Legislature(2009 - 2010)SENATE FINANCE 532

03/12/2010 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 1:00 pm --
+= SB 305 SEPARATE OIL & GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
--Testimony by Administration--
--Public Testimony--
+= SB 110 PRESERVATION OF EVIDENCE TELECONFERENCED
Moved CSSB 110(FIN) Out of Committee
+ SB 246 INCREASING NUMBER OF SUPERIOR CT JUDGES TELECONFERENCED
Heard & Held
+ SB 257 YOUTH COURTS AND CRIMINAL FINES TELECONFERENCED
Heard & Held
+= SB 306 SEPARATE OIL & GAS PRODUCTION TAX TELECONFERENCED
<Bill Hearing Canceled>
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 12, 2010                                                                                            
                         9:14 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
9:14:44 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:14 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Charlie Huggins, Vice-Chair                                                                                             
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Roger  Marks,  Legislative   Budget  and  Audit  Legislative                                                                    
Consultant, Logsdon &  Associates; Pat Galvin, Commissioner,                                                                    
Department  of Revenue;  Megan Stanneland,  Advocate, Juneau                                                                    
Youth Court; Doug Wooliver,  Administrative Attorney for the                                                                    
Court System;  Senator Joe  Paskvan; Senator  Lesil McGuire;                                                                    
Senator  Bill  Wielechowski;  Representative  John  Coghill;                                                                    
Senator Hollis French                                                                                                           
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Kerri Fox,  Bethel Youth Court; Lisa  Albert-Konecky, Mat-Su                                                                    
Youth Court, Wasilla                                                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB 305    SEPARATE OIL & GAS PRODUCTION TAX                                                                                     
                                                                                                                                
          SB 305 was heard and HELD in Committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
SB 110    PRESERVATION OF EVIDENCE                                                                                              
                                                                                                                                
          CSSB 110 (JUD) was  REPORTED out of Committee with                                                                    
          a "do  pass" recommendation and with  two new zero                                                                    
          fiscal notes  by the Department of  Public Safety,                                                                    
          and a new fiscal note by the Department of Law.                                                                       
                                                                                                                                
SB 246    INCREASING NUMBER OF SUPERIOR CT JUDGES                                                                               
                                                                                                                                
          SB 246 was heard and HELD in Committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
SB 257    YOUTH COURTS AND CRIMINAL FINES                                                                                       
                                                                                                                                
          SB 257 was heard and HELD in Committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
9:14:58 AM                                                                                                                    
                                                                                                                                
SENATE BILL NO. 305                                                                                                           
                                                                                                                                
     "An Act relating to the tax on oil and gas production;                                                                     
     and providing for an effective date."                                                                                      
                                                                                                                                
Co-Chair Stedman  began with the  second hearing of  SB 305.                                                                    
He noted the  first hearing was on March 9.  Another new CS,                                                                    
which  will tighten  up the  title, will  be forthcoming  on                                                                    
Wednesday.  Some   issues  in  the  CS   will  need  further                                                                    
attention. One of  the purposes of the hearing  is to inform                                                                    
the   public   how   the    legislature   works   with   the                                                                    
administration and the industry to solve those issues.                                                                          
                                                                                                                                
9:17:53 AM                                                                                                                    
                                                                                                                                
Co-Chair Hoffman MOVED  to ADOPT the work draft  for SB 305,                                                                    
labeled 26-LS1577\E, Bullock, 3/10/10.                                                                                          
                                                                                                                                
Co-Chair Stedman OBJECTED for discussion purposes.                                                                              
                                                                                                                                
9:18:35 AM                                                                                                                    
                                                                                                                                
ROGER  MARKS,  LEGISLATIVE   BUDGET  AND  AUDIT  LEGISLATIVE                                                                    
CONSULTANT, LOGSDON & ASSOCIATES,  explained the two changes                                                                    
in version  E of the  bill. The title  of the bill  has been                                                                    
modified to  reduce the  scope of the  bill. There  was some                                                                    
concern  that  the original  title  was  too broad.  It  now                                                                    
reads, "An Act  relating to that part of the  tax on oil and                                                                    
gas  production  that  increases  the rate  of  tax  as  the                                                                    
production tax  value increases above  $30 and  limiting the                                                                    
effect of that  rate increase to the production  of oil; and                                                                    
providing for an  effective date." He said  there were plans                                                                    
to tighten the title even more.                                                                                                 
                                                                                                                                
Mr. Marks addressed  the second change in the  bill. On page                                                                    
9,  Section 8,  the applicability  of the  bill states  that                                                                    
"Sections 1 - 7 of this  Act are applicable on and after the                                                                    
first day  of the  calendar month immediately  following the                                                                    
effective date of the Act."  He clarified that under current                                                                    
statute  and  under  the  bill  as  currently  written,  the                                                                    
taxpayers  calculate installment  payments  every month.  He                                                                    
opined  that   if  the  taxpayers  have   to  calculate  two                                                                    
different progressivity factors in  the same month, it would                                                                    
make the  tax calculation burdensome for  the department and                                                                    
for the taxpayers.                                                                                                              
                                                                                                                                
9:20:40 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  REMOVED  his OBJECTION.  There  being  NO                                                                    
further OBJECTION, version E was adopted.                                                                                       
                                                                                                                                
PAT GALVIN, COMMISSIONER,  DEPARTMENT OF REVENUE, introduced                                                                    
himself.                                                                                                                        
                                                                                                                                
Co-Chair  Stedman  commented  that  the  process  has  moved                                                                    
rapidly. He  hoped to have the  particular technical changes                                                                    
included in the next CS.                                                                                                        
                                                                                                                                
Commissioner   Galvin  referred   to  a   handout  entitled,                                                                    
"Comments on SB 305" (copy on  file). He noted that he would                                                                    
focus on three  main topics - slide 2  - revenue projections                                                                    
under SB 305 and under  the status quo; cost allocation; and                                                                    
technical  issues regarding  SB 305.  He began  with revenue                                                                    
projections under  SB 305 - slide  3. It was decided  to use                                                                    
the single  year income statement  model assumptions  from a                                                                    
previous  Department  of  Revenue  (DOR)  presentation.  The                                                                    
question in  mind is how SB  305 compares to the  status quo                                                                    
at  different  oil-to-gas  price  parities.  He  highlighted                                                                    
income statement model  assumptions - slide 4  - and pointed                                                                    
out  that  any  of  them  could change  in  the  future.  He                                                                    
cautioned to  keep in mind  sensitivities as they  relate to                                                                    
the relative production between oil and gas.                                                                                    
                                                                                                                                
9:24:52 AM                                                                                                                    
                                                                                                                                
Commissioner Galvin spoke  of a scenario at  high parity, SB
305 > status quo - slide  5. This is a situation where there                                                                    
is $120/bbl oil and $8/MMBtu  gas (15:1 parity). The result,                                                                    
under the  status quo,  is combined oil  and gas  revenue to                                                                    
the state of $5.5 billion.                                                                                                      
                                                                                                                                
Co-Chair  Stedman requested  a  general  explanation of  the                                                                    
scenario.  Commissioner  Galvin  returned   to  slide  4  to                                                                    
explain the  assumptions. He  explained that  the production                                                                    
levels are intended  to approximate what is  expected at the                                                                    
beginning of the  flow of the gas pipeline.  The current oil                                                                    
production  forecast  has   production  approaching  500,000                                                                    
barrels per day  in 2020. The initial throughput  on the gas                                                                    
pipeline is  currently estimated  to be 4.5  Bcf a  day. The                                                                    
relative volumes of  oil and gas are  significant drivers to                                                                    
the  analysis,  as  well  as  the  price.  He  detailed  the                                                                    
difference in production  under oil and gas.  He stated that                                                                    
the  presentation is  in order  to examine  the gas  and oil                                                                    
production tax under  AGIA as it currently  stands and under                                                                    
SB 305, which stands to change the way the tax is figured.                                                                      
                                                                                                                                
Commissioner   Galvin   continued   to   explain   how   the                                                                    
calculations for net oil and  gas tax would work. He defined                                                                    
how  it would  work under  the current  system and  under SB
305. The  status quo has a  revenue factor of 5.5;  under SB
305 it would be 7.5                                                                                                             
                                                                                                                                
9:30:08 AM                                                                                                                    
                                                                                                                                
Commissioner  Galvin  turned  to  slide  6  to  explain  the                                                                    
scenario at lower  parity under SB 305 and  under the status                                                                    
quo.  The graph  shows the  primary difference  is that  the                                                                    
separate  tax on  gas  brings  in less  because  of lack  of                                                                    
progressivity.                                                                                                                  
                                                                                                                                
Commissioner Galvin made observations  about slide 7. SB 305                                                                    
can lead  to higher or  lower state revenue compared  to the                                                                    
status  quo  tax system,  depending  on  oil price  and  gas                                                                    
parity. SB 305 provides for  a lower state share compared to                                                                    
the  status quo  when profits  are high  and gas  prices are                                                                    
relatively  high (no  gas progressivity).  SB 305  imposes a                                                                    
higher  tax  burden compared  to  the  status quo  when  gas                                                                    
prices are relatively low.                                                                                                      
                                                                                                                                
9:33:31 AM                                                                                                                    
                                                                                                                                
Commissioner Galvin  showed the  oil/gas price  parity guess                                                                    
depicted on slide  8. The graph projects  where price parity                                                                    
has been  from 2008 to 2010.  The question is where  it will                                                                    
be in 2020 - 2045. He did not wish to speculate.                                                                                
                                                                                                                                
9:35:03 AM                                                                                                                    
                                                                                                                                
Commissioner  Galvin  turned  to cost  allocation  issues  -                                                                    
slide  10. This  is a  significant  issue as  it relates  to                                                                    
having separate  oil and gas  taxes whose  individual values                                                                    
will affect their  respective tax rates. As  costs move from                                                                    
a profitable side  to a less profitable side,  the result is                                                                    
that more revenue is generated by the tax system.                                                                               
                                                                                                                                
Commissioner Galvin  explained that  the current  status quo                                                                    
does not  address how  to determine how  the costs  would be                                                                    
allocated  between  oil  and  gas,  which  could  result  in                                                                    
uncertainty,  disputes, and  delays. Cost  allocation should                                                                    
be specified in  the statute and is a  very important policy                                                                    
decision.                                                                                                                       
                                                                                                                                
Commissioner  Galvin  proposed   different  cost  allocation                                                                    
options - slide 11. He  first discussed the detailed item by                                                                    
item attribution  methods, followed by the  formula or rule-                                                                    
based  attribution  methods.  He stressed  that  attribution                                                                    
differences  have and  could lead  to a  number of  disputes                                                                    
among  working  interest  owners   in  terms  of  investment                                                                    
decisions.                                                                                                                      
                                                                                                                                
9:41:07 AM                                                                                                                    
                                                                                                                                
Senator Huggins  assumed that in  places outside  of Alaska,                                                                    
oil  and gas  taxes  are separate  and  producers with  more                                                                    
experience  than   Alaska  have  solved   similar  problems.                                                                    
Commissioner  Galvin   agreed  and  thought  it   was  worth                                                                    
recruiting outside opinions on these matters.                                                                                   
                                                                                                                                
Co-Chair Stedman pointed out that  this is an early stage of                                                                    
this particular legislation.                                                                                                    
                                                                                                                                
9:38:40 AM                                                                                                                    
                                                                                                                                
Commissioner  showed  on  slide  12 how  the  item  by  item                                                                    
attribution methods  work. Many places have  moved away from                                                                    
a detailed  item by item  attribution method because  of the                                                                    
issues it creates, and have  moved toward a formula or rule-                                                                    
based method.                                                                                                                   
                                                                                                                                
9:42:22 AM                                                                                                                    
                                                                                                                                
Commissioner  Galvin continued  with slide  13 -  formula or                                                                    
rule-based   methods.  A   consequence  of   not  accurately                                                                    
reflecting the  true purpose  of the cost  is that  it could                                                                    
lead to disputes. He provided  examples of ways to attribute                                                                    
costs:  proportion  of   production,  proportion  of  sales,                                                                    
proportion of  reserves, rule of  dominant use -  either gas                                                                    
or oil,  deemed oil unless  item is 100 percent  gas relate,                                                                    
and a combination of any of the above.                                                                                          
                                                                                                                                
9:45:45 AM                                                                                                                    
                                                                                                                                
Commissioner Galvin explained the  impact of cost allocation                                                                    
choices  -  slide  14.  The current  bill  requires  a  cost                                                                    
allocation between  oil and gas,  but does not  describe the                                                                    
allocation method  or guiding principles. He  compared three                                                                    
cost  allocation  possibilities:  costs allocated  based  on                                                                    
relative BOE  production, costs allocated based  on relative                                                                    
gross  value  at  Point of  Production  (PoP),  and  assumed                                                                    
"actual" cost split of 90/10 between oil and gas.                                                                               
                                                                                                                                
Co-Chair  Stedman  requested  an   explanation  of  how  the                                                                    
current  cost allocation  system works.  Commissioner Galvin                                                                    
clarified that  the current system  does not deal  with cost                                                                    
allocation. He  cautioned, however,  that there is  one area                                                                    
with  cost  allocation,  provisions  that  hold  Cook  Inlet                                                                    
harmless. The  provision worked by determining  what the tax                                                                    
would be  under the current  production tax and  requiring a                                                                    
comparison  with  the  ELF-derived tax.  Whichever  tax  was                                                                    
lower, would be paid. A  way to split the current allocation                                                                    
between oil and  gas had to be  found, so it was  split on a                                                                    
production volume basis.                                                                                                        
                                                                                                                                
9:50:26 AM                                                                                                                    
                                                                                                                                
Commissioner  Galvin  showed  cost  allocation  examples  on                                                                    
slide 15,  which explain how  the cost breakdown  is derived                                                                    
under the three potential scenarios.                                                                                            
                                                                                                                                
9:55:14 AM                                                                                                                    
                                                                                                                                
Commissioner Galvin turned  to slide 16 - the  impact of the                                                                    
allocation method on SB 305  revenue. At $120/bbl oil and 15                                                                    
to 1  parity there is  $8.5 billion of revenue  generated by                                                                    
SB 305 using  the BOE basis. Using the  PoP methodology, the                                                                    
revenue decreases  to $7.9 billion.  Using the  90/10 split,                                                                    
the revenue decreases even further  to $7.5 billion. It is a                                                                    
reflection  of  the  relative  profitability  of  oil  being                                                                    
reduced by  adding more  costs to that  side of  the ledger,                                                                    
bringing down  progressivity and affecting the  separate oil                                                                    
tax calculation.                                                                                                                
                                                                                                                                
Commissioner  Galvin  explained slide  17  -  the impact  of                                                                    
allocation method on SB 305 revenue  using the 8 to 1 parity                                                                    
with gas at $15. There  is still a significant effect moving                                                                    
from one  allocation method to  another. There is  almost $1                                                                    
billion  difference  between  the  two  extreme  methods  of                                                                    
allocation.                                                                                                                     
                                                                                                                                
Commissioner  Galvin  stressed the  importance,  complexity,                                                                    
and stakes associated with the cost allocation decision.                                                                        
                                                                                                                                
9:57:27 AM                                                                                                                    
                                                                                                                                
Commissioner  Galvin addressed  the technical  issues of  SB
305  - slide  19.  He explained  the  issue of  inconsistent                                                                    
treatment of negative production tax values.                                                                                    
                                                                                                                                
Commissioner Galvin  turned to slide 20  - another technical                                                                    
issue. This one  deals with the timing  of adjustments under                                                                    
AS 43.55.170,  the reimbursements section. The  current bill                                                                    
is unclear  if the  adjustment is to  occur before  or after                                                                    
the allocation process. If after,  then the department needs                                                                    
the authority  and direction  to allocate  those adjustments                                                                    
between oil and gas.                                                                                                            
                                                                                                                                
9:59:23 AM                                                                                                                    
                                                                                                                                
Commissioner  Galvin concluded  with slide  21. He  observed                                                                    
that separating oil and gas taxes  is not a panacea, and can                                                                    
raise new  and different  risks to state  revenues, compared                                                                    
to the  status quo.  With uncertainties in  the oil  and gas                                                                    
markets  and wildly  fluctuating  price  forecasts, the  tax                                                                    
system needs to  be responsive to a wide  range of potential                                                                    
price scenarios. To achieve the  state's objectives, the tax                                                                    
system must balance the desire  for revenue with creating an                                                                    
attractive investment climate for a gas line.                                                                                   
                                                                                                                                
10:00:34 AM                                                                                                                   
                                                                                                                                
Senator  Thomas  appreciated  the  complexity  of  the  cost                                                                    
allocations  and  stated  appreciation  for  the  industry's                                                                    
expertise.  He  voiced concern  about  parity,  as shown  on                                                                    
slide 6. He  questioned what impact shale gas  would have on                                                                    
Alaska's  oil   and  gas  production.  He   noted  that  the                                                                    
suggestion was to increase the price of gas by 325 percent.                                                                     
                                                                                                                                
Senator  Thomas asked  how the  Commissioner arrived  at the                                                                    
expected gas  and oil prices used  in the 15 to  1 scenario,                                                                    
with the large increase in  gas price compared to oil price,                                                                    
considering the amount of shale gas being discovered.                                                                           
                                                                                                                                
Commissioner Galvin responded that  in the forecasting world                                                                    
the perception  that the dynamics  that exist today  will be                                                                    
long-standing  and   will  affect  future  markets   is  the                                                                    
dominant presumption. He maintained  that the world does not                                                                    
work that  way. He thought  the dynamics between  supply and                                                                    
demand  would change.  The hope  is  that there  will be  an                                                                    
abundant supply of gas. It  remains to be seen. He predicted                                                                    
changes in expectations on the  supply side and a transition                                                                    
from  oil-based  demand to  natural  gas.  He suggested  not                                                                    
setting policy on one expected  outcome. Senator Thomas said                                                                    
that uncertainty was his concern.                                                                                               
                                                                                                                                
10:07:32 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  asked  Mr.   Marks  to  comment  on  cost                                                                    
allocation.                                                                                                                     
                                                                                                                                
Mr.  Marks remarked  on cost  allocation  under the  current                                                                    
ACES  production  tax. He  said  it  was necessary  in  some                                                                    
circumstances  to allocate  upstream costs  between oil  and                                                                    
gas, such as the  example that Commissioner Galvin mentioned                                                                    
regarding Cook  Inlet. There is one  other application where                                                                    
instate  gas,   which  is  subject   to  a   different  rate                                                                    
regardless of  where it's  produced, has  to have  its costs                                                                    
allocated.  Under   current  statute  AS   43.55.165(h)  the                                                                    
department has  the authority to allocate  costs between oil                                                                    
and gas for these purposes.  He agreed that the magnitude of                                                                    
the dollar impact  and how costs are  allocated is magnified                                                                    
under SB  305. There are  current regulations that  could be                                                                    
applied to SB  305 which are reasonable and  give the option                                                                    
of  cost allocation.  He agreed  with Commissioner  Galvin's                                                                    
view of future allocations.                                                                                                     
                                                                                                                                
Mr. Marks stressed that the value  of SB 305 is to point out                                                                    
the  difference between  oil and  gas and  the necessity  to                                                                    
separate the  two for tax  purposes. He referred to  slide 6                                                                    
where money  could be lost under  SB 305 in a  scenario with                                                                    
no progressivity. He said that SB  305 could cause a loss of                                                                    
money to  the state and  create an additional burden  to the                                                                    
industry. He thought that warranted further examination.                                                                        
                                                                                                                                
10:13:02 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman pointed  out  that the  committee has  the                                                                    
language to insert progressivity on  gas into the bill if it                                                                    
decides to do so.                                                                                                               
                                                                                                                                
SENATOR BILL WIELECHOWSKI asked  at what point progressivity                                                                    
kicks  in with  gas.  Co-Chair Stedman  suggested using  the                                                                    
current statute to answer.                                                                                                      
                                                                                                                                
Commissioner Galvin said progressivity  kicks in at $30 bbl.                                                                    
He explained  that when looking at  oil and gas in  terms of                                                                    
relative value, the  statute provides a 6 to  1 value basis.                                                                    
From a rough perspective on  net production tax value, there                                                                    
is  a $5/MMBtu  profit, taking  transportation and  upstream                                                                    
costs into  account. A $10 -  $12 market price is  needed in                                                                    
order to return  to a gas price that could  stand on its own                                                                    
weight in  the progressivity realm.  Because it is a  six to                                                                    
one price relationship, the dollar  increase in the price of                                                                    
gas has a  six-times affect on the  progressivity. For every                                                                    
dollar increase in MMBtu above  the $30 kickoff yields a 2.4                                                                    
percent increase in progressivity on gas.                                                                                       
                                                                                                                                
Senator   Wielechowski   summarized  Commissioner   Galvin's                                                                    
answer.  Commissioner  Galvin agreed.  Senator  Wielechowski                                                                    
noted   that  as   gas   prices   increase,  stripping   out                                                                    
progressivity under SB 305, there is  a loss to the state of                                                                    
$1.6   billion.   Commissioner    Galvin   agreed.   Senator                                                                    
Wielechowski inquired  what the loss  to the state  would be                                                                    
if  the   price  of   gas  increases.   Commissioner  Galvin                                                                    
explained  that  he has  a  full  range of  models.  Senator                                                                    
Wielechowski calculated  that at $125  oil and $20  gas, the                                                                    
loss  after stripping  out progressivity  would be  about $5                                                                    
billion  per  year.  Commissioner Galvin  thought  that  was                                                                    
accurate.                                                                                                                       
                                                                                                                                
10:18:14 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman suggested  running progressivity numbers on                                                                    
gas.                                                                                                                            
                                                                                                                                
Senator  Wielechowski asked  what the  impact of  SB 305  on                                                                    
Cook Inlet  gas would be. Commissioner  Galvin reported that                                                                    
it  was examined  as an  issue,  but not  as individual  tax                                                                    
payer information.                                                                                                              
                                                                                                                                
Co-Chair Stedman  informed the  committee that  a consultant                                                                    
was  working   on  a   rough  model   for  Cook   Inlet  for                                                                    
consideration  in   the  next  CS.  There   is  currently  a                                                                    
dissolution effect  going on in  Cook Inlet and also  in the                                                                    
Arctic. The analysis of that model  is under way and work is                                                                    
being done with  the administration on projections  and on a                                                                    
fiscal note.                                                                                                                    
                                                                                                                                
10:20:20 AM                                                                                                                   
                                                                                                                                
Senator  Wielechowski requested  the Commissioner's  opinion                                                                    
if  decoupling  could legally  occur  after  May 1,  without                                                                    
incurring  any  penalty under  the  AGIA  definition of  gas                                                                    
production   tax.  Commissioner   Galvin  opined   that  the                                                                    
legislature  could  change the  tax  system  after the  open                                                                    
season. He stressed  that the question was -  what would the                                                                    
tax  be changed  to. A  future obligation  would need  to be                                                                    
compared to  the current  system. It  would be  important to                                                                    
address  the  value  of  the   exemption.  Under  SB  305  a                                                                    
significant  exemption  is  not  created if  a  new  tax  is                                                                    
adopted after the open season.                                                                                                  
                                                                                                                                
Senator  Wielechowski summarized  that  no  income would  be                                                                    
lost and  no penalty  incurred. Commissioner  Galvin agreed,                                                                    
but clarified that "penalty" is  not the right word; he used                                                                    
the idea of an acceptable exemption to the shipper.                                                                             
                                                                                                                                
10:23:26 AM                                                                                                                   
                                                                                                                                
Senator Wielechowski  asked what  the impact  on regulations                                                                    
would  be  if  SB  305 were  to  pass.  Commissioner  Galvin                                                                    
replied that  it would  raise the  issue of  cost allocation                                                                    
and  cause the  legislature to  make tax  decisions and  the                                                                    
department  to choose  the methodology  to use.  The current                                                                    
methodology was used for a  very small impact to the overall                                                                    
gas  production tax  in terms  of revenue  to the  state. He                                                                    
suggested revisiting the question from a policy standpoint.                                                                     
                                                                                                                                
Commissioner  Galvin addressed  the  implications for  lease                                                                    
expenditures and other  regulations if SB 305  were to pass.                                                                    
The one regulation  affected would be the impact  on the tax                                                                    
inducement.   He doubted an  attribution formula on  the tax                                                                    
would be  used, but  rather a determination  of the  size of                                                                    
the exemption.  He predicted  that adding  gas progressivity                                                                    
after the open  season would create an  exemption that would                                                                    
probably eliminate the progressivity increase.                                                                                  
                                                                                                                                
Senator  Wielechowski  asked if  SB  305  is passed  without                                                                    
progressivity, whether  it is locked into  that status after                                                                    
May 1,  2010. He also  inquired if progressivity were  to be                                                                    
added  later on,  whether all  who  bid at  the open  season                                                                    
would  be exempt  from paying  progressivity for  ten years.                                                                    
Commissioner Galvin replied it would  to the extent that the                                                                    
legislature  leaves the  inducement  intact.  To the  extent                                                                    
that the  AGIA 10-year  tax exemption  remains in  place, it                                                                    
would result  in the exemption  applying to the  increase in                                                                    
the  progressivity for  gas. The  actual tax  paid would  be                                                                    
what is generated under SB 305.                                                                                                 
                                                                                                                                
Senator Wielechowski gave  an example of gas at  $15 and oil                                                                    
at $120  per barrel where the  state would be locked  into a                                                                    
system where it would lose  about $1.6 billion for a decade.                                                                    
Commissioner  Galvin   agreed,  to   the  extent   that  the                                                                    
exemption was left intact.                                                                                                      
                                                                                                                                
10:28:37 AM                                                                                                                   
                                                                                                                                
Senator Wielechowski  asked how the bill  would affect Point                                                                    
Thomson  in cost  allocation. Commissioner  Galvin explained                                                                    
that until  there is gas  production, any costs for  oil and                                                                    
gas  are  combined  and  the   combined  production  tax  is                                                                    
figured.  Next,  the  gas expenditures  are  taken  out  and                                                                    
progressivity on oil alone is  figured. If a cost allocation                                                                    
method is used based on  either barrel of oil equivalent, or                                                                    
a  production tax  value, or  a point  of production  value,                                                                    
until there is any gas production,  all of it is going to go                                                                    
towards the oil.  For example, all of  the development costs                                                                    
in Point Thomson  would be deductible against  oil and would                                                                    
bring down the  oil tax and the progressivity  aspect of the                                                                    
taxes  that  are paid  for  the  partners who  are  existing                                                                    
producers.  Once  there is  gas  production,  then the  cost                                                                    
allocation  method becomes  critical. It  raises a  question                                                                    
about allowing gas field development  costs to be deductible                                                                    
against oil production leading up  to gas production and not                                                                    
have  the  gas  bear  those costs  when  they  are  actually                                                                    
producing.                                                                                                                      
                                                                                                                                
10:32:51 AM                                                                                                                   
                                                                                                                                
Senator  Wielechowski asked  if,  under  the current  system                                                                    
where gas and  oil taxes are coupled,  future oil production                                                                    
and  exploration are  incentivized.  He wondered  if SB  305                                                                    
would be  a deterrent. Co-Chair  Stedman stated that  SB 305                                                                    
was an inducement.                                                                                                              
                                                                                                                                
Commissioner Galvin  discussed investment risks and  the way                                                                    
the current  system works  by providing  a lower  tax burden                                                                    
when  gas  is  relatively  less valuable.  This  provides  a                                                                    
positive impact on the economics  when it's needed the most.                                                                    
He  thought it  was  possible to  create  the same  positive                                                                    
impact  for gas,  even though  it could  be complicated  and                                                                    
costly.  He maintained  that the  current  system is  better                                                                    
than SB 305 regarding those economics.                                                                                          
                                                                                                                                
Senator  Wielechowski asked  if SB  305 creates  a negative,                                                                    
positive,  or  no  impact  on   the  upcoming  open  season.                                                                    
Commissioner  Galvin said  it  was not  possible  to give  a                                                                    
single answer.  He thought the  effect of making  any change                                                                    
going  into an  open  season was  a  negative. The  economic                                                                    
impact of  SB 305 at  the low  end of the  price expectation                                                                    
for the  gas line is  a negative. When prices  are favorable                                                                    
for a  gas line, there  are positives  under SB 305  from an                                                                    
investment standpoint.                                                                                                          
                                                                                                                                
10:39:05 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  referred to a  letter from  BP Exploration                                                                    
(copy on file) which reviews the bill.                                                                                          
                                                                                                                                
10:40:00 AM                                                                                                                   
                                                                                                                                
Senator Huggins  stated his impressions  about AGIA  and the                                                                    
ability  of all  players  to  suggest changes.  Commissioner                                                                    
Galvin said it  was possible that after the  open season the                                                                    
producers  would  work  with   the  administration  and  the                                                                    
legislature to craft a different  fiscal system than what is                                                                    
currently  in  place.  He  thought it  was  in  the  state's                                                                    
interest to  put a tax  system in place that  is appropriate                                                                    
for this project, the state, and the producers.                                                                                 
                                                                                                                                
Senator Huggins  thought the conversation should  have taken                                                                    
place  earlier, not  just before  the open  season. Co-Chair                                                                    
Stedman pointed out  that the legislature has not  set a gas                                                                    
tax policy,  but has spent  a great deal of  time discussing                                                                    
oil.  He maintained  that a  gas tax  is a  very complicated                                                                    
injection  into the  fiscal regime.  He agreed  with Senator                                                                    
Huggins that  legislators wanted  to deal  with the  gas tax                                                                    
structure at an earlier date.                                                                                                   
                                                                                                                                
10:42:53 AM                                                                                                                   
                                                                                                                                
Senator  Ellis requested  information about  the new  CS. He                                                                    
inquired if the changes  included cost allocation, a tighter                                                                    
title,  and  an  effective   date  of  decoupling.  Co-Chair                                                                    
Stedman added  that work has  also been done to  include the                                                                    
progressivity structure.  Senator Ellis  asked if  there are                                                                    
other issues to think about.  Co-Chair Stedman said that the                                                                    
legislature  would be  working  with  the administration  on                                                                    
cost  allocation.  There  could be  other  concerns  brought                                                                    
forward   by  the   administration,  the   consultants,  the                                                                    
industry, or the public.                                                                                                        
                                                                                                                                
Senator Thomas asked about how  capital expenditures for gas                                                                    
facilities, such  as treatment plants, would  be dealt with.                                                                    
Co-Chair  Stedman  asked   Commissioner  Galvin  to  address                                                                    
credits that  would apply to  the gas line,  treatment plant                                                                    
and other gas facilities.                                                                                                       
                                                                                                                                
Commissioner Galvin  spoke about  upstream costs.  The point                                                                    
of  production will  be  located  at the  inlet  of the  gas                                                                    
treatment  plant.  The  treatment  plant  and  pipeline  are                                                                    
downstream and  not deductible  as lease  expenditures. They                                                                    
are deductible  as incremental  costs of  the transportation                                                                    
system.                                                                                                                         
                                                                                                                                
Co-Chair Stedman added the dilution  effect in Cook Inlet to                                                                    
Senator Ellis' list. He noted  that the committee would work                                                                    
with the administration on fiscal notes.                                                                                        
                                                                                                                                
SB  305  was  heard  and   HELD  in  Committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
RECESSED       10:47:04 AM                                                                                                    
RECONVENED     1:01:39 PM                                                                                                     
                                                                                                                                
SENATE BILL NO. 110                                                                                                           
                                                                                                                                
     "An Act relating to the preservation of evidence."                                                                         
                                                                                                                                
SENATOR  HOLLIS FRENCH,  sponsor,  explained  that the  bill                                                                    
puts   new  provisions   in  the   criminal  code   for  the                                                                    
preservation  of evidence.  It requires  state agencies  and                                                                    
municipal law enforcement agencies  to preserve all evidence                                                                    
in the  most serious cases,  such as unsolved  murder, first                                                                    
degree sexual  assault, and first  degree sexual abuse  of a                                                                    
minor.  The  bill  requires   that  biological  evidence  be                                                                    
retained  as long  as a  person  remains a  prisoner in  the                                                                    
Department of  Corrections or subject  to registration  as a                                                                    
sex  offender.  The  bill provides  that  evidence  that  is                                                                    
impractical due  to its size, or  other characteristics, may                                                                    
be destroyed after the removal  and preservation of portions                                                                    
that  are  likely to  contain  relevant  evidence. The  bill                                                                    
allows for remedies to be  provided for by judges after they                                                                    
have  heard  both sides  and  protects  agencies from  civil                                                                    
immunity due to an unintentional  failure to comply with the                                                                    
provisions.  It allows  for innocent  people to  prove their                                                                    
innocence. Twenty-five  other states have similar  laws. The                                                                    
bill is supported  by the Department of  Law, the Department                                                                    
of Public Safety,  the Association of Chiefs  of Police, the                                                                    
Alaska  Innocents  Project,  the  ACLU, and  by  the  Alaska                                                                    
Network on Domestic Violence and Sexual Assault.                                                                                
                                                                                                                                
1:05:44 PM                                                                                                                    
                                                                                                                                
Senator Huggins MOVED to ADOPT Amendment 1:                                                                                     
                                                                                                                                
     Page 6, line 13, following "December 31,"                                                                                  
     Delete: "2011"                                                                                                             
     Insert: "2012"                                                                                                             
                                                                                                                                
     Page 6, line 24, following "January 1,"                                                                                    
     Delete: "2011"                                                                                                             
     Insert: "2012"                                                                                                             
                                                                                                                                
Co-Chair Stedman  OBJECTED for discussion purposes.  He said                                                                    
that the amendment corrects the dates.                                                                                          
                                                                                                                                
Co-Chair  Stedman WITHDREW  his  OBJECTION.  There being  NO                                                                    
further OBJECTION, it was so ordered.                                                                                           
                                                                                                                                
Co-Chair  Stedman  reviewed  the  three  fiscal  notes:  one                                                                    
fiscal  note is  from the  Department of  Law for  $5,000 to                                                                    
cover travel  costs associated with  the task force,  a zero                                                                    
fiscal  note from  Alaska State  Troopers Division,  and one                                                                    
fiscal note from the Department  of Public Safety, statewide                                                                    
support, for  $134,200 to cover  the cost of a  new position                                                                    
and  storage.  The  committee requested  an  updated  fiscal                                                                    
note,  but  it  was  not  provided.  He  reported  that  the                                                                    
governor also has  a bill that requires  the preservation of                                                                    
evidence  and   the  same  fiscal   note  provided   by  the                                                                    
department  for that  bill  is zero.  To  be consistent  the                                                                    
committee has  drafted a zero  fiscal note to be  adopted in                                                                    
lieu of  the department's note.  There are a total  of three                                                                    
fiscal notes.                                                                                                                   
                                                                                                                                
1:07:24 PM                                                                                                                    
                                                                                                                                
Senator  Ellis   MOVED  to  report  CSSB   110(JUD)  out  of                                                                    
committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal notes. There  being NO OBJECTION, it was                                                                    
so ordered.                                                                                                                     
                                                                                                                                
CSSB  110 (JUD)  was REPORTED  out of  Committee with  a "do                                                                    
pass" recommendation, and with two  new zero fiscal notes by                                                                    
the Department of  Public Safety and a new  zero fiscal note                                                                    
by the Department of Law.                                                                                                       
                                                                                                                                
1:08:26 PM                                                                                                                    
                                                                                                                                
SENATE BILL NO. 257                                                                                                           
                                                                                                                                
     "An Act relating to funding for youth courts; and                                                                          
     relating to accounting for criminal fines."                                                                                
                                                                                                                                
Senator Dennis Egan, sponsor, read the sponsor statement.                                                                       
                                                                                                                                
   · Senate Bill 257 provides a sustainable source of                                                                           
     funding for Alaska's youth courts.                                                                                         
                                                                                                                                
  · Every youth court in the state is a little different,                                                                       
     but they share the same basic idea:  Young people                                                                          
    picked up for misdemeanors, violations, and alcohol                                                                         
     offenses get a trial by their peers.                                                                                       
                                                                                                                                
   · Youth courts work. Only 10 percent of juveniles who go                                                                     
     through these programs reoffend.                                                                                           
                                                                                                                                
   · That saves the state money - roughly $10,000 per                                                                           
     offender.                                                                                                                  
                                                                                                                                
   · It also means the Juvenile Justice professionals at                                                                        
     the Department of Health & Social Services don't have                                                                      
     to dedicate resources to the little stuff.                                                                                 
        o That's a 2-way benefit - real attention and real                                                                      
          consequences for young people who otherwise don't                                                                     
          always get a hard look.                                                                                               
                                                                                                                                
        o And our well-trained youth corrections people are                                                                     
          available for the 'hard cases.'                                                                                       
                                                                                                                                
   · There's another great benefit for Alaska - the kids                                                                        
     who volunteer in these programs get great training in                                                                      
    the basics of criminal law, research, writing, and                                                                          
     public speaking.                                                                                                           
                                                                                                                                
   · The bill chooses a funding source for these courts - a                                                                     
     portion of criminal fines.                                                                                                 
                                                                                                                                
        o Currently adults' criminal fines are unrestricted                                                                     
          general fund.                                                                                                         
                                                                                                                                
        o SB 257 designates up to 25% of those fines for                                                                        
          youth courts.                                                                                                         
                                                                                                                                
        o Making criminals pay for crime prevention makes                                                                       
          sense                                                                                                                 
                                                                                                                                
        o I look forward to hearing from the public, and                                                                        
          answering committee members' questions.                                                                               
                                                                                                                                
1:10:00 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman noted  three zero  fiscal notes,  one from                                                                    
the Department  of Law,  one from  the Department  of Health                                                                    
and Social Services, and one from the Court System.                                                                             
                                                                                                                                
KERRI  FOX,   BETHEL  YOUTH  COURT,   (via  teleconference),                                                                    
testified in  support of  the bill.  She shared  that Bethel                                                                    
has been  trying to  get a youth  court started  for several                                                                    
years. Some  progress has  recently been  made. She  did not                                                                    
want to lose that momentum.                                                                                                     
                                                                                                                                
Senator Ellis asked  how the court connects  the elders with                                                                    
youthful  offenders. Ms.  Fox replied  that  when youth  are                                                                    
charged with  minor consuming, they  come before a  panel of                                                                    
elders and youths. Guidance is offered.                                                                                         
                                                                                                                                
1:12:56 PM                                                                                                                    
                                                                                                                                
LISA  ALBERT-KONECKY,  MAT-SU  YOUTH  COURT,  WASILLA,  (via                                                                    
teleconference),  testified  in  favor of  the  bill.  Youth                                                                    
courts show a strong  community-supported program. The youth                                                                    
court  in  Wasilla is  struggling  for  funding. Each  youth                                                                    
court reflects  their community's  needs. She  urged support                                                                    
of the bill.                                                                                                                    
                                                                                                                                
1:14:57 PM                                                                                                                    
                                                                                                                                
MEGAN  STANNELAND, ADVOCATE,  JUNEAU YOUTH  COURT, testified                                                                    
in support of  the bill. She stressed that  youth courts are                                                                    
youth advocating  for youth, which  gives the  program power                                                                    
and  momentum. The  youth courts  attempts to  find creative                                                                    
sentencing   using   community   service   that   fits   the                                                                    
individual.                                                                                                                     
                                                                                                                                
Senator Thomas  pointed out that youth  courts are supported                                                                    
by pro  bono trial  lawyers. Youth courts  reduce recidivism                                                                    
dramatically.                                                                                                                   
                                                                                                                                
Senator  Egan  agreed. The  recidivism  rate  is 10  percent                                                                    
compared to 30 percent in regular court cases.                                                                                  
                                                                                                                                
SB  257  was  HEARD  and   HELD  in  Committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
1:18:55 PM                                                                                                                    
                                                                                                                                
SENATE BILL NO. 246                                                                                                           
                                                                                                                                
     "An Act increasing the number of superior court judges                                                                     
     designated for the third judicial district; and                                                                            
     providing for an effective date."                                                                                          
                                                                                                                                
DOUG  WOOLIVER,   ADMINISTRATIVE  ATTORNEY  FOR   THE  COURT                                                                    
SYSTEM, presented  an overview of  the bill. He  pointed out                                                                    
that the  legislation was introduced by  the Rules Committee                                                                    
at the request of the Supreme  Court. The bill would add one                                                                    
new Superior Court  Judge in Anchorage and the  intent is to                                                                    
have  that judge  sit  on  the civil  bench  and hear  civil                                                                    
cases. Anchorage  Superior Court  Judges are the  busiest in                                                                    
the state  due to the  number of  cases and case  types. Two                                                                    
case  types  in particular  draw  a  considerable amount  of                                                                    
judicial time.                                                                                                                  
                                                                                                                                
Mr. Wooliver  explained that the  amount of time  needed for                                                                    
Child In Need  of Aid (CINA) cases and Family  Law cases has                                                                    
increased  significantly over  the  years. Appearing  before                                                                    
the  same  judicial  officer   better  serves  families  and                                                                    
facilitates  the  whole  process.  Close  court  supervision                                                                    
helps  to keep  families on  track. This  closer supervision                                                                    
takes more time, but will  help the family get back together                                                                    
as the goal is to unify the family.                                                                                             
                                                                                                                                
Mr. Wooliver  informed the committee  that Family  Law cases                                                                    
have  increased  due to  the  number  of people  who  appear                                                                    
without  an attorney.  This creates  an increased  amount of                                                                    
work  for  the judges;  however,  they  realize that  adding                                                                    
another judge  is expensive, but necessary.  An attempt will                                                                    
also be made to find more case managers.                                                                                        
                                                                                                                                
1:24:06 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman requested more  information about case load                                                                    
per   judicial  district.   Mr.   Wooliver  mentioned   that                                                                    
Anchorage,  followed   by  Juneau  and  Fairbanks   had  the                                                                    
heaviest loads.  He assumed  that it  would be  necessary to                                                                    
return to the legislature next year to request more judges.                                                                     
                                                                                                                                
Senator Hoffman  asked for information  about the  growth of                                                                    
Superior Court  Judges in the  state for the past  10 years.                                                                    
Mr. Wooliver  said he would  get back to the  committee with                                                                    
that information.                                                                                                               
                                                                                                                                
Co-Chair Stedman also  asked for a 10-year  history of court                                                                    
loads by judicial district.                                                                                                     
                                                                                                                                
1:26:02 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman noted  that there was one  zero fiscal note                                                                    
from the Judicial  Council and one fiscal  note for $499,100                                                                    
in  general funds  reflecting the  cost of  a new  judge and                                                                    
support staff.                                                                                                                  
                                                                                                                                
Senator Olson asked if there  would be enough physical space                                                                    
for a  new judge. Mr. Wooliver  said they were making  a new                                                                    
superior  court  available in  the  Nesbit  Court House,  so                                                                    
there is one court room available for this new seat.                                                                            
                                                                                                                                
Senator  Thomas  asked  if  the need  for  more  judges  and                                                                    
prisons  was because  of  a population  increase  or due  to                                                                    
other factors.                                                                                                                  
                                                                                                                                
1:27:59 PM                                                                                                                    
                                                                                                                                
Mr. Wooliver  noted that the  therapeutic court has  a lower                                                                    
recidivism  rate but  does not  affect a  large part  of the                                                                    
population. The  Department of Corrections has  refocused on                                                                    
treatment issues as  a way to help  reduce recidivism rates.                                                                    
The system does work, but it is a long road.                                                                                    
                                                                                                                                
SB 246 was HEARD and HELD in Committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 1:29 PM.                                                                                           
                                                                                                                                

Document Name Date/Time Subjects
Articles.pdf SFIN 4/13/2009 9:00:00 AM
SFIN 3/12/2010 9:00:00 AM
SB 110
SB110 Sectional Analysis.pdf SFIN 4/13/2009 9:00:00 AM
SFIN 3/12/2010 9:00:00 AM
SB 110
SB110 Sponsor Statement.pdf SFIN 4/13/2009 9:00:00 AM
SFIN 3/12/2010 9:00:00 AM
SB 110
SB246 Sponsor Statement.pdf SFIN 3/12/2010 9:00:00 AM
SB 246
SB_257_Sponsor_Statement.pdf SFIN 3/12/2010 9:00:00 AM
SJUD 2/19/2010 1:30:00 PM
SB 257
SB 257 Juneau DistCourt LOS.pdf SFIN 3/12/2010 9:00:00 AM
SJUD 2/19/2010 1:30:00 PM
SB 257
SB257 Letter of Support.pdf SFIN 3/12/2010 9:00:00 AM
SJUD 2/19/2010 1:30:00 PM
SB 257
SB257 Ketchikan Magistrate LOS.pdf SFIN 3/12/2010 9:00:00 AM
SJUD 2/19/2010 1:30:00 PM
SB 257
SB257 JYC Bd LOS.doc SFIN 3/12/2010 9:00:00 AM
SJUD 2/19/2010 1:30:00 PM
SB 257
Wasilla PD LOS.pdf SFIN 3/12/2010 9:00:00 AM
SJUD 2/19/2010 1:30:00 PM
SB 257
Palmer Distcourt LOS.doc SFIN 3/12/2010 9:00:00 AM
SB 257
LOS Wrangell Bethel.pdf SFIN 3/12/2010 9:00:00 AM
SB 257
Kodiak PD LOS.pdf SFIN 3/12/2010 9:00:00 AM
SB 257
Kethcikan DistCourt LOS.pdf SFIN 3/12/2010 9:00:00 AM
SB 257
Wrangell D.Rooney LOS.doc SFIN 3/12/2010 9:00:00 AM
SB 257
Letter in Support Teen Court.pdf SFIN 3/12/2010 9:00:00 AM
SB 257
AYC FM LOS.doc SFIN 3/12/2010 9:00:00 AM
SB 257
North Star Magistrate LOS.pdf SFIN 3/12/2010 9:00:00 AM
SB 257
Kodiak COC LOS.pdf SFIN 3/12/2010 9:00:00 AM
SB 257
Kodiak Judge LOS.doc SFIN 3/12/2010 9:00:00 AM
SB 257
Nome Mag LOS.doc SFIN 3/12/2010 9:00:00 AM
SB 257
SB 305 Proposed SFIN CS Version E.pdf SFIN 3/12/2010 9:00:00 AM
SB 305
SB305 3-12-10 DOR Presentation.pdf SFIN 3/12/2010 9:00:00 AM
SB 305
SB 305 BP Testimony 3-12 SFC.pdf SFIN 3/12/2010 9:00:00 AM
SB 305
SB 110 SFC Am. #1.pdf SFIN 3/12/2010 9:00:00 AM
SB 110
SJR 21 Southeast Conference ltr of support .pdf SFIN 3/12/2010 9:00:00 AM
SJR 21
Support Ltr.pdf SFIN 3/12/2010 9:00:00 AM
SB 238
Letter of Support.pdf SFIN 3/12/2010 9:00:00 AM
SB 257
SB 246 Superior Court . Case Filings.pdf SFIN 3/12/2010 9:00:00 AM
SB 246