                                                                                
Co-Chair  Green  asked  whether the  Department  would  rank  the                                                               
option  proposed  in  this  amendment  higher  than  other  audit                                                               
options  that  were available.  In  addition,  she asked  whether                                                               
confusion might  arise over the  decision to use one  option over                                                               
another.                                                                                                                        
                                                                                                                                
Ms.  Wilson deferred  to  Mr.  Mintz as  the  question had  legal                                                               
ramifications.                                                                                                                  
                                                                                                                                
3:16:44 PM                                                                                                                    
                                                                                                                                
Mr. Mintz considered  this a "very good question"  as there could                                                               
be "certain  examples enumerated in  a Statute". However,  he did                                                               
not think there  would be "a problem" in this  case as there "was                                                               
really not  much of a  list; its'  just pretty much  singling out                                                               
one or  two sources" which  would "be  relevant to aspects  of AS                                                               
43.55.160".                                                                                                                     
                                                                                                                                
A roll call was taken on the motion.                                                                                            
                                                                                                                                
IN FAVOR: Senator Bunde, Senator Dyson, and Co-Chair Wilken                                                                     
                                                                                                                                
OPPOSED: Senator Hoffman, Senator  Olson, Senator Stedman and Co-                                                               
Chair Green                                                                                                                     
                                                                                                                                
The motion FAILED (3-4)                                                                                                         
                                                                                                                                
The amendment FAILED to be adopted.                                                                                             
                                                                                                                                
Amendment #14:  This amendment inserts  a new subsection  to Sec.                                                               
43.55.024.  Tax credits  for  certain  losses and  expenditures.,                                                               
added by  Section 12 on  page 10, following  line 21, to  read as                                                               
follows.                                                                                                                        
                                                                                                                                
          (j) As a condition of receiving a tax credit under                                                                    
     this section,  a producer, explorer, or  other taxpayer that                                                               
     obtains  the  tax  credit  for  or  directly  related  to  a                                                               
     pipeline,  facility,  or  other  asset that  is  or  becomes                                                               
     subject  to  regulation  by the  Federal  Energy  Regulatory                                                               
     Commission  or the  Regulatory Commission  of  Alaska, or  a                                                               
     successor regulatory  body, shall  at all times  support and                                                               
     in all rate proceedings file  to flow through 100 percent of                                                               
     the tax  credits to ratepayers  as a reduction in  the costs                                                               
     of service for the pipeline, facility, or other asset.                                                                     
                                                                                                                                
Co-Chair Wilken moved for adoption.                                                                                             
                                                                                                                                
Co-Chair Green objected for explanation.                                                                                        
                                                                                                                                
Co-Chair Wilken asked that Senator  Therriault be able to testify                                                               
to this amendment.                                                                                                              
                                                                                                                                
Co-Chair Green refused.                                                                                                         
                                                                                                                                
Co-Chair Wilken then explained that  this amendment was pertinent                                                               
to Sec. 12. subsection 42.55.024.  Tax credits for certain losses                                                               
and expenditures. The  effect of the amendment would  be that the                                                               
builder receiving a  credit from the State for  building an asset                                                               
could  ask the  Federal  Energy Regulatory  Commission (FERC)  to                                                               
allow that credit to be  utilized against "the tariff for hauling                                                               
the  product north  to south".  This would  in effect  lower that                                                               
tariff rate.                                                                                                                    
                                                                                                                                
Co-Chair Wilken  stated that lowering  the pipeline  tariff would                                                               
have two  beneficial consequences:  it would  reduce the  cost of                                                               
hauling  the product  and it  would make  the cost  of using  the                                                               
pipeline more accessible for new  producers. This could result in                                                               
there being more explorers and producers.                                                                                       
                                                                                                                                
3:20:23 PM                                                                                                                    
                                                                                                                                
Co-Chair  Green read  the  last sentence  of  the amendment.  She                                                               
thought that  the consideration  of this  language was  "a little                                                               
premature" to address at this  time. She suggested an alternative                                                               
approach: that the  credits be used as currently  proposed in the                                                               
PPT bill until FERC suggested otherwise.                                                                                        
                                                                                                                                
3:21:21 PM                                                                                                                    
                                                                                                                                
Senator Stedman  did not support  the amendment. It was  an issue                                                               
relevant  to  a  proposed  gas   pipeline  rather  than  to  this                                                               
"supposedly  stand alone  tax bill".  While he  acknowledged that                                                               
this issue must  be eventually addressed, it should be  done at a                                                               
later time.                                                                                                                     
                                                                                                                                
A roll call was taken on the motion.                                                                                            
                                                                                                                                
IN FAVOR: Senator Bunde, Senator Dyson and Co-Chair Wilken                                                                      
                                                                                                                                
OPPOSED: Senator Olson, Senator  Stedman, Senator Hoffman and Co-                                                               
Chair Green                                                                                                                     
                                                                                                                                
The motion FAILED (3-4)                                                                                                         
                                                                                                                                
The amendment FAILED to be adopted.                                                                                             
                                                                                                                                
3:23:44 PM                                                                                                                    
                                                                                                                                
In response  to a question  from Co-Chair Wilken,  Co-Chair Green                                                               
communicated  that language  pertaining to  "the Anadarko  issue"                                                               
had not  developed to a  desired point. That matter  would likely                                                               
be addressed by either the House or the Senate at a later time.                                                                 
                                                                                                                                
AT EASE 3:24:03 PM / 3:25:39 PM                                                                                             
                                                                                                                                
Co-Chair  Green  directed  members   to  Amendment  #7  as  twice                                                               
amended. In  order to address  a phase inadvertently  included in                                                               
that amendment, she would be offering a separate amendment.                                                                     
                                                                                                                                
Amendment #15: This conceptual amendment  inserts "other than tax                                                               
credits" following  "credits" in the last  sentence of subsection                                                               
(e) of Sec.  43.55.160. Determination of production  tax value of                                                               
oil  and gas.,  added by  Section  26, on  page 22,  line 1.  The                                                               
amended language reads as follows.                                                                                              
                                                                                                                                
          …The payments or credits that a producer shall                                                                        
     subtract  from the  producer's lease  expenditures, or  from                                                               
     zero, under  this subsection are  payments or  credits other                                                               
     than tax credits received by the producer for…                                                                             
                                                                                                                                
Co-Chair Green moved for adoption.                                                                                              
                                                                                                                                
Senator Bunde objected for explanation.                                                                                         
                                                                                                                                
3:26:17 PM                                                                                                                    
                                                                                                                                
Ms.  Wilson stated  that the  phrase  ", other  than tax  credits                                                               
under this  chapter," inserted following "credits"  in subsection                                                               
(e) Sec. 43.55.160. Determination of  production tax value of oil                                                               
and gas., added by Section 26 on  page 22, line 1 by the adoption                                                               
of  Amendment #7  as amended  seemed  to imply  that tax  credits                                                               
other than  those in this  chapter would  have to be  added back.                                                               
The intention "was to address tax credits in general".                                                                          
                                                                                                                                
Senator Bunde removed his objection.                                                                                            
                                                                                                                                
Without objection the amendment was ADOPTED.                                                                                    
                                                                                                                                
Senator Bunde  offered a motion  to report CSSB 305,  Version 24-                                                               
GS2052\P,   as   amended,    from   Committee   with   individual                                                               
recommendations and accompanying fiscal notes.                                                                                  
                                                                                                                                
There  being  no objection,  CSSB  305  (FIN) was  REPORTED  from                                                               
Committee  with new  $801,200 Department  of Revenue  fiscal note                                                               
dated April  24, 2006 and previous  zero fiscal note #1  from the                                                               
Department of Natural Resources.                                                                                                
                                                                                                                                
Co-Chair Green expressed appreciation  for the efforts exerted by                                                               
the  Committee  and  the  many  others  who  contributed  to  the                                                               
development of this legislation.                                                                                                
                                                                                                                                

Document Name Date/Time Subjects