Legislature(2007 - 2008)BUTROVICH 205
04/20/2007 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB186 | |
| SB80 | |
| SB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 111 | TELECONFERENCED | |
| + | HB 186 | TELECONFERENCED | |
| + | SJR 4 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| = | SB 80 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
April 20, 2007
3:36 p.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Gary Stevens
Senator Lesil McGuire
Senator Thomas Wagoner
MEMBERS ABSENT
Senator Wielechowski
Senator Lyda Green
COMMITTEE CALENDAR
CS FOR HOUSE BILL NO. 186(FSH)
"An Act relating to sharing with certain federal agencies
records required of sport fishing guides; and providing for an
effective date."
HEARD AND HELD
SENATE BILL NO. 80
"An Act relating to allowable lease expenditures for the purpose
of determining the production tax value of oil and gas for the
purposes of the oil and gas production tax; and providing for an
effective date."
HEARD AND HELD
SENATE BILL NO. 111
"An Act creating the Kodiak Narrow Cape Public Use Area."
HEARD AND HELD
SENATE JOINT RESOLUTION NO. 4
Urging the attorney general, the producers of natural gas in the
Cook Inlet region, and the Regulatory Commission of Alaska to
work to secure long-term and affordable supplies of natural gas
for the people and businesses of the state.
SCHEDULED BUT NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB 186
SHORT TITLE: SPORT FISHING GUIDE RECORDS
SPONSOR(s): REPRESENTATIVE(s) HARRIS BY REQUEST
03/12/07 (H) READ THE FIRST TIME - REFERRALS
03/12/07 (H) FSH, RES
03/19/07 (H) FSH AT 8:30 AM BARNES 124
03/19/07 (H) Heard & Held
03/19/07 (H) MINUTE(FSH)
03/21/07 (H) FSH AT 8:30 AM BARNES 124
03/21/07 (H) Moved CSHB 186(FSH) Out of Committee
03/21/07 (H) MINUTE(FSH)
03/22/07 (H) FSH RPT CS(FSH) NT 4DP 2NR
03/22/07 (H) DP: JOHNSON, LEDOUX, EDGMON, SEATON
03/22/07 (H) NR: JOHANSEN, HOLMES
03/26/07 (H) RES AT 1:00 PM BARNES 124
03/26/07 (H) -- MEETING CANCELED --
03/28/07 (H) RES AT 1:00 PM BARNES 124
03/28/07 (H) Moved CSHB 186(FSH) Out of Committee
03/28/07 (H) MINUTE(RES)
03/29/07 (H) RES RPT CS(FSH) NT 6DP 2NR
03/29/07 (H) DP: ROSES, WILSON, SEATON, EDGMON,
GATTO, JOHNSON
03/29/07 (H) NR: KAWASAKI, GUTTENBERG
03/30/07 (H) TRANSMITTED TO (S)
03/30/07 (H) VERSION: CSHB 186(FSH)
04/02/07 (S) READ THE FIRST TIME - REFERRALS
04/02/07 (S) RES
04/20/07 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 80
SHORT TITLE: OIL & GAS PRODUCTION TAX: EXPENDITURES
SPONSOR(s): SENATOR(s) WAGONER
02/09/07 (S) READ THE FIRST TIME - REFERRALS
02/09/07 (S) RES, FIN
02/21/07 (S) RES AT 3:30 PM BUTROVICH 205
02/21/07 (S) Heard & Held
02/21/07 (S) MINUTE(RES)
02/28/07 (S) RES AT 3:30 PM BUTROVICH 205
02/28/07 (S) Heard & Held
02/28/07 (S) MINUTE(RES)
04/18/07 (S) RES AT 4:00 PM BUTROVICH 205
04/18/07 (S) Scheduled But Not Heard
04/20/07 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 111
SHORT TITLE: KODIAK NARROW CAPE PUBLIC USE AREA
SPONSOR(s): SENATOR(s) STEVENS
03/12/07 (S) READ THE FIRST TIME - REFERRALS
03/12/07 (S) RES, FIN
04/20/07 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
TOM WRIGHT
Staff to Representative Harris
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Sponsor of HB 186.
DOUGLAS VINCENT-LANG
Special Projects
Alaska Department of Fish and Game (ADF&G),
Juneau AK
POSITION STATEMENT: Commented on HB 186.
STEVEN DAUGHERTY
Department of Law
Anchorage AK
POSITION STATEMENT: Answered questions on HB 186.
MICHAEL HURLEY, Director
State Government Relations
ConocoPhillips Alaska
Anchorage AK
POSITION STATEMENT: Opposed SB 80.
KEVIN BANKS, Director
Division of Oil and Gas
Department of Natural Resources (DNR)
Anchorage AK
POSITION STATEMENT: Commented on SB 80.
PAT GALVIN, Commissioner
Department of Revenue (DOR)
Juneau AK
POSITION STATEMENT: Commented on SB 80.
JOHN IVERSON, Director
Tax Division
Department of Revenue (DOR)
Anchorage AK
POSITION STATEMENT: Commented on SB 80.
DOUG LETCH
Staff to Senator Stevens
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Commented on SB 111 for the sponsor.
MAYOR JEROME SELBY
Kodiak Island Borough
POSITION STATEMENT: Supported CSSB 111(RES).
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 3:36:49 PM. Present at the call to
order were Senators Wagoner, Stedman, McGuire, Stevens and
Huggins.
CSHB 186(FSH)-SPORT FISHING GUIDE RECORDS
3:37:54 PM
CHAIR HUGGINS announced CSHB 186(FSH) to be up for
consideration.
TOM WRIGHT, staff to Representative Harris, sponsor of HB 186,
said that it makes minor amendments to AS 16.05.815 that allows
the ADF&G to share information about sport fishing guides for
law enforcement purposes with the National Oceanic and
Atmospheric Administration (NOAA) and the National Marine
Fishery Service (NMFS) and to the International Pacific Halibut
Commission (IPHC).
CHAIR HUGGINS asked the ADF&G why this information needs to be
shared.
DOUGLAS VINCENT-LANG, Special Projects, Alaska Department of
Fish and Game (ADF&G), explained that the allocation of halibut
has been before the North Pacific Fishery Management Council
(NPFMC) recently and one of the preferred alternatives that was
favored by charter boat operators is having an annual limit
rather than a one-fish bag limit or instituting even more
restrictive measures that would affect the daily opportunity of
guided anglers to catch fish. However after an analysis, it was
found that an annual limit could not be established without
having the ability to share log book information with NMFS
enforcement. The only other way to track an annual limit would
be for charter boat operators to have a state log book for state
managed species as well as a duplicate federal log book for
halibut. The Council and many charter boat operators view annual
limits as an opportunity, but don't want to burden the charter
boat operators by requiring a duplicate log book program. So,
they are now asking to allow sharing of log book information for
enforcement purposes only with the NMFS enforcement and with the
IPHC. The shared information would remain confidential with one
minor exception - if a violation actually went to court, that
piece of information associated with the violation would become
public. However this information would still remain confidential
meaning that those confidential records could not be released.
3:40:02 PM
SENATOR STEVENS said he knows a lot of fishermen who are very
concerned about giving out information and probably wouldn't
tell their own mothers where they caught halibut. How can people
be assured that this information that is shared with federal
agencies is going to be protected as much as it was when it was
in state hands.
MR. VINCENT-LANG replied under the statue the information
remains confidential except for enforcement purposes. He
reminded the committee that log book information is already
shared for the purposes of fishery management plan development.
The only reason you would be fearful is if you have a violation.
3:41:29 PM
SENATOR WAGONER asked what the penalty would be if information
gets out accidentally. Charter boat operators are concerned that
this information is their client list which is how they make
their living. Competitors will do bulk mailing to their client
base and offer them a trip at a reduced rate if they have access
to that information.
3:43:44 PM
MR. VINCENT-LANG replied that he didn't know the exact penalty,
but it wouldn't be any different than the penalties associated
with the current sharing of commercial fish ticket information
with NMFS enforcement. Commercial fishermen have that same
worry.
SENATOR WAGONER said that commercial fishermen fish a much
larger geographic area and guides have areas that are much more
specific, so this information would be much more damaging to
them.
MR. VINCENT-LANG said he would get the penalty information for
him.
STEVEN DAUGHERTY, Department of Law, said he was looking for an
answer to that question.
CHAIR HUGGINS remarked that it is very easy to find information
about anybody on the Internet and asked what makes him think
this information won't be able to be found there, too.
MR. VINCENT-LANG replied that the department has an MOU with the
federal government saying it won't release this information if
it is not kept confidential.
CHAIR HUGGINS asked if another course of action could get the
same results.
MR. VINCENT-LANG replied that the other course of action would
be for charter boat operators to have a duplicate federal
recording program.
3:46:33 PM
CHAIR HUGGINS asked why the client base is germane to where the
fish are caught.
MR. VINCENT-LANG replied that the past log book program included
summary harvest information by trip, but the Council needs good
harvest records to develop quotas and allocation guidelines as
well as individual fishery quota systems (IFQs). To assure
accurate reporting, the Council started recording angler-by-
angler harvest and are sub-sampling those entries for accuracy.
CHAIR HUGGINS asked him to explain the moratorium.
MR. VINCENT-LANG responded that some people are confused because
the NPFMC recently adopted a halibut sport charter moratorium
and entries in these log books will be used to establish a
management plan. Operators might be confused about how this bill
would affect their ability to enter into that moratorium.
However, the department can already share information with the
Council for developing that management plan. HB 186 will allow
enforceability once the moratorium is in place. So, it doesn't
necessarily translate into the eligibility for the moratorium.
SENATOR STEDMAN asked if there is any linkage to potential IFQs
for the charter industry.
MR. VINCENT-LANG replied that the information could potentially
be used by the Council in deciding on whether to go to an IFQ
system or not, but this bill doesn't get it any closer to that
decision. He said that the state has a vote on the Council.
3:49:38 PM
CHAIR HUGGINS asked if the commissioner of ADF&G supports this
bill.
MR. VINCENT-LANG answered yes.
CHAIR HUGGINS asked what the boat operators have to say about
this issue.
MR. VINCENT-LANG replied that he has talked to a lot of
different boat owners who exhibited uniform support for an
annual limit for charter anglers. However, everyone was quite
shocked when they found out that state log book information
could not be shared with the federal system and that a duplicate
federal reporting program would have to be put in place. That's
why the Halibut Commission adopted the one-fish bag limit, which
is not the preferred alternative for the industry.
SENATOR STEDMAN said the City of Sitka has imposed a surcharge
on export of fish boxes because of its concerns over the large
amount of product being flown out of town and the amount of
product being flow out of town with the same name on the 50-
pound boxes. He asked if that community and possibly others
could set up systems that track the export of fish to the ADF&G
so the different reporting could be cross-referenced.
MR. VINCENT-LANG replied that wouldn't be part of this
legislation. He elaborated that Sitka was worried about a couple
of different issues when it adopted that export tax. Part of it
was concern over local user conflicts, which the department is
concerned about too and it is looking at a variety of different
mechanisms to address - including the development of local area
management plans. Sitka has one of those plans, but it needs to
be updated - because since the original plan was developed, a
subsistence long-line fishery has been instituted in the area
which needs to become a part of it.
3:53:28 PM
SENATOR STEDMAN said Sitka is the first city to institute this
kind of surcharge and has more concerns that a large amount of
product goes unreported. He thought the more cross reporting the
state has, the more accurate the information regulators will
have.
MR. VINCENT-LANG replied that is what the Council liked about
the annual limit which is based on how much fish an individual
needs on an annual basis.
MR. DAUGHERTY found a partial answer to penalties for disclosure
of confidential information in 18USC19.05. It said they "shall
be fined under this title or imprisoned for not more than one
year or both and shall be removed from office or employment." He
hadn't been able to determine the fine, yet, but he thought the
termination of employment and imprisonment for one year were
fairly substantial penalties and should be sufficient to assure
a pretty high degree of confidentiality.
SENATOR WAGONER said, "It sounds good to me."
3:56:34 PM
CHAIR HUGGINS asked how this information is transmitted.
MR. VINCENT-LANG replied electronically and only upon request to
the requesting person.
CHAIRS HUGGINS said they would set HB 186 aside.
3:58:11 PM at ease 4:01:22 PM
SB 80-OIL & GAS PRODUCTION TAX: EXPENDITURES
CHAIR HUGGINS announced SB 80 to be up for consideration.
4:01:53 PM
MICHAEL HURLEY, Director, State Government Relations,
ConocoPhillips Alaska, said he opposed SB 80 for three reasons.
First, he said it was important to put SB 80 in the context of
the petroleum production tax (PPT) that doubled their taxes and
ConocoPhillips remains concerned that the current level of tax
in PPT will not lead to the kind of additional investment that
is needed on the North Slope to keep the pipeline running.
He opposed SB 80 first, because it is premature. Even before the
regulations are written, the legislature is beginning to whittle
away at what deductions there are. He referred to page 27, line
12, of the PPT handout that said:
In determining whether costs are lease expenditures,
the department shall consider, among other factors,
(1) the typical industry practices and standards in
the state that determine the costs other than the
costs listed in subsection(e) of the section. That an
operator is allowed to bill a working interest owner
that is not the operator under unit operating
agreements....
MR. HURLEY said this language is relatively broad and the
legislature gave the department a fair bit of flexibility as to
how it is going to determine typical industry practices. The
regulations for PPT have not been completed and they still may
take into account the kinds of circumstances that SB 80 is
trying to address.
4:05:15 PM
Second, he said they are concerned with the process that is put
in place by this bill. It refers to improper maintenance, which
in his view is a poor standard because, for one thing, it has no
judicial history. It will be analyzed by Department of Revenue
(DOR) auditors who have no real experience or expertise in
evaluating the propriety of a maintenance program - especially
if they only get to it during an audit cycle which can happen
one to three years after the fact. It would also lead to a lot
of disputes between the companies and the state. He said a
better standard is needed.
Third, Mr. Hurley said he believed the existing statute already
deals with the kinds of specific circumstances that are being
brought out SB 80. First, the lease expenditures definition is
there; it just doesn't have regulations written for it yet.
Second, the existing exclusions that are already in subsection
(e) of the PPT including subsection (6), which is where the
definition specifically already excludes costs arising from
fraud, wilful misconduct and gross negligence, and subsection
(16) which already excludes costs associated with spill response
and cleanup.
Finally, under subsection 18 (e), he said, the 30-cent-a-barrel
disallowance of the deduction is already in the PPT explicitly
to cover these particular circumstances.
4:07:27 PM
He referred the committee to the August 8, 2006 memo from Pedro
van Meurs.
4:08:19 PM at ease 4:16:41 PM
CHAIR HUGGINS announced that they had two memos from Dr. van
Meurs, one dated August 5 and the other August 8, both from
2006. He said the August 8 memo, at one point, had a
confidential classification.
PAT GALVIN, Commissioner, Department of Revenue (DOR), said the
August 8 memo was an internal communication within the previous
administration that at the end discussed strategy which suggests
that it wouldn't have been public at the time, but from the fact
that the bill already passed and it was released by a previous
member of the administration, it is not confidential any more.
CHAIR HUGGINS said he called Dr. van Meurs who said he wrote
both of the memos and he meant what he said in both of them. He
invited anyone who had questions about them to give him a call.
He asked Commissioner Galvin if he thought the information in
the memos was pertinent to this discussion.
COMMISSIONER GALVIN replied that he thought it was pertinent to
how the previous administration viewed this issue.
4:20:11 PM
rd
MR. HURLEY went to the 3 paragraph in the August 8 memo where
the issue was raised about the question should companies receive
a 40 percent tax credit for replacing a pipeline that was
defective and not properly maintained. Further down at the end
of the first page, Dr. van Meurs recommends the 30-cent-per-btu
equivalent barrel disallowance of a deduction, which is what
ended up being subsection (18) in the PPT bill. That 30 cents is
removed every month currently.
In the final paragraph on the second page of the memo Dr. van
Meurs concludes that he believed this provided a good answer to
the public criticism that under the PPT companies would be
paying 50 percent of the replacement costs of the pipeline as a
result of the Prudhoe Bay shutdown and Mr. Hurley concluded,
"This memo leads me to believe that 30 cents was meant to cover
the very stuff we've been talking about that is at issue under
SB 80."
MR. HURLEY said that deductibles can be looked at on a case-by-
case basis or a disallowance can be set at a general level to
cover those kinds of things. "We believe that choice was made by
the legislature in adopting the 30-cent disallowance, which is
doing it on a proxy, if you will."
4:23:38 PM
SENATOR STEDMAN asked him if his firm was going to submit
deductions for the repair and replacement of those pipes along
with the oil spill cleanup costs and to comment on its current
policy.
MR. HURLEY replied that the oil spill cleanup costs that have
already been incurred have not been deducted because they aren't
allowed as a deduction under subsection (16) under 165(e). With
respect to the costs of tearing the lines out and replacing them
- that is under discussion with the operator who hasn't actually
pulled the lines out and replaced them yet. The unit, itself,
has a process whereby if the operator wants to propose an
investment of some kind - of a significant maintenance
investment or investment in new property, plant and equipment -
they come forward to the other working interest owners with an
Authorization for Expenditure (AFE) to get approval to make that
expenditure. The other working interest owners at Prudhoe Bay do
not have an AFE to replace those lines - yet. His company would
take a hard look at the proposed expenditures and have lots of
spirited discussions and questions about them. But, so far,
ConocoPhillips has not been asked to pay for them.
4:27:07 PM
SENATOR STEDMAN recalled discussions last year of replacement
and maintenance issues on the Cook Inlet platforms - so the
state doesn't get "gamed." The 30 cents per barrel was used,
which worked out to $1 billion for 10 years with an oil flow of
900,000 barrels a day. He asked if they should go back and look
at that. "Is that too low or too high?"
MR. HURLEY replied that he didn't know. That number was based on
Dr. van Meurs' analyses that he hadn't seen. The problem is in
identifying what "improperly maintained" means and the 30 cents
was supposed to deal with that. It's hard to put a range on what
that number ought to be, he said. "This one just happened to be
a number that represented Dr. van Meurs' professional judgment
and I don't know how good it was."
4:30:13 PM
SENATOR WAGONER refreshed everyone's memory one more time on the
30 cent issue because he was the one who brought it about
originally on the floor. He stated:
It had nothing to do with how much or how little
maintenance was going to be done or anything else -
other than the fact that I asked Mr. van Meurs to see
how he could formulate getting the PPT bill that we
had in front of us that was based on net profits
closer to a gross bill. And he said one way to do it
would be to calculate 30 cents a barrel and that would
make about - well, at the time we're talking some $80
million difference in the amount of maintenance that
could be written off against the PPT on the net basis
versus the gross basis - that's where the 30 cents
came from. It's not rocket science; it's a formula
that Pedro came up with. That's exactly why it's in
there. It had nothing to do with capex or anything
else.
4:31:24 PM
SENATOR STEDMAN said they need to pull the minutes of those
meetings when the issue was discussed because there is clearly a
difference of opinion. He said this discussion went on for quite
some time.
4:32:16 PM
SENATOR WAGONER said the amendment for the 30 cents was drafted
on 8/5, which was a Saturday. It was offered as Amendment 7 on
8/9, the day after the Pedro van Meurs' number 2 memo, which was
not presented to the special committee because it was a
confidential memo to the administration. There was about a 15-
minute discussion on it on the floor before it passed. Then they
went to Amendment 11, which was the gross floor amendment.
SENATOR WAGONER stated he was the maker of the amendment and
"There wasn't a long-term discussion over this at all. Dr. van
Meurs mentioned the fact that over a period of years for a large
maintenance item, the 30 cents would make up that cost. He
elaborated:
But my whole point in this thing is we're not talking
about a large maintenance item. If that pipe is
replaced, we're talking about a capital expenditure.
Now if they decide to go in there and sleeve the pipe,
like Mr. Hurley is saying, they may still decide to
do, I don't know. And that is a possibility if they
find through inspection that they've sleeved the pipe
in certain areas that they can maintain the existing
pipe.
But we're confusing ourselves in discussing a 30-cent
amendment to a bill that was to take care of some
maintenance costs which otherwise could be written off
and which gave me more comfort getting closer to a
gross bill than a net bill with a future potential
capital expenditure. That's where the confusion is.
4:35:33 PM
MR. HURLEY went to the first memo that had the title of
enhancement of the gross character, on page 5, that had a
subheading called "Deemed Capital Maintenance Costs." He said
that:
After discussing the gross floor stuff for the first
four pages, Dr. van Meurs begins that fifth page with
another concern that is regularly expressed - is that
the state should not permit the deduction of costs
related to replacing equipment. That is it's a
different concern. That's another concern that was
brought up. That is why I remain convinced that the 30
cents a barrel was designed to cover that - in Pedro's
mind.
SENATOR WAGONER responded:
Whether it's maintenance on equipment, capital
equipment or maintenance on other oil field services,
it's still maintenance, Mr. Chairman, and I just don't
want to get us off track and confused because it was
meant for maintenance. That's what I asked Pedro to do
and that's what he did.
I'll just say one thing more and Mr. Hurley was
correct and he brought it up - I've got a note here -
as far as the regulations - this bill was meant to
give the state one more tool in the toolbox and I
think we'd be much better off having this passed and
amended to the PPT bill prior to them writing the
regulations so it could be taken it into consideration
at the time they write the regulations instead of
having to come back later and rewrite regulations and
readdress them again.
4:37:36 PM
CHAIR HUGGINS went to Mr. Hurley's item 2 on process and
improper maintenance and asked for the source of the handouts he
gave the committee.
th
MR. HURLEY replied that they came from the 27 page of the PPT
bill which you can get off of BASIS.
4:38:12 PM
CHAIR HUGGINS asked if Mr. Hurley was concerned with the
specificity of the term "improperly maintained."
MR. HURLEY replied yes. He said that the AOGCC and others have
also testified as to their concerns about that particular
standard. Some standards have more or less case law behind them
and "improper maintenance" doesn't have a whole lot of history
behind it. The "gross negligence standard" in subsection (6) is
pretty well defined and does have a lot of case law behind it.
There is case law behind the phrase "negligence". Also, in the
oil and gas business there is case law behind what is called the
"prudent operator standard" which is the standard that most of
the companies hold each other to. But, he repeated, there isn't
a whole lot of legal history behind the phrase "improper
maintenance".
CHAIR HUGGINS asked Mr. Banks for his thoughts on maintenance
procedures.
4:39:49 PM
KEVIN BANKS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), indicated that as the Petroleum Systems
Integrity Office (PSIO) goes forward it will have an oversight
role on maintenance and care of the facilities upstream of the
point of production as well as in the flow lines and so forth
within each of the units on state lands. The PSIO will employ a
couple of engineers and a quality assurance specialist who will
work with the producers to develop quality assurance plans to
examine the kinds of standards that they will propose and apply
to maintenance programs and validate that as the companies
implement those plans that they are following the guidelines
that they've assumed.
The PSIO will develop a track record of proper maintenance in
that case so should an event occur and the DNR is called upon to
provide consultation to the DOR, it should have record of
whether or not the firm has complied with its maintenance plan.
"To me that would suggest we will have some evidence about
whether or not proper maintenance has occurred."
CHAIR HUGGINS asked more directly: "Would it concern you if we
had more specific terms that alluded to typical or proper or
common industry practices and standards?"
MR. BANKS replied: "I don't want to get too far ahead of myself
here and I'm not a lawyer, but I think the answer to that would
be that looking to good oil field practices or standard
practices is probably sufficient in my view."
CHAIR HUGGINS asked if he wanted to add other things in that
respect.
MR. BANKS responded:
I see a process evolving over time that I don't think
that this particular, you know, the issue of improper
maintenance will arise very frequently. I think that
auditors as they examine the records and the books of
the taxpayer will be alerted to events - will be
alerted to a question of improper maintenance if
something goes awry - that under normal audit
procedures I don't know that we would be hearing very
often from the Department of Revenue with a question
as to whether or not proper maintenance or improper
maintenance had occurred.
4:44:33 PM
CHAIR HUGGINS said he was working on his truck and looking at
the owner's manual that has a relatively comprehensive time
schedule for maintenance. He asked if that sort of formatted
process is what he envisioned for his organization.
MR. BANKS answered that is a reasonable analogy. Developing the
standards will be half the battle. They would initially begin to
see where there may be gaps in the operators own regulations and
maintenance planning. He would also consult with the lessees
look over gaps in industry standards and fill those in. So
eventually they would have a kind of check list established - to
make sure they are changing the oil as often as the book says
they should.
4:46:05 PM
SENATOR STEDMAN asked how tight the standards will be when the
regulations are finished.
MR. BANKS replied he is staffing the PSIO right now and their
first job will be to see where in its own and other agency's
regulations there may be gaps concerning the types of facilities
that are covered. He thought they would rely largely on the
third-party certifying-type agencies like those offered by the
American Mechanical Engineers and other certifying
organizations. Finally, the PSIO would look at the plans the
companies themselves are using. Further, he said:
As to whether or not we will be developing
comprehensive regulations to that effect, that may not
be necessary. We want to fill in the gaps that we have
and rely on the regulations and the authorities under
our leasing unit agreements that are already in place.
SENATOR STEDMAN asked him to speak a little more directly to the
issue at hand concerning deductibility.
4:49:09 PM
COMMISSIONER GALVIN responded the tax director could better
respond to how the PPT regulations relate to deductible
expenditures.
JOHN IVERSON, Director, Tax Division, Department of Revenue
(DOR), explained that the second regulation package for the PPT
would include honing in on what lease expenditures are as well
as the roll that the joint venture audits are going to play in
determining what lease expenditures are going to be allowable.
They have just started ramping up on that; he anticipated the
regs would come out in the late fall of 2007.
4:50:46 PM
COMMISSIONER GALVIN went back to the question of the purpose of
the 30-cent deduction and he said he didn't have this position a
year ago and he wasn't involved in the discussions. On the
question of whether the 30-cent deduction was intended to cover
possible negligence or improper standards used for maintaining
the equipment, he had the two Pedro van Meurs memos and the
committee minutes in which this amendment and another amendment
were brought. He continued:
First off, when you look at the two documents from
Pedro van Meurs, it's amazing actually to think about
the timing of these things, because we had the - as
Senator Wagoner discussed - the first document which
was directed to Senator Wagoner on August 5 preceded
by a day the beginning of the shutdown on Prudhoe and
brought this issue into focus for the discussion
contained in the August 8 document. What I think is
interesting to look at is how I believe they are
consistent with each other in terms of their overall
statement of the purpose of this deduction.
As Senator Wagoner stated, the intent of the August 5
discussion had to do with moving the net aspects of
the PPT to reflect something similar to a gross type
scenario. And he ran through a few different ways in
which that can be affected and the four was one and
Senator Wagoner brought that amendment and this 30
cents deduction was another aspect of that. Within the
discussion of the purpose of the 30-cent deduction,
there is a discussion of the fact that equipment
eventually ages and needs to be replaced and under
PPT, those replacement costs would be characterized as
capital expenditures and would be subject to both the
exemption 22.5-percent value, and the credit, whatever
that at the time - it was still up for discussion. And
the question became in those instances should those be
allowable and in the nature of this discussion, the
distinction between properly maintained equipment that
needs to be replaced and improperly maintained
equipment wasn't really made. It just didn't come up.
The discussion was solely on the issue of properly
maintained and how these things age and the fact that
these are a regular expenditure and whether or not
they should be deductible under one scenario or
another. And so the 30-cent deduction was...
4:54:43 PM
CHAIR HUGGINS interrupted to say he thought there was a
negligence factor.
COMMISSIONER GALVIN answered:
Not in the discussion from this period of time. There
is not discussion of negligence in the nature of the
30-cent deduction.
CHAIR HUGGINS responded that it wasn't made in the context of
the 30-cent deduction, but it was made somewhere else.
COMMISSIONER GALVIN continued:
So, the 30-cent was created clearly. Mr. van Meurs was
the one who came up with the idea of coming up with 30
cents - he bases upon his experience. He comes up with
this as a response to Senator Wagoner's desire for
this more gross type of structure.
After the event at Prudhoe Bay, we get to the August 8
memo. And we have to put ourselves back to that
particular point in time. It was a day after the
announcement.
So continuing, so we turn to the August 8 memo, now
we're a day after the big press announcement and the
discussion of the need to replace the entire
infrastructure. At that particular point in time, it
was a matter of speculation as to whether or not this
was due to just the aging of the infrastructure or due
to some improper level of maintenance. And Mr. van
Meurs addresses that right from the get-go - that the
shutdown at Prudhoe has brought into sharp focus that
some facilities on the North Slope may be in poor
shape - not there characterizing it one way or the
other.
In the third paragraph he talks about the issue of
fairness. First, it's an issue of fairness whether
companies should receive a tax deduction for replacing
a pipeline that was defective and not properly
maintained - and says that, you know, this is out
there. However, at the same time it raises a broader
issue. So, this is separate from the question of
whether it has been properly maintained. It is likely
that over time, more defective equipment will be
identified that needs repair or replacement. It's just
a factor of any field. And then he goes into the
distinction between whether that should be an
allowable capital expenditure when you replace these
things or whether you should set this type of 30-cent
catch-all.
And then closes out with, I believe, this will provide
a good answer to the public criticism that under PPT
we would provide 50 percent of the replacement costs
for pipelines as a result of the Prudhoe Bay shutdown
- again not attributing that to whether that was
properly maintained or not properly maintained - the
fact that we're going to have to make that kind of a
contribution to the replacement. And then makes that
sort of political statement about how that would help
gain support for the bill.
4:58:34 PM
Then when you turn to the following day, on August 9,
the Special Committee on Natural Gas Development, the
Senate Committee that Senator Wagoner offered these
amendments in, I looked at those minutes and they
provide a fairly detailed picture of how the
discussion went. You first had what was Amendment 7,
which was the 30-cent deduction and there was a great
deal of discussion about how that would work and what
the purpose of it was and in no place do they discuss
negligence or properly maintained versus not properly
maintained. It's just whether or not equipment that
eventually runs out and needs to be replaced should be
a capital expenditure or whether you should have a
separate way of accounting for that so that we don't
end up paying for that entire amount from the state's
perspective.
And so we continue on and eventually some questions
were raised about the nature of the language and that
amendment was withdrawn for the purposes of adjusting
the language. Then following that, you have Amendment
10, no Amendment 9, which was basically this bill.
It's talking about lines being properly maintained and
whether or not that should be properly deducted. And
the discussion continues as for everything that we're
talking about now whether that standard can actually
be implemented, whether or not that something that
should be considered or not. And at no point during
that discussion is there a reference to oh that 30-
cent thing that we just talked about is intended to
address this situation. They are not intermixed and
discussions are separate. And that discussion ends
with, again, a recognition that there is some language
that needs to be changed and so that amendment is set
aside.
CHAIR HUGGINS asked if Amendment 7 passed.
COMMISSIONER GALVIN replied no, not yet:
So continuing through that day, that same day,
Amendment 10 was forwarded and this was basically
Amendment 7 with the new language...
CHAIR HUGGINS remarked: "Amendment 9 was withdrawn."
COMMISSIONER GALVIN continued:
Amendment 9 was withdrawn or tabled whatever it was,
the reference is that ahhh Amendment 9 was 'set aside
the amendment while Senator Therriault redrafts the
language.'
SENATOR WAGONER inserted: "And that became Amendment 13 if you
go on down.
COMMISSIONER GALVIN continued:
So, I continue through the record and you get to
Amendment 10 which is the redraft of the 30-cent
provision and that is adopted. And then a little while
later, you get to Amendment 13, which is Senator
Therriault's redraft of the negligence issue or the
improperly maintained standard. So, 'costs or a
portion of the costs determined in consultation with
DEC and the AOGCC relying on standard practice of the
industry relating to the repair and maintenance of
improperly maintained property and equipment' which is
basically the framework for SB 80.
Again they talked to it for a while and at no point do
they reference back that this has already been dealt
with in the amendment that they just passed - the 30-
cent provision. It's considered to be a completely
different issue. Basically, this is setting the
standard where the previous one just had to do with
any replacement of any equipment.
So, when I look at all of this together - and let me
just add one last thing in terms of my own experience
in trying to evaluate this question. When the bill was
first introduced this session, I had discussions with
folks within the department who participated in the
PPT discussion and they felt fairly clearly that the
30-cent haircut, as it was called, was intended to
deal with improperly maintained equipment. That was
the idea that was held, I believe, within the
administration's team.
5:02:24 PM
Now, that said, that was never discussed during the
hearing process and I'm not sure when it actually
became the position of the administration, but that is
the position of the previous administration with
regard to the purpose and intent of that 30-cent
provision - that it was meant to be all-inclusive of
both properly maintained and improperly maintained
replacement provisions.
But as far as the both - when you look at the van
Meurs documents, there's a distinction made in those
documents between the question of whether improperly
maintained equipment should get a deduction and the
30-cent provision which is in the context of just
standard replacement of equipment and how that should
be treated or how that can be basically addressed
through this vehicle so that we're not covering all
those costs.
And then you get to the next day when they're
discussed in committee and there's no connection
between the two issues. And so, just my own reflection
on the record would indicate to me that from the
legislative perspective the two were not considered to
be the same issue and the 30 cents was not intended to
cover improperly maintained equipment. And I think
that that is a logical connection. I think it is an
issue that is ripe for our discussion in terms of the
nature of SB 80 and whether or not when we talk about
what types of costs should be deductible whether there
is - we've got a standard of gross negligence that's
explicit in the current statute. And the question
becomes based upon what we have subsequently learned,
and what we can project out given the need for the
PSIO, given why we're putting all that into place,
it's strictly a policy question from the state's
perspective as to whether or not we're going to bear
those costs associated with a particular standard of
care. And I think that the question of what that
standard of care should be is one that this committee
should pay close attention to and I think the previous
discussion was right on point in terms of that
particular language and I know that John Iverson and
Kevin Banks have participated in the discussions
within the administration on that standard and I think
they're kind of moving towards some language that
maybe is part of an amendment that is being - that is
going to be presented here, but in terms of the 30-
cent question, I come away from the record, at least,
with an understanding that it was not designed or
intended to be something that covered improperly
maintained equipment.
5:06:00 PM
CHAIR HUGGINS asked him to explain what the value of the 30
cents is to the state.
COMMISSIONER GALVIN explained:
When you look at the level of production for FY07 -
and this is a projection for the remainder of the year
- and this would include the April and May of '06 that
was from the effective date of the bill - the amount
that the 30 cents would amount to is approximately $83
million. So, that would basically be excluded from
being deductible as a capital expenditure, which would
mean that the actual taxable, the change in the tax
that would be paid would be roughly $44 million - it's
52 percent of that figure - for FY 07. For FY 08,
based upon our current production estimates, the
amount of the exemption is $73 million, which would
change the tax paid. It would increase the amount of
tax that we receive by $38.6 million.
CHAIR HUGGINS asked him what the value to the state is.
COMMISSIONER GALVIN replied, "The $38.6 million and the $44
million for FY07." He added that that number would decline with
the decline in production.
5:07:46 PM
CHAIR HUGGINS asked how the DOR operates since the regulations
are not drafted yet.
COMMISSIONER GALVIN replied that was a very good question and
that the department had received the first set of returns that
were based on the taxpayers' interpretation of what the law
means based upon the statute and the regulations that are in
place now. As those regulations are further defined, they will
have the opportunity to adjust their returns and their payments
based upon that information.
5:09:10 PM
SENATOR MCGUIRE asked if Senator Wagoner envisioned a process by
which the taxpayers would be able to appeal a decision. She
asked if the regulations would define what improperly maintained
property or equipment means.
COMMISSIONER GALVIN answered yes if this bill passes. The way it
would work is the department would get a tax return with a
certain payment. As they audit the tax return they would
identify expenditures that should not have been deducted and
make a claim for an additional payment based upon that audit.
That claim would go through the regular tax appeal process.
SENATOR MCGUIRE asked if his intent would be to sort of survey
the world of production and equipment to define what "improper
maintenance" means.
COMMISSIONER GALVIN replied he didn't think that could be done
in a regulation given the complexity of the types of systems
they may be dealing with. He expanded:
There is a question as to the amount of clarifying
regulations we could reasonably expect.... To a
certain extent what the bill is structured to do is to
rely upon the standards Kevin Banks was referring to
that are going to be generated through the PSIO
office. And that is not going to be embedded in our
regulations. That will be something that we developed
through that channel in terms of identifying what the
appropriate level is. And in the end it really comes
down to whether we feel comfortable collectively that
the standard of improperly maintained or whatever it
ends up being is one that reasonable people can decide
what it means.
5:12:23 PM
SENATOR MCGUIRE said she would like to see certainty and
predictability no matter what industry it is. She directed:
If you want to do business in Alaska, you shouldn't
have to go to 25 different books. You shouldn't have
to wade through mountains of paperwork. You should be
able to figure out very clearly this is the law of the
land and these are your rights and responsibilities
and these are the consequences and if you violate or
if you fail, here is the process by which you go
through. And it should be very clear.
5:14:49 PM
COMMISSIONER GALVIN said there is a high level of complexity in
deciding what an allowable deduction is for those who have to
implement the PPT. He stated:
The question becomes to what extent would adding this
type of a standard to that evaluation affect the
expectation of predictability and reasonable assurance
of what should be and what should not. I think it is
possible to come up with a standard that basically
stays within the same level of complexity that we
currently have in PPT in trying to draw that line.
With the state establishing a policy decision that
there is a difference between properly maintained
equipment that results in replacement and improperly
maintained equipment that results in replacement and
that we've taken responsibility for the step that's
properly maintained through that 30-cent issue and
those that are not, we're not going to take
responsibility for paying for. And the question
becomes once the state decides that's a proper policy
decision to make, can we come up with the language
that's going to draw that line. And I think my
recommendation would be that the committee first
decide whether or not that's a proper policy decision
to make and then from that, can we draw the line in a
way that provides a level of assurance that is
commensurate with the rest of PPT as opposed to a
level of assurance that goes even beyond what PPT can
provide in itself.
5:17:47 PM
SENATOR MCGUIRE said the concept in law is mens rea, which means
what you were thinking or your intent. When you are talking
about maintenance and improper maintenance, you're talking about
lots of people and their mens rea. She elaborated:
What did they intend? What was their corporate
philosophy, what was the individual intent, of a whole
lot of people in terms of equipment and their
maintenance?.... Wagoner, I agree with the policy. I'm
just saying it is lot more complex than I think people
really - I mean people probably do realize. But the
fact is especially based on what moment in time where
those thoughts formed. So, if I started out, for
example the predicted life of Prudhoe Bay, of TAPS,
was 30 years at one point. So, here we are 30 years
later. So, if I made a decision at year 10 or year 15
believing I had 15 years left or 10 years left, maybe
it's a different decision than I would have made if I
would have thought it was going to go - you know the
lifespan would have been longer. So, it's going to be
very complex and like I say I just really, really,
felt strongly at the time and I still do that a gross
tax just straight across and then decide where you
want to give incentives. Those are easy to decide -
viscous oil, whatever, whatever, but here we are with
the morass that I thought we'd be in. So, more
government jobs.
CHAIR HUGGINS commented, "The good news is we've made the most
money ever off - revenue wise. So, their numbers are based on
it. A lot of money."
5:19:27 PM
SENATOR WAGONER said he wanted to respond to her question about
what the intent was. He produced an interoffice memo from BP
that he received anonymously dated June 4, 1999, 11:42 am. He
stated:
The first sentence says, 'Due to budgetary
constraints, the decision has been made to discontinue
the PW inhibitor currently being injected at GC2 and
GC3.'
The last line says, 'The current plan is to inject the
remaining inventory of EC1081A into the high risk S69
line that runs from M to S pads. At a 40 parts per
minute rate (PPM), we will have enough product to
treat this 40,000 wd for about 250 days.'
There's the intent. They shut down the maintenance for
budgetary constraints as far as the injection of
corrosive inhibitors.
5:21:21 PM
SENATOR STEDMAN said he saw a paradox:
We've got the legislative record, which I think is
good that you brought that forward and went through
that and then if I understood your testimony
correctly, that you had conversations with the staff
that were around at the time and they recollect this
being the 30-cents being put in there to deal with a
maintenance issue, which appears to be a disconnect
from the legislative minutes that you reviewed. Did
anybody try to connect that dot and why they would
draw that conclusion?
COMMISSIONER GALVIN responded:
I guess the question comes from the fact that it
originated from Pedro van Meurs to Senator Wagoner for
a particular purpose. Events unfolded right during
that same period of time with regards to Prudhoe. And
when it came up the next day, the discussion at the
time did not reflect mirroring of these two things
being for a particular purpose. Now as the bill
continued and as the Prudhoe event continued to unfold
and the nature of whether it was properly or
improperly maintained began to evolve, I think folks
within the previous administration continued to evolve
their interpretation of what its was intended to do.
That, as we all experience, that was probably separate
from the understanding within the legislature. So, all
we can do is go by what was in the discussion at the
time. I can't put myself in the minds of individual
legislators whether or not they were having
conversations with the administration aside in terms
of what the purpose of this was. I don't know if we'll
ever get to that point. I think it just comes down to
- in the end what I conclude is that it ultimately
doesn't have to be relevant to this decision. Because
it's unclear, the question becomes whether this
legislature today considers maintenance to be
something that should be deductible or not.
5:23:44 PM
CHAIR HUGGINS commented that looking at the budgetary
constraints memo and the bill, and its co-sponsors, he agreed
with the essence of the bill, however he cautioned:
But we are making policy that goes forward. As the
chairman of this committee, I want to make sure that
what we do is fair to all. Remember this also has a
retroactive component - back to 1 April, as I recall.
So, most of us do not like to have people do to us
retroactively, if you will. I'm not here and I feel
very uncomfortable with the fact that we have a letter
here from BP saying they're going to charge us, I
recall, $11 million for write-offs. I don't support
that, but in the same token, the bill we got here -
we're talking about public policy. You're behind on
your regulations. I think we're going to change, as
was adequately pointed out in the case by Mr. Hurley,
that we're introducing something before we ever got
the dust settled on the other. That may be okay, but
whatever comes out of this committee I want to make
sure is functional.
It may get changed later on, if you will, but it needs
to be a good product that is not just a knee-jerk
based on we don't like a producer or that we're carry
over of an emotional pact piece from last year or the
year prior that didn't pass and that we do it
objectively and it rests on its own merit and that
it's well-staffed within the state and if it has a
retroactive component, it has one. My assumption is
that it will have one, though I felt very
uncomfortable in PPT doing retroactivity. I would hate
for Uncle Sam to send me IRS notices retroactively
about things that I had to do and I think that we have
to be aware of that state-wise.
5:25:32 PM
SENATOR WAGONER responded that the retroactivity in the PPT
wasn't an arbitrary date. It coincided with the ability of the
companies to write off capital expenditures they had previously.
"There was pretty sound reasoning behind that and the reason I
put the retroactive date on this was just to make it coincide as
part of that bill - so it was a more cohesive package."
CHAIR HUGGINS said he didn't want the bill to be event-driven
and he set it aside.
SB 111-KODIAK NARROW CAPE PUBLIC USE AREA
5:26:53 PM
CHAIR HUGGINS announced SB 111 to be up for consideration.
SENATOR STEVENS, sponsor of SB 111, said this establishes a new
46,000-acre public use area on Narrow Cape. It is used for a
wide range of activities and is one of the few surfing areas in
Alaska. It is subject to grazing leases as well as use by the
Kodiak Launch Complex. It recognizes the special and multiple
use activities within this area and increases the protection to
insure that the public can continue to use this area and
acknowledges the very valid rights for the rocket launch and the
grazing.
DOUG LETCH, staff to Senator Stevens, said there are currently
five public use areas recognized in the state. Narrow Cape is
the only place in Kodiak that you can drive to for all these
different activities and it's a very popular recreation spot. SB
111 allows the department to have the management plan that they
have already. Resolutions in support of SB 111 from Kodiak
Island Borough and from the City of Kodiak are in their packets.
He noted a proposed CS that comports with the House version.
5:31:29 PM
SENATOR MCGUIRE moved to adopt CSSB 111(RES), version K. There
were no objections and it was so ordered.
MR. LETCH said the CS adds grazing to the top uses listed on
page 1, line 12, at the request of the buffalo ranchers in the
Narrow Cape area. On page 2, line 3, "shall" is deleted and
"may" is inserted. This eliminates any need for a fiscal plan
since the management plan has already been accomplished. The
legal description was changed on page 3, line 30, to delete a
section of the ocean because they just wanted to focus on the
land.
5:33:58 PM
CHAIR HUGGINS asked if the Knik Public Use area would be managed
as a park is in this bill.
MR. LETCH replied that this bill has no reference to park
language. SB 111 doesn't change anything that's in place; it
just guarantees things will continue. Another provision says if
the state decides to dispose of the land, that it would require
legislative approval. On page 2, line 26, section (e) language
says "The commissioner may not manage the Kodiak Narrow Cape
Public Use Area as a unit of the state park system."
5:35:21 PM
MAYOR JEROME SELBY, Kodiak Island Borough, said there is no
other public recreation area on the Kodiak road system that is
available. Other land on the road system is privately owned. He
emphasized they are not trying to lock the land up forever, but
they want to raise the bar so that it can't be disposed or used
in some other manner without the community knowing about it. The
impetus for this bill came from the attempt to transfer this
land to the University of Alaska in a bill they had never heard
of and no one said anything to them about a number of years ago.
He said there is unanimous support for SB 111 from all the users
including the rocket launch folks, the grazing folks, the public
recreation folks, the hunters and the fishers. No one is being
excluded.
CHAIR HUGGINS said CSSB 111(RES) would be held. There being no
further business to come before the committee, he adjourned the
meeting at 5:37:40 PM.
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