Legislature(2007 - 2008)BUTROVICH 205
02/21/2007 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB80 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 80 | TELECONFERENCED | |
SB 80-OIL & GAS PRODUCTION TAX: EXPENDITURES
3:38:29 PM
CHAIR HUGGINS announced SB 80 to be up for consideration.
SENATOR WAGONER moved to adopt CSSB 80(RES), version M, dated
2/21/07 as the working document. He objected for purposes of
discussion.
MARY JACKSON, staff to Senator Wagoner, came forward to explain
the CS. She said it amends the PPT legislation that was passed
last August and it does that by not allowing for costs of repair
or replacement of improperly maintained or not maintained
facilities. She stated:
Senator Wagoner believes that the citizens of the
state of Alaska should not be responsible for costs
that are associated with bad maintenance and 16 other
members in the Senate agree with him and thank you for
that.
For the record, she said, that neither Senator Wagoner nor
Representative Curt Olson, sponsor of the same legislation in
the other body, ever intended or do intend to have this turn
into a vehicle for a gross tax. Current statutes set out some
costs that are already not allowed as lease expenditures and
this bill inserts a new provision on page 3, line 19. The
Department of Natural Resources (DNR), Department of
Environmental Conservation (DEC), Department of Revenue (DOR)
and AOGCC all worked on the language.
3:41:00 PM
She went through the changes for committee. The first change
adds the DNR commissioner on page 3, line 21, because that
department handles the leases and has a great deal of expertise
in this area. It just made good sense to include them as part of
the consulting group. The term "the chair of" was deleted in
front of the "AOGCC" and the reason for that was so that any
member of the AOGCC could be included as part of the consulting
group.
The term "relying on" was deleted and replaced with "taking into
consideration". It was thought by members of the departments
that this language was a little more general in nature and
easier for them to work with.
Clarifying language was added in (A), (B) and (C) on page 3 so
it didn't just say "improper maintenance"; it says "improper or
no maintenance".
3:43:00 PM
CHAIR HUGGINS asked who they envision being the commissioner on
page 3, line 20.
MS. JACKSON answered the commissioner of DOR.
SENATOR WAGONER added the reason it says just commissioner is
that it is a tax bill and, therefore, in his purview.
CHAIR HUGGINS asked her where it says "no maintenance" in the
bill.
MS. JACKSON replied that clarifying language is on page 3, line
24 and 25 and says "(A)related to the repair and replacement of
property or equipment that was not maintained or was improperly
maintained;".
SENATOR STEDMAN said the deductions are listed starting on page
2, line 1. He asked how "wilful misconduct, or gross negligence"
interplayed with the proposed new language on page 3, line 24,
that talks about items that were "not maintained" or "improperly
maintained" that sounded like they were related to negligence.
SENATOR WAGONER answered that basically wilful misconduct and
gross negligence require a higher level of proof on those items
than the ones in the amendment.
CHAIR HUGGINS pointed out that the amendment language was in
addition to and not replacing wilful misconduct language.
SENATOR STEDMAN asked where the line is drawn on the cost for
repairs and if all items would be audited or just large items
that come to particular peoples' attention.
DON BULLOCK, Attorney, Legislative Legal and Research Services,
answered that everything on the PPT return would be subject to
audit by the Department of Revenue. "Obviously, it would make
good management sense to put their efforts where they'll most
likely find errors or parts of the return that need to be
corrected."
He thought the departments would set internal standards by
regulation, because this language takes into consideration the
standard practices of the industry and recognizes that there are
things one would normally do in maintaining a field to avoid
repairs.
So, the job that the commissioner will have is to
determine what those standards are and then to look at
what was actually reported on the return and determine
the significant variance if any from the standard that
the commissioner has decided should be applied.
3:48:00 PM
SENATOR STEDMAN asked if the state has any idea what it is
facing in terms of pipelines and facilities not being maintained
or improperly maintained.
MR. BULLOCK replied that the scope won't be known until the
commissioner establishes what the standards are and then makes
the decision as to how far away from those standards one can go.
SENATOR WIELECHOWSKI asked what the mechanism is for resolving a
dispute regarding a decision that is made by the commissioner in
regards to language on page 3, line 19.
MR. BULLOCK replied that he was a hearing officer in the
Department of Revenue for 13 years and the formal appeal
function is now to an independent body. Generally, he expected
the first filing under the PPT to happen on April 1. Statutory
authority exists for someone to amend a tax return within three
years of the date it was filed. The DOR also has a period of
three years in which it can audit the return. It would then
issue a notice to the taxpayer of the adjustment it found. If
the taxpayer disagrees with that amount, he would file an appeal
generally initially at an informal level where he would get
together with the people who did the audit. This would be the
first chance to explain why the taxpayer thinks he is entitled
to the deductions he took. They might continue to consult
afterwards with other commissioners and the AOGCC as to what
standard should be applied.
He said the next formal level of appeal could involve such
things as expert witnesses that would speak to the issue of what
standard practices would be and if what was done was reasonable
and if the deduction should be allowed. After that the issue
would go to Superior Court and on up the ladder.
SENATOR WIELECHOWSKI asked if it would go to the Alaska Supreme
Court.
MR. BULLOCK replied yes, unless there is a federal issue
involved.
SENATOR WIELECHOWSKI asked if the state could have a situation
where a report is filed April 1 and then gets amended three
years later, and therefore, the state would not know the true
expenses for that amount of time.
MR. BULLOCK replied yes and that is similar to the federal
system where the taxpayer has the opportunity to correct a
return for three years and the department has the same amount of
time to correct it through the audit process.
CHAIR HUGGINS asked if the term "not maintained" was a common
term that most people would come to grips with.
MR. BULLOCK replied:
Arguably, improperly maintained as was stated in the
earlier draft of this legislation would have covered
the failure to maintain it at all and this is just to
make sure that as you get into malfeasance or
nonfeasance issues, that just as one proceeds to say
it's the belt and the suspenders both. It's just to
insure that there's no unnecessary room.
CHAIR HUGGINS asked if he as a professional was confident with
that term.
MR. BULLOCK replied, "It's not a matter of legal interpretation.
Plane meaning would apply to this - to these terms."
CHAIR HUGGINS equated it to maintaining a vehicle by changing
the oil to making sure the lube job is done. But if you didn't
check the air pressure in your tires and one was 28 lbs. versus
30, would that be splitting hairs and would it be quickly
dismissed.
MR. BULLOCK replied:
I think when they're looking at this deduction,
they're going to develop a link between what the error
was and what the result of the cost was. An example of
'not maintained' versus 'improperly maintained' with
your car is if you didn't ever change the oil, you
didn't maintain your vehicle. If you put the wrong oil
in - put the automatic transmission fluid in your oil
pan instead of the oil - then you are improperly
maintaining - you took some effort toward it. So, it's
a matter of doing nothing as well as the matter of
doing even what you should have done, but doing it
poorly.
CHAIR HUGGINS asked if "not maintained" was defined somewhere.
MR. BULLOCK replied it's what it is on its face. "It's either
maintained or it's not maintained."
3:56:00 PM
SENATOR WAGONER said:
This is not saying that BP is not going to be able to
write off these expenses or the other companies
involved. What this is is another tool to put in the
toolbox to give this a review to see if we think those
should be allowable expenses or not. And I don't want
anybody to think right now that this is going to be a
punitive act to make sure that all this is not a write
off. It may very well be or a portion of it may be
allowed. That isn't the point of this. The point of
this is just to give it a final review by a committee
that are able to bring to the table during the audit
process certain skills and to take a good hard and
final look at this.
BP, in a letter the other day, stated that they plan
to write off up to $11 million in credits. Well if
they have 28 percent of the field that leaves about
another $29 million there that the other companies can
write off. So, that's almost $40 million. That's a
pretty good size chunk of change. So that's one of the
reasons for this bill - to give that a good review and
see if that is allowable or not.
CHAIR HUGGINS asked Mr. Bullock to restate the piece about
clarification and regulations so everybody understands this is
not a stand-alone issue.
MR. BULLOCK clarified that he is participating in this meeting
at Senator Wagoner's request along with people from the DNR, DOR
and AOGCC. They are discussing their authority to define in
regulations and to make the determinations as to what the
standard practices were.
MS. JACKSON inserted that Mr. Norman, Chair of the AOGCC, spoke
directly to this issue and he would be better able to expound on
it. He talked about developing a standard for reasonable and
prudent operators, which would fit within this framework.
CHAIR HUGGINS asked Mr. Norman if he had anything to add to
that.
MR. NORMAN said certain standards providing specificity and
guidance should be developed so they could be relied upon.
Certain standards are in place, but they are generally voluntary
guidelines enacted by the American Petroleum Institute and
societies such as the American Society of Corrosion Engineers.
This would have to be fleshed out in the regulations the
department promulgates.
He said currently, there are no standard practices that apply
across the board to refer to. In other cases, they are evolving
just as new technological innovations evolved and types of
equipment that were not in use five years ago. Promulgating
regulations will take a fair amount of work.
4:00:00 PM
SENATOR MCGUIRE referenced a letter dated February 15, 2007 from
Doug Settles saying she could see where the legal argument was
going. So, she commented to Senator Wagoner that the distinction
would be:
If the argument on BP's part was that they were
already going to replace certain pieces of equipment,
certain parts of equipment that would have been a
standard practice and so forth - is there a place in
your bill that takes that into account? In other
words, that would be the kind of deduction that they
would have anticipated to upgrade and expand and go
forward with a regular capital expense. Here what you
want to do is exclude those parts, those expenses,
that go towards improper maintenance or lack of
maintenance. Where does that line fall and do you
think you have taken care of it in here?
SENATOR WAGONER responded:
The partial answer to that question is, in my mind,
would BP and the other partners - would they be
replacing that 30 inch line with a 20 line had not
these corrosion problems come up. It's not the
ordinary thing to do to replace a line like that. If
it was, I think we'd be looking at replacing the TAPS
line and downsizing it, so we've got a more efficient
flow. Because what they are doing is taking pumping
stations off line and putting in new compressors and
new pumps. But they aren't downsizing the line. That
line would have functioned very well at 30-inch versus
a 20-inch had not the corrosion been so bad that they
decided to take it out. That's in my mind, anyway.
Excuse me - follow up - the good thing about it is
this panel of seven people aren't going to have to sit
and make the decisions. That's why this bill is
setting this up. It's really not our job to do that.
It's the Department of Revenue's.
SENATOR MCGUIRE commented that she wanted to get that on the
record because she thought that would be the point of
delineation.
SENATOR STEDMAN said he and a lot of other people worked long
and hard for months on PPT and recalled that the 20 percent
credit was put in place to stimulate development and expansion
of the state's oil basin. The intent was to increase the flow of
oil in the TAPS and to share in the cost of exploration and
development with the industry. That is a little different twist
than rebuilding infrastructure in an old basin. He added:
But in looking at the - dealing with the older basin
issue, we had put in roughly a 30 cents a barrel cost
for just normal maintenance of equipment - that just
wears out over time. So, the normal maintenance issue
would be dealt with. I'd like you to stop there for a
minute because that's kind of just putting some of
these pieces together for someone that didn't recall
or wasn't interested in the other PPT bill, the old
PPT bill, but there's two pieces and I'm just kind of
curious how that 30 cent exclusion plays into the
issue of improperly maintained. Clearly, hopefully,
there is no such thing as not maintained and we're
just dealing with poorly maintained. I'd just like to
hear your thoughts on that.
MS. JACKSON responded that Senator Wagoner developed the 30 cent
per barrel (BOE) with Dr. Van Meurs who had provided a
memorandum to Senator Wagoner on that issue. The gist of it was
how to make the PPT closer to a gross tax system. This was part
of the third PPT bill (HB 3001) in August of the second special
session.
SENATOR WAGONER agreed that the BOE was put in place to bring
the bill closer to a gross bill instead of a net bill.
4:07:00 PM at ease 4:10:31 PM
JUDY BRADY, Executive Director, Alaska Oil and Gas Association
(AOGA), said her testimony today had the consensus of the
association with no descent. She testified:
As pointed out earlier just last August in a third
special session, the legislature passed a final
version of the Petroleum Production Tax, which was set
out to both increase tax revenues to the state in
times of higher prices and to encourage new
exploration and production. That and the tax offered
new credits and shared the risk of certain categories
of costs. So, we're all pretty sure that it certainly
did its job in terms of a higher tax. The letter that
was referred to earlier from BP's president, Ed
Settles, talked about their tax nearly tripling from
$180 million to over $500 million for the first nine
months of 2006. Not surprisingly, many legislators
were enthusiastic about the higher taxes for this
state and not so enthusiastic about the credits or the
concept of the state sharing some of the risk by
providing incentive for certain categories of costs.
And those of you who were involved in this and many of
you were, there were literally dozens of concerns
about the new approach - what standards of review
should be used, what costs should be included, how to
prevent the state from being gamed by the companies,
how to prevent the companies from being gamed by the
state, how the credits could be used, what the tax
rate should be. And on August 6, BP discovered the
leak at Flow Station 2 with an oil transit line in the
Prudhoe Bay. It notified the appropriate regulatory
authorities and implemented procedures to stop the
leak and clean the spill and began the process of
suspending production from the entire field.
The House of Representatives was informed just before
its vote on final passage in third reading to enact
PPT and it passed 29 to 10. As more information was
released, the level of concern regarding the effect of
the spill under the proposed new tax legislation
heightened. Legislators did not want the State of
Alaska to end up paying for the result of the spill
under the PPT if standards had been ignored. As a
result, the section on lease expenditures, what they
would not include, as well as the standards came in
for close scrutiny [indisc.]
There was discussion of a lot of other standards,
various words were used and finally settled on lease
expenditures would not include costs arising from
fraud, wilful misconduct or gross negligence. All of
those words have meaning in law with lots of court
cases behind them. It was further decided that costs
incurred for containment, control, clean up or removal
in connection with any unpermitted release of oil or a
hazardous substance would not be included.
On August 9, the Senate Special Committee on Natural
Gas Development reviewed a new amendment with almost
the same language as SB 80, which is in front of you
today. The language was introduced twice, first as
Amendment 9 and then as Amendment 13. Its difficulties
were immediately apparent - what does improperly
maintained mean - what does diminished capacity mean -
who decides in the first place? An auditor? Does there
have to be an incident like a spill? If so, that's
already taken care of under unpermitted releases. If
an incident takes place, does that mean the state can
decide what maintenance costs are appropriate under
every circumstance? And if no incident takes place,
does that mean the state can decide what maintenance
costs are appropriate under every circumstance?
Both legislators and State Department of Revenue
personnel expressed concern about the difficulties and
after a discussion, neither amendment was adopted.
Instead, the Senate Special Committee adopted an
amendment proposed by Dr. Pedro van Meurs and he
explained in the hearing on August 9, according to the
minutes, that maintenance is a reasonable deduction
for PPT, but sometimes [its] hard to decide which
expenditures fall into that classification. The
simplest solution is to take some base expenditure and
over the next 20 or 30 years disallow a floor for the
capital expenditures. A flat 30 cents per barrel
exclusion, which sets a floor for maintenance costs
according to Senator Wagoner and avoids the problem of
a case by case decision as to whether maintenance,
repair or replacement is required because equipment or
facilities have been improperly maintained, was
adopted.
Amendment 13 requiring case by case decisions as to
the reason for the repair or the replacement, almost
identical to SB 80, was not adopted. Dr. van Meurs
favored using a proxy in order to have clarity and
certainty and to avoid disputes. Now the legislature
is again debating the same amendment that failed on
August 9 and the same problems with it exists. I would
note that the legislature is not debating whether or
not to amend the PPT legislation to drop the 30 cent a
barrel proxy cost which [indisc.] for every producing
company whether there is an incident or not.
4:16:00 PM
What is being proposed here is a per-activity decision
every time of proper maintenance in addition to the
flat surcharge that was intended as a proxy for such a
decision. However, it may be helpful that this
amendment be debated again. For PPT to function
effectively, it is important that both legislators and
the industry understand how the legislation works and
why it should work as intended. If either side feels
gamed, we will not be in court forever regardless of
what kind of tax it is.
AOGA opposes SB 80 for four reasons. First, we believe
that the state is already protected from being
inappropriately charged with lease expenditures as a
result of spill incidents under the current law.
Second, SB 80 has unintended, but potentially
significant implications that will extend far beyond
Prudhoe Bay, particularly troublesome in Cook Inlet.
Third, this is an ex-post facto law that is forbidden
under the federal and state constitution. And fourth,
and continually troublesome, is SB 80, because of the
ambiguities of its language, it creates ambiguity
throughout the entire PPT legislation related to costs
and credits.
Before going into our specific concerns, we'd like to
express our general concerns with the premature and
possibly unwarranted assumptions regarding the Prudhoe
Bay oil leaks. SB 80 is aimed directly at Prudhoe Bay.
There have been lots of comments about what was done
and not done and appears to be based on the assumption
that because corrosion on a Prudhoe Bay transit line
was more severe than expected and those lines were
improperly maintained.
This is to judge BP's conduct and that of Atlantic
Richfield, as the operator of the eastern side of the
Prudhoe Bay field before the BP/Arco merger in 2000,
without having the decisions of the federal and state
regulators and/or the courts. We like to believe that
companies like individuals are innocent until proven
guilty. There certainly does need to be the level of
concern and scrutiny exhibited they industry and the
state and federal regulators. What we hope to avoid is
legislation based on an assumption of wrong-doing that
will not only not solve a problem, but will create new
ones.
Real shortly here I'll go through our four concerns.
We believe the state is already protected from
inappropriately being charged with lease expenditures
as a result of spill incidents under the current law.
The PPT laws already specifically disallow costs
arising from fraud, wilful misconduct and gross
negligence. SB 80 in contrast would introduce a
completely new and subjective term for judging whether
maintenance-related costs would be lease expenditures.
And this new term would be the improperness of the
maintenance in question. All of the other terms are
common law terms, specifically the law of court and
the judicial precedents, that establish their meaning
go back literally thousands of years. To the extent
that the concept of improper maintenance is
encompassed by any or all of the other already
existing statutory terms, it is superfluous. To the
extent it may mean something different from the term
already in the statutes, the concept of improper
maintenance is ambiguous because there is nothing to
guide taxpayers or tax administrators about which of
the existing terms it is different from and in what
ways it is different from each of them. And in effect
waiting for this to go to be spelled out by regulators
by three different departments turns the whole
question of whether the PPT as an act that is supposed
to encourage new production over to regulators.
Implications extend statewide. Corrosion is not a
problem unique to the fields on the North Slope. It's
a challenge everywhere. Sometimes you can slow it down
a great deal, but you cannot stop it completely. That
means the older an iron or steel structure or facility
is the greater the cumulative effects. Prudhoe Bay
th
will mark the 30 anniversary at the start of this
year; in Cook Inlet the number of fields will have
thth
their 40 and a few even their 50. And our members
with Cook Inlet interest are concerned that this
legislation, which seems aimed at a particular
situation that rules on the North Slope, will affect
them as well.
4:21:00 PM
There are operations in the Inlet area that will
eventually need to be replaced or significantly
repaired in order to remain in operation. When these
facilities and structures are eventually replaced,
there is nothing in SB 80 to protect them from claims
that they were improperly maintained - unless the
costs of repairing or replacing them are limited or
disallowed altogether. This uncertainty over whether
the costs will be fully recognized as deductions and
whether the tax credits or capital portions of these
costs will be fully allowed could lead to fields and
facilities being permanently shut in instead of
remaining in production even longer.
Third, ex-post facto legislation is forbidden under
both the federal and Alaska Constitutions. Section 10,
Article 1 of the US Constitution declares that no
state shall pass any ex post facto law. And according
to Black's Law Dictionary, an ex post facto law is a
law passed after the occurrence of a fact or
commission of an act which retrospectively changes the
legal consequences or relations of such a fact or deed
- and certainly SB 80 does this. We are going to be
assuming that you have talked to the Department of Law
or will about this issue.
The last one is SB 80's ambiguity that threatens the
effective implementation of the PPT. With respect to
providing clarity about how taxes work, SB 80 promises
to create ambiguity between its improperness standard
and the other well-defined statutory standards already
in place for determining which expenditures are proper
under PPT. With respect to providing certainty about
what a taxpayer owes, the ambiguity under SB 80
promises countless disputes about whether maintenance
was improper or not and, to the extent it was, how
much of the cost repairing it or otherwise dealing
with the situation should be disallowed.
The question of what costs are deductible is central
to the concept of the PPT as an incentive to new
investment and new production. The tax rate under the
legislation is extremely high. The trade off was in
part related to cost sharing and credits. AOGA has
already testified that we believe the tax rate is too
high and now we are replacing the position and
testifying that along with the high tax rate the
determination of cost and credits will spiral off into
a black and never-ending hole of litigation. I will
tell you that we have done this before from the 70s,
80s, and 90s we've spent millions and billions on the
table because of disagreements about what words meant
and if we do that again after having just got through
with the last 10 years, then shame on us.
4:24:00 PM
We strongly believe that SB 80 is a step backwards in
achieving effective clarity in the PPT. We all are
concerned about declining oil and gas production.
That's the only reason the legislature took such a
huge leap to make this law that is unique in the
world, that has a very high tax rate in times of high
prices and also where the state takes some of the
risk. There is no other reason to do that if we
weren't concerned about production. That's why we're
so concerned about having a gas pipeline as well. To
add language that deliberately adds new ambiguity is
truly a step backwards in this whole movement towards
increasing production and making Alaska a place where
people can do business with surety that they know
what's going to happen in a fiscal sense. That
concludes my remarks.
4:25:00 PM
SENATOR WAGONER mentioned that Ms. Brady brought up the fact
that there are some lines in Cook Inlet that are 50 years or
older. He said the first two platforms were set by Shell in Cook
Inlet and are 50 years old. To this date they have not had a
problem of the magnitude of the one on the North Slope. The oil
is different, but the lines are pigged on a scheduled basis,
chemicals are injected and those lines are very operable to this
day. They haven't seen the necessity of resizing those lines,
putting new lines in or anything else.
I don't know when, if ever, those lines will need to
be replaced. And that gets to the crux of this whole
amendment. And I just checked on that last week,
because I happened to know the people who set those
platforms.
SENATOR MCGUIRE thanked Ms. Brady for her comments. She added
that an amendment already clarifies that costs arising from
fraud - wilful misconduct or gross negligence - will be a part
of that. She thought failing to maintain at all or improperly
maintain structures was gross negligence.
If anything, the bill here - it's just something to
consider, Judy - but maybe [it's] a clarification of
an earlier statement made by the legislature. Gross
deviation - is deviating from the standard of care
that somebody would not normally do and I think the
argument could be made if it's proved or not - I'm not
the judge or jury here - that the line was not
maintained or improperly maintained. That would likely
be gross negligence. That was just something to add.
You talked a lot about going back in time and ex post
facto laws and things like that. One other thought
would be that it's a clarification of an earlier
statement we made as a legislature.
SENATOR WIELECHOWSKI asked Ms. Brady if she considered BP's
actions to be gross negligence in this matter.
MS. BRADY replied her point was that there are three standards
in the law as it stands now and BP will have to play against
them for it to use the credits and deductions. These standards
have a long history in law and any company wanting to use the
credits will have to play against them.
SENATOR WIELECHOWSKI asked if it is industry standard to not
inspect lines for over a decade.
MS. BRADY replied that right now people are making assumptions
and asking questions about issues that are being looked at by
regulators with both the expertise and the authority to look at
them. There will be decisions about what was done or not done in
the proper place and at the proper time.
4:30:00 PM
CHAIR HUGGINS asked Mr. Bullock to comment on his view of what
"not maintained" or "improperly maintained" means.
MR. BULLOCK recapped there were discussions of gross negligence,
which is a higher standard of negligence. This bill offers a
lower standard and it comes down to what extent a poor decision
was made and should the state shoulder the cost. Prior law when
the tax was on the gross value at the point of production had
elements like what was the sales price at the refinery, what
were the transportation costs from Valdez to the refinery, what
was the pipeline tariff. There was a prevailing value backstop,
that if somebody made a bad decision, like underpricing the oil
relative to other sales, that the prevailing value of that oil
would be the applicable standard rather than the state sharing
in the cost of a mistake or sharing in a negotiation.
He said this language is similar in that it sets up a standard
which the commissioners will decide. If there is a variance from
the standard practice, perhaps the state shouldn't share the
cost of the decision to vary from the standard practice.
This bill doesn't say that BP didn't maintain their
pipeline. What this bill says there's a problem, and
that the commissioner will look at it and say this was
fully expected - at the end of the life of a field -
it's expected that the pipelines might be changed or
downsized. I don't know what the answer is, but what
this bill does is it allows the commissioner to make
that decision and really make a decision as to whether
the state should share in the burden of these costs or
not.
4:32:00 PM
CHAIR HUGGINS asked him to comment on the retroactivity of the
standard.
MR. BULLOCK replied that tax law has exceptions, but he couldn't
quote them. The PPT, itself, was a retroactive law - passed in
August and made retroactive to April 1 of 2006.
CHAIR HUGGINS asked about the case where the standard was not
maintained to the occurrence.
MR. BULLOCK replied AS 43.55.165(a) allows lease expenditures
that are ordinary and necessary and even under that standard the
issue is raised of whether an extraordinary repair would be an
ordinary expense. The 18 exceptions from allowable lease
expenditures are already in the statute and they are effectively
provisions where the legislature has taken the step of saying if
there's any doubt as to ordinary or necessary, these are not
ordinary and necessary and may not be deducted.
SENATOR MCGUIRE remembered that civil gross negligence is a
conscious disregard of a known risk.
MR. BULLOCK agreed.
SENATOR MCGUIRE explained that her argument earlier that to the
extent that an ex post facto law were espoused, it seemed that
the earlier version of the bill on page 2, line 6, discussing
costs arising from fraud, wilful misconduct and gross negligence
seems to dovetail with page 3, lines 24-25. She asked if
something is not being maintained at all or being maintained
improperly and a conscious disregard of a known risk can be
shown, where the standard is being lowered.
MR. BULLOCK replied that it's the awareness of the risk. He used
the analogy of shooting a bullet into a train or into a field as
having a different risk. Foresee ability is used in defining
gross negligence as opposed to simple negligence.
SENATOR MCGUIRE asked if this is where the commission would ask
whether or not not maintaining it at all or improperly
maintaining a line consciously would be a known risk. Has anyone
done it successfully?
MR. BULLOCK replied that part of the issue is identifying the
standard that says the state expects certain things have to be
done and if those things aren't done, it doesn't necessarily
mean it's gross negligence. It goes back to torts and what would
the reasonably prudent person do.
4:36:00 PM
SENATOR GREEN asked if no incident takes place and changes or
repairs are made, would that be reviewed by this panel. "Are we
doing something that would deter or discourage someone from
doing aggressive repairs, replacement - maintenance?"
MR. BULLOCK speculated that current law lists 18 things that
can't be deducted or limits them to 30 cents. That obviously
tells the department to look for those things first to see if a
return is inconsistent with the expectations of the law. If they
find things in that group, they would pursue it further. In the
case of a major capital expenditure that might be subject to
this provision, they may look at an extraordinary expense more
carefully to see if it fits in with the reasonable, ordinary and
necessary expenses that are lease expenditures.
SENATOR GREEN went to page 3, line 19, that talks about the
commissioner in consultation with the commissioner of DEC and
DNR and the AOGCC and asked if that meant that all of 18 things
are going to go through a different review group.
MR. BULLOCK explained that the standards all have standards
within them as to whether or not they are deductible. This one
says the state is concerned with how a field should be operated.
What this does in particular - what is the industry
standard for taking care of it. And these other
commissioners each come to the table with their
expertise that can help the commissioner of Revenue
determine what the reasonable standard is before the
commissioner then determines whether there was a
variation from that standard. It's unique, you know -
this consultation with the other commissioners relates
to developing the standard of what should have been
done.
SENATOR GREEN asked without this language, would everything
through 18 just be done however they do it with their tax review
panel now.
MR. BULLOCK replied yes. It's basically a tax issue like any
other tax issue. There are deductions you can have and
deductions you're not allowed to have. This case deals with what
the standard is and if it has been varied. It involves more than
just the Department of Revenue conducting an audit.
SENATOR GREEN asked if it's still for purposes of tax.
MR. BULLOCK replied yes. This is a deduction to get to the
taxable value of oil that is subject to the PPT.
SENATOR WIELECHOWSKI asked if an oil company or producer was
maintaining their lines, running pigs and inspecting lines, but
the line was old, then potentially they could write that off
under this bill. However, if they failed to inspect their lines
or improperly maintained those lines, the state is saying that
can't be deducted. "Alaskan residents shouldn't bear the burden
of having to pay it. Is that an accurate framing of what we're
trying to do here?"
MR. BULLOCK replied:
It is, but you always keep in mind whatever the
standard that these commissioners expect would be
normal would be the starting point. They'd say what
should have been done and then in fact, what wasn't
done - and if what wasn't done - does it amount to not
doing maintenance or doing what would be expected to
be normal maintenance, but they didn't do what was
expected.
SENATOR WIELECHOWSKI said there are probably millions of miles
of pipeline across the world and they had probably been in
existence for decades. So, there is probably a well-established
body of how they are taken care of. He asked if that was fair to
say.
MR. BULLOCK replied that he couldn't speak to that. That's why
this legislation is directed at the people who would be in a
better position to answer that question.
SENATOR MCGUIRE followed up on Senator Green's comment saying
that a concern she has is this might become a general deterrent
to general maintenance for the existing operators as well as
those who might want to come to Alaska and invest. She asked Mr.
Norman after this issue is resolved with BP, was it his intent
and did he think it was prudent to set out guidelines for what
is proper maintenance. She asked if a log that should be kept,
for example. She asked what could be done in the future to set
up some kind of parameters by which resource development
companies could have some expectations.
4:44:00 PM
MR. NORMAN responded:
The way I would perceive this is there's no question -
this will be a difficult assignment because in looking
for improper maintenance, substandard maintenance.
Some maintenance operations will be obvious, but as
has been discussed by the committee already, many of
those will fit under subsection (6). They may even
rise to the level of wilful misconduct - and I want to
add a disclaimer here. I am not speaking to any
specific situation and so I do not want to prejudge
any situation at this point because should the
legislature enact this and task us with this
assignment, then I want to be able to look at it
without having previously expressed any opinion as to
any particular maintenance situation as to equipment.
I think you can appreciate that.
But the point I want to make is that the obvious cases
of improper maintenance, very obvious ones, will
certainly be picked up already under subsection (6)
and I would expect them to rise to the level of gross
negligence and in some instance, perhaps even wilful
misconduct.
What we're looking at right now under subsection (19)
is beginning to slice the bread pretty thin and it is
a very difficult assignment that will be presented to
us, one which we will do to the best of our ability.
The way that I would approach it if it is presented to
us would be to begin work on promulgating regulations
to address the question that was put to me to try to
give some predictability. But I have to say right now
on the basis of having practiced law for many years
that I do not believe it will be possible to foresee
every situation, every compressor, every pipeline,
every improper additive of lubricant and so forth and
I think that we would have to fall back upon some of
the general standards - and there are many - that
exist in case law.
The standard of the prudent operator is a standard
that is repeated. Also the standard of good and
workmanlike manner are in accordance with best
engineering practices. These again are general
standards that would lead us in some instances to
cases - I know the FERC has its own definitions of
prudent operations that they do apply to pipelines. So
we would do our best to incorporate some of those
definitions and also we would look at the API,
American Petroleum Institute, and other professional
organizations that have committees of experts that
works on what constitutes maintenance. But again,
having said all of that, technology is constantly
evolving and whatever standard you lay down today may
not hold true five years from now.
As I indicated in my letter also, there would be a
question about the time that a particular decision was
made to configure a system in such a way that sets in
motion a chain of events and that may not be the best
standard in light of today, 2007, but perhaps at the
time the decisions were made, that was a good
standard. So, there are an awful lot of subtleties and
nuances once you get outside gross negligence, wilful
misconduct, obvious maintenance, and we would do our
very best to do exactly what the question anticipated.
And that is to try to describe in regulations some
standards that would give predictability. But I know
before we even start that it would be an impossibility
to anticipate everything that might go wrong.
We would also try to do it with a measure of common
sense and try to avoid the temptation to apply
hindsight because we do not live in a perfect world
and things don't always go right. I do know there are
some parallel decision makers that would be looking at
the same things. Certainly for federal income tax
purposes certain deductions would have to be
classified one way or another and the federal
government would have an interest in this certainly
over and above the PPT for state corporate income tax
purposes.
Again, decision makers would have to make a decision
as to whether this is an allowable deduction and
finally under applicable unit agreements, which exist
on virtually most of the field in Alaska, each
operator has a partner and for purposes of determining
whether you can allocate these expenses across the
different partners, the question normally is asked.
There are different standards in different operating
agreements, but the question does come down to - was
this conduct that would rise to the level of what
would have been done by a prudent operator.
In some agreements, ordinary negligence is recognized
as something that does occur and it's negligence
outside that standard that is disallowed. The reason
that that has developed in the law is that often
operators would be reluctant to assume that
responsibility if they knew they were going to, in
effect, become an insurer of a perfect result. So,
that's something that would be on my mind as chairman
of this commission if this passed and we set about as
best we can. And I want to underscore, we would do our
best to implement it, but we would try to strike a
proper balance. We would try to incorporate and reach
out to adopt professional well thought-out standards
and we would look at the case law, specifically
definitions of the prudent operator standard and the
good and workman like manner standard that have been
repeated. And then by applying those, we would make
our best judgment and render advice to the
commissioner of Revenue.
4:52:00 PM
SENATOR GREEN quoted Mr. Norman's letter on page 2:
One can never lose sight of the fact that significant
technological advances have occurred as a result of
innovations which at the time were departures from
standard industry practices. Also engineers sometimes
learn more through failure than success. Often there
is no indication something is being done improperly
until a failure has occurred that is through analyzing
the failure that root cause can be determined and
changes made going forward.
MR. NORMAN said what he was trying to indicate with those words
is that if this assignment is given to them, they will undertake
it and carry it out to the best of their ability, but they would
do it in an atmosphere where they apply common sense.
That paragraph that was just quoted was intended to
remind all of us again that life and technology is a
constantly evolving learning experience and so what we
would do, perhaps, foresee-ability is a term that is
familiar to lawyers and that is one of the basic
elements in conducting a negligence analysis - is -
was this foreseeable. And if a prudent operator or an
operator functioning and carrying out operations in a
good and workmanlike manner could not be said to have
foreseen this particular outcome, then it would be
unfair to penalize that operator. And that's what I
was attempting to address here. I don't know that I
wrote that as clearly as I perhaps could have, but
that was the tone - I was trying to give some balance
to this, which would be a fairly difficult assignment
for us.
4:54:00 PM
CHAIR HUGGINS referred to the statement in his letter:
We do, however, wish to point out some of the
practical difficulties that may arise in determining
whether maintenance has been improper.
He asked if defining the term "not maintained" simplifies or
complicates his life.
MR. NORMAN replied that it simplifies it. It covered the
instance when something is simply not maintained period - to use
the analogy of a car that might call for a particular weight of
oil and a frequency for changing it; and should you fail to
change it, you risk damage to the engine. Not changing the oil
at all is an easier call than if someone added 40-weight oil
when 30-weight is called for.
CHAIR HUGGINS thanked everyone for their comments. He emphasized
how important getting this bill right is to all the players. He
agreed with Senator McGuire about the importance of
predictability and people being able to understand what the
state wants so they can meet those expectations and declared,
"We want to be customer friendly, not scaring customers away."
He then adjourned the meeting at 4:58:00 PM.
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