Legislature(2007 - 2008)
11/10/2007 01:30 PM House FIN
| Audio | Topic |
|---|---|
| HB2001 | |
| Start |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
November 10, 2007
1:30 P.M.
CALL TO ORDER
Co-Chair Chenault called the House Finance Committee meeting
to order at
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Harry Crawford
Representative Richard Foster
Representative Les Gara
Representative Mike Hawker
Representative Reggie Joule
Representative Mike Kelly
Representative Mary Nelson
Representative Bill Thomas, Jr.
MEMBERS ABSENT
None
ALSO PRESENT
Representative Paul Seaton; Representative Kyle Johansen,
Representative David Guttenberg; Representative Lindsey
Holmes; Representative Max Gruenberg; Representative Beth
Kerttula; Representative Andrea Doll; Representative Mike
Doogan; Representative Berta Gardner; Representative Mark
Neuman; Representative Jay Ramras; Representative Bob Roses;
Representative Carl Gatto; Representative Beth Kerttula;
Representative Bob Buch; Pat Galvin, Commissioner,
Department of Revenue; Dan Dickinson, Consultant, Tax
Division, Department of Revenue; Kevin Banks, Director,
Division of Oil & Gas, Department of Natural Resources
PRESENT VIA TELECONFERENCE
Robert Mintz, Assistant Attorney General, Department of Law,
Anchorage
SUMMARY
HB 2001 An Act relating to the production tax on oil and
gas and to conservation surcharges on oil;
relating to the issuance of advisory bulletins and
the disclosure of certain information relating to
the production tax and the sharing between
agencies of certain information relating to the
production tax and to oil and gas or gas only
leases; amending the State Personnel Act to place
in the exempt service certain state oil and gas
auditors and their immediate supervisors;
establishing an oil and gas tax credit fund and
authorizing payment from that fund; providing for
retroactive application of certain statutory and
regulatory provisions relating to the production
tax on oil and gas and conservation surcharges on
oil; making conforming amendments; and providing
for an effective date.
CSHB 2001(FIN) was REPORTED out of Committee with
a "no recommendation" and with the forthcoming
revised fiscal notes.
HOUSE BILL NO. 2001
An Act relating to the production tax on oil and gas
and to conservation surcharges on oil; relating to the
issuance of advisory bulletins and the disclosure of
certain information relating to the production tax and
the sharing between agencies of certain information
relating to the production tax and to oil and gas or
gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas
auditors and their immediate supervisors; establishing
an oil and gas tax credit fund and authorizing payment
from that fund; providing for retroactive application
of certain statutory and regulatory provisions relating
to the production tax on oil and gas and conservation
surcharges on oil; making conforming amendments; and
providing for an effective date.
Co-Chair Chenault MOVED to ADOPT Amendment 1, 25-
GH0014\N.19, Cook/Bullock, 11/10/07.
Co-Chair Meyer OBJECTED.
Co-Chair Chenault explained that the amendment was requested
by Legislative Legal Services as a technical amendment to
conform the legislation to current statute.
DAN DICKINSON, CONSULTANT, LEGISLATIVE BUDGET AND AUDIT
COMMITTEE reviewed the amendment. The amendment adds three
statutory references that were omitted. He explained that
the ceilings in AS 45.55.011 (j) and (k) needed to be
extended to subsection (o). The amendment also clarifies
that the tax is asserted on the producer, rather than on the
production of oil and gas, and that the ceiling will be the
determining factor where a ceiling and floor could apply to
the same oil and gas.
Representative Gara observed that the amendment addresses
the concept that the gross tax floor should never be less
than the minimum 4 percent. He observed that the amendment
makes an exception for AS 43.44.011 (i) or (o). Mr.
Dickinson explained that AS 43.55.011 (i) refers to private
lease hold interest. AS 43.55.011 (o) refers to gas used in
state. Representative Gara concluded that if there is a
ceiling, a higher tax, and a minimum, the minimum would be
paid, not the higher tax. Mr. Dickinson confirmed that under
AS 43.55.011 (f), the ceiling would limit the payment on
taxable North Slope gas when the floor is higher than the
ceiling.
1:37:16 PM
Representative Crawford asked for a definition of private
lease holder. Mr. Dickinson explained that a private lease
holder is defined in AS 43.55.011(i): ownership or right to
which constitutes a landowner's royalty interest. The entity
owns the land and has retained an interest in the land, such
as a royalty, which makes them a producer from the point of
view of the production tax, because they are producing 12.5
percent.
Mr. Dickinson noted that a reference to (g) was deleted on
page 10, since (e) provides that the rates in (g) be used.
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, agreed with
Mr. Dickinson's description of the amendment.
Co-Chair Meyer WITHDREW his OBJECTION.
There being NO further OBJECTION, Amendment 1 was ADOPTED.
Representative Hawker MOVED to ADOPT Amendment 2.
Representative Gara OBJECTED.
Representative Hawker explained that the amendment would
provide legislative intent on AS 43.55.165(e)(6) by stating
that producers would not be allowed to deduct costs that
were "incurred as a result of monitoring and management
decisions that fail to properly consider risks posed by
changing operating conditions and result in failure to take
necessary actions to prevent a pipeline spill." The
amendment would clarify that the legislature did not intend
that the costs associated with material actions such as the
Prudhoe Bay shutdown were covered by PPT. The intent is to
capture those costs as well as any similar actions that have
occurred in the past or will occur in the future.
1:43:41 PM
Commissioner Galvin did not believe discussions regarding
the disallowance of costs associated with replacement of
improperly maintained equipment were limited to instances
where the action was taken to prevent a pipeline spill. The
intent is to recognize that greater costs may be incurred
when things are improperly maintained. He clarified that the
intent is not to be limited to the costs that arise when one
is not paying attention to the risk of a spill. The issue is
whether the state's interest in the legislation was limited
to the spill or the fact that the pipeline was shut down for
a prolonged length of time. He cautioned that language
presented in the amendment would be more limited in scope if
the intent is to ensure that improperly maintained equipment
and the associated replacement costs are not to be deducted.
Representative Hawker felt the language was broad enough to
incorporate the aforementioned intent and would establish a
valid future standard for disallowance of costs.
Representative Kelly noted the difficulty of voting on the
amendment prior to discussing other penalty amendments.
1:47:27 PM
Representative Gara suggested the public would be best
served with a policy that prevents interruption of service
as well as spills. He felt the operator should be
responsible for more than changing operating conditions. He
felt the amendment limited the responsibility of the
operator only to a spill in the case of changing operating
conditions. He opined that an operator should be held
responsible for all conditions leading to a shutdown.
Representative Hawker feared that the broader language would
allow loopholes. The amendment was crafted to capture events
such as the irresponsible maintenance activities that led to
the shut down in 2006.
Representative Gara MOVED to AMEND Amendment 2: delete
"changing" on line 7 and add "interruption of service or
shut down" after the word "spill".
Representative Hawker OBJECTED. He spokeagainst the
deletion of "changing." He felt the word "changing" was
critical in capturing the 2006 events. Representative Gara
expressed concern that "changing" infers that the operator
is only responsible to stop risk caused by those operating
conditions that are changing. The duty is to be responsible
all the time.
1:52:33 PM
Commissioner Galvin spoke in support of the amendment to
Amendment 2. He did not believe the deletion of "changing"
would substantially change the amendment.
Representative Gara WITHDREW his Amendment to Amendment 2.
Representative Gara MOVED to AMEND Amendment 2 by adding, on
line 9 of the amendment, after "spill", "interruption of
service or shut down."
Representative Hawker WITHDREW his OBJECTION to Amendment 2.
There being NO further OBJECTION, Amendment 2, was ADOPTED
as AMENDED.
1:54:50 PM
Representative Stoltze MOVED to ADOPT Amendment 3.
Co-Chair Meyer OBJECTED.
Representative Stoltze explained that Amendment 3 added
intent language to clarify that the in-state gas provision
is expressly intended for the benefit of Alaska citizens by
allowing access to affordable gas.
Co-Chair Meyer WITHDREW his OBJECTION. There being NO
further OBJECTION, Amendment 3 was ADOPTED.
1:56:02 PM
Representative Hawker MOVED to ADOPT Amendment 4, labeled
25-GH0014\N.1, Bullock, 11/9/7.
Representative Stoltze OBJECTED.
Representative Hawker explained that Amendment 4:
Deletes the provisions that removes auditors from
classified services and places them in exempt status;
and
Adds language directing the Department to develop and
implement a classification plan for oil and gas
auditors.
Representative Hawker acknowledged the difficulty of
attracting qualified auditors and the escalation of
compensation in the private sector, but thought the facts
did not substantiate claims that the state was not able to
recruit for the positions. Some positions have been filled
and hiring for others has been suspended pending the outcome
of the Special Session. He emphasized that independence is
an importance characteristic of an auditor and expressed
concern regarding the exempt status, which serves at the
discretion of the Administration. He stressed that the
purpose of the Personnel Act, under AS 30.25.010(5), was the
"selection and retention of an employee's position secure
from political influences."
2:00:06 PM
Commissioner Galvin spoke against the amendment and
maintained that the exempt status and associated pay rate
for hiring experienced auditors at the top level was
critical to his ability to implement the net-based tax.
Experienced auditors that understand how oil companies keep
track of their books are needed to design
effective and efficient audits. He continued to speak to
the importance of exempting auditors in order to reach a
level of pay that would allow the department to compete.
He expressed concern with legislative manipulation of the
classification system. He argued that the position should
be exempt. He observed that investment officers and oil
and gas positions working with royalty determinations are
exempt.
Co-Chair Meyer pointed out that other ideas have been
presented to support the intent mentioned by Commissioner
Galvin. He suggested that the top four auditors could be
exempt or expertise could be contracted. Commissioner Galvin
wanted the ability to hire manager level positions at an
experience level that could help set up the system and "hit
the ground running". He accepted the limitation of hiring
four exempt managers and noted that the fiscal note already
anticipates the use of contract hiring, but emphasized that
contracting out the work is not the solution, since he needs
auditors "in house" to put the system in place. He
acknowledged that there is "middle ground", but did not feel
the amendment would provide the tools needed to implement
the tax.
Representative Kelly spoke against the amendment. He did not
want to give the Commissioner an excuse to be behind on
audits. He did not think that the threat of firing by the
Governor was a concern or that the positions needed
protection.
2:10:50 PM
Representative Gara questioned why the Administration had
not changed the classification system and opined that doing
so would be the easiest solution. He expressed a concern
that without passage of the amendment, auditors could be
fired for "other reasons". He mentioned that there was
nothing in the amendment that would keep the department from
hiring contract auditors.
Commissioner Galvin testified that there is misinformation
in the legislative building regarding the hiring of
auditors. He explained that there was a nationwide search
for auditors with oil and gas experience. From that search
there were no auditors found willing to be hired for the
job. As a result, auditors were brought in from the
Regulatory Commission of Alaska and another state agency.
He reiterated that the state of Alaska could not attract
auditors nationwide and further noted that there was some
reclassification of the lowest level positions. He
reiterated that using contractors is not the solution and
will not protect the state system. He urged the legislature
to provide the tools for the department and said that if the
amendment is passed he will not have the tools he needs.
2:16:38 PM
Representative Crawford recalled discussions regarding the
auditor position being an exempt status. He stressed that
there have been many instances of political pressure on the
exempt workers. He urged that another solution be found.
Commissioner Galvin disagreed. He said there is a perception
that those in exempt positions will do whatever the
executive says. He maintained that the perception is false.
He noted that every critical position having to do with oil
and gas is in exempt status. He went on to say that
implementing a tax system requires that the auditors are
experienced enough to understand the tax structures of the
oil companies. He acknowledged that there is a difference
of opinion and expressed concern that he must be able to
hire the people he needs with a wage that is competitive.
He requested that the committee consider allowing for at
least four of the positions needed, to be exempt positions.
2:22:23 PM
Representative Hawker disagreed with Commissioner Galvin's
characterization of the amendment; that it would deny the
tools needed to do the job. He stated that the amendment
would provide the best and most credible tools to do the
necessary work. He explained that an auditor must be
independent in fact and in appearance. He maintained that
if an auditor does not appear that way it creates doubt.
Representative Kelly noted he was not attempting to raise
the pay scale as indicated by the previous testimony.
2:26:25 PM
A roll call vote was taken on the motion.
IN FAVOR: Foster, Gara, Hawker, Joule, Nelson, Thomas,
Crawford
OPPOSED: Kelly, Stoltze, Meyer, Chenault
The MOTION PASSED (7-4).
There being NO further OBJECTION, Amendment 4 was adopted.
RECESSED: 2:27:48 PM
RECONVENED: 2:51:16 PM
Representative Kelly MOVED to ADOPT New Amendment 5, labeled
25-GH0014\N.30, Bullock, 11/10/07.
Representative Hawker OBJECTED.
Representative Kelly explained the amendment, which would
increase progressivity to .4 percent.
2:53:46 PM
Commissioner Galvin spoke in support of the amendment.
Representative Kelly pointed out that CSHB 2001 (FIN) has a
25 percent base rate. He asked if that number was supported
by the Governor. Commissioner Galvin stated that the
Governor supports 25 percent as the base rate; the
Administration would support the amendment with the 25
percent base rate.
Representative Hawker commented that production decline is
the greatest challenge facing the state of Alaska. He
discussed the difficulty of incenting companies to invest by
establishing higher taxes. He also maintained the importance
of the state receiving its fair share. He suggested that the
way to deal with that could be through a windfall profits
tax. He reported that his constituents do not support
increasing or changing the production tax rate. He
maintained his opposition.
3:02:41 PM
Representative Kelly disagreed with Representative Hawker.
He said the amendment is about getting the state's value for
the product and resource. He emphasized that the work of the
legislature is to establish a solid future tax policy to
send a message of stability to the oil companies. In order
to rebuild the trust of the people of Alaska, progressivity
should be at the rate that the Governor has recommended. He
urged support.
3:07:54 PM
A roll call vote was taken on the motion to adopt Amendment
5.
IN FAVOR: Gara, Joule, Kelly, Nelson, Stoltze, Crawford
OPPOSED: Hawker, Thomas, Foster, Chenault, Meyer
The MOTION PASSED (6-5).
There being NO further OBJECTION, Amendment 5 was adopted.
3:08:46 PM
Representative Hawker MOVED to ADOPT Amendment 6.
Representative Stoltze OBJECTED.
Representative Hawker explained that the amendment removes
provisions that were added to impose civil penalties related
to under payment of an installment payment: page 1, lines 3-
5, delete "providing a penalty for the underpayment of an
installment payment of the production tax on oil and gas".
Producers have to estimate their entire year's expenses for
the January payment. Interest is charged if the estimate
fails. He felt the provision imposed civil penalties on
taxpayers acting in good faith.
Commissioner Galvin noted support for the amendment.
Representative Stoltze WITHDREW his OBJECTION. There being
NO further OBJECTION, Amendment 6 was adopted.
3:12:59 PM
Co-Chair Chenault noted that the effective dates on
Amendment 5 were not clarified.
DAN DICKINSON, CONSULTANT, TAX DIVISION, DEPARTMENT OF
REVENUE, thought Amendment 5 could be made effective at the
same time as the bill, with the first taxes paid January 1,
2008, unless noted differently.
3:15:04 PM
Representative Gara MOVED to ADOPT Amendment 7.
Representative Stoltze OBJECTED.
Representative Gara explained that Amendment 7 deletes the
Transitional Investment (TIE) credits. He opined that with
other credits and incentives in the bill, the TIE credits
are not necessary. He went on to say the TIE credits are
unique to tax law.
3:18:06 PM
Commissioner Galvin stated that the Administration's
position has remained consistent regarding credits. He
explained that the current credits available suffice and
added that the TIE credits violate the principles of the
Administration. He further explained that the Administration
did provide language to allow credit for those producers who
have had exploration since PPT was passed.
Commissioner Galvin said the TIE credits are being frozen
and may be used when production is realized. He spoke in
support of the amendment.
In response to a question by Representative Gara regarding
the cost to the state, Commissioner Galvin observed that TIE
credits would cost the state $1 billion with a 5-year look
back. Under CSHB 2001 (FIN), the 3-year look back would
cost the state $750 million; with the amendment the cost
would be less than $50 million.
Representative Gara WITHDREW Amendment 7.
3:22:14 PM
There was discussion of conflict of interest.
Representative Hawker commented on the proper use of
conflict of interest statements.
Representative Crawford MOVED to ADOPT Amendment 8, labeled
25-GH0014\N, Finley/Bullock, 11/9/07.
Representative Hawker OBJECTED.
Representative Crawford discussed the fairness of one
producer receiving credits and others not. Commissioner
Galvin explained that the original bill was based on the
principal that an entity that is not subject to the tax
should not be eligible to take the credit offered under the
tax.
3:27:41 PM
Representative Gara expressed concern with the amendment.
He noted the discrepancy of reward for one portion of the
state and not another. He characterized the amendment as a
subsidy.
3:31:00 PM
Representative Kelly pointed out that the amendment is about
a strict application of the tax on gas. He countered that it
is a fairness issue and not about subsidizing customers.
Representative Joule spoke in support of the amendment.
Representative Hawker WITHDREW his OBJECTION.
Representative Gara OBJECTED for purpose of further
discussion. He said the companies that are not taxed will
receive a credit.
Representative Kelly disagreed and concluded that they are
taxed on sales, not taxed on the portion of sales that are
not taxable.
Representative Gara WITHDREW his OBJECTION.
There being NO further OBJECTION, Amendment 8 was adopted.
3:36:01 PM
Representative Hawker MOVED to ADOPT Amendment 9.
Representative Stoltze OBJECTED.
Representative Hawker explained that the amendment repeals
and reenacts criteria to qualify for enhanced exploration
credits (outlined in AS 43.55.025). He stated that upon
completion of the well, the Commissioner of Department of
Natural Resources must determine that the well "adequately
achieved" the stated geological objective. He opined that
this language was too subjective. He maintained that the
amendment is to protect taxpayers who were operating in good
faith by changing the wording to "was consistent with
achieving".
KEVIN BANKS, DIRECTOR, DIVISION OF OIL & GAS, DEPARTMENT OF
NATURAL RESOURCES, observed that the current language is in
place to protect the state from those not acting in good
faith. He acknowledged that the language proposed would
still provide that safety and said the department did not
have issue with the amendment.
Representative Stoltze WITHDREW his OBJECTION.
There being NO further OBJECTION, Amendment 9 was adopted.
3:42:17 PM
Co-Chair Chenault MOVED to ADOPT Amendment 10.
Representative Stoltze OBJECTED.
Representative Hawker emphasized that his intention was to
draft language that would better protect those taxpayers who
operate in good faith, and to protect the state from those
who do not. He addressed the current language in Section
32, AS 43.55.025. He observed that the previously deleted
language was too restrictive and created a loophole. He felt
that as a result the language was now too broad.
Representative Hawker explained that Amendment 10 would
reinstate language "the explorer shall submit information
necessary for the Commissioner of Department of Natural
Resources to evaluate the validity of the explorer's
compliance with the requirements of this section." The
amendment would also delete language on page 22, lines 11-
19. He specifically noted the wording "include all derivate
products". He maintained the language is too broad. He
further expressed concern with the mandatory stipulation of
providing "tangible materials". He felt that the specific
requirements for core samples were too demanding and
questioned if the demand was reasonable.
3:50:19 PM
Mr. Banks reviewed information that would be required under
the provision. He observed that the information on page 22,
line 14, is a form that comes to the department. He
explained that the state becomes an investor by providing
the credit thus interested in the results of the data. The
tangible information is handed over to Alaska Oil and Gas
Conservation Commission (AOGCC) for storage of the data in
Eagle River. He added that this information is not
confidential.
Mr. Banks elaborated on terms: the purpose of using the term
"derivative products" was to receive information for a
period of time. He agreed that perhaps there would be a
better term for "derivative". He explained that the
department would like the information. The legislation
allows discretion to ask tangible materials to be held in a
safe place to be stored with the entity until the period of
confidentiality is over. The AOGCC does not receive adequate
information at this date.
3:56:00 PM
Representative Gara asked Mr. Banks what value the
information had and how it benefits the state. Mr. Banks
replied that it allows the state to evaluate the prospects
of its land. He elaborated saying that sharing the
information makes the state land more valuable in its
potential to encourage new leases and exploration.
Representative Hawker asked the committee to support the
amendment with the caveat that access to tangible materials
would be clarified.
Mr. Banks spoke in opposition to the amendment.
A roll call vote was taken on the motion.
IN FAVOR: Hawker, Joule, Nelson, Crawford, Foster, Meyer,
Chenault
OPPOSED: Kelly, Stoltze, Thomas, Gara
The MOTION PASSED (7-4).
There being NO further OBJECTION, Amendment 10 was adopted.
4:00:31 PM
Representative Hawker WITHDREW Amendment 11.
Representative Joule MOVED to ADOPT Amendment 12.
Representative Hawker OBJECTED.
Representative Joule explained that the issue of private
landowners and the disclosure of information regarding those
lands were brought up in committee before the CS was
drafted. He noted that though the department agreed that
the issue should be addressed in the CS, it is not. The
amendment would state that the information regarding private
lands could not be released to the public without permission
of the landholder.
Mr. Banks reiterated comments by Representative Joule.
4:04:23 PM
Representative Hawker MOVED to AMEND Amendment 12 to conform
to Amendment 10. He asked that language be inserted on line
3 of the amendment to include "in this subparagraph". There
being NO OBJECTION, it was so ordered.
Representative Chenault asked if the department supported
the changes. Mr. Banks said they did not have a problem
with it.
Representative Hawker WITHDREW his OBJECTION.
There being NO further OBJECTION, Amendment 12 was adopted.
Representative Gara MOVED to ADOPT Amendment 13.
Representative Hawker OBJECTED.
Representative Gara explained that the intent of the
amendment is to provide the state with an enforcement
mechanism when there are substantial underpayments of a tax.
The amendment outlines penalties under three scenarios:
Minor underpayment = no penalty
Substantial underpayment = 10 percent penalty
Gross underpayment = 20 percent
Additionally, audit costs would be included in the
penalty costs.
4:09:40 PM
Commissioner Galvin said the Administration supports the
amendment.
RECESSED: 4:11:53 PM
RECONVENED: 4:36:40 PM
4:36:54 PM
A roll call vote was taken on the motion.
IN FAVOR: Nelson, Stoltze, Thomas, Crawford, Gara, Joule,
Kelly
OPPOSED: Foster, Hawker, Meyer, Chenault
The MOTION PASSED (7-4).
There being NO further OBJECTION, Amendment 13 was adopted.
4:37:58 PM
Representative Gara MOVED to ADOPT Amendment 14 and then
WITHDREW Amendment 14.
4:38:36 PM
Representative Thomas MOVED to ADOPT Amendment 15, labeled
25-GH0014\N.22, Kane/Bullock, 11/9/07.
Representative Gara OBJECTED.
Representative Thomas explained the amendment establishes a
limitation on the ability of a producer who has a judgment
against it, to receive credits. The producer would not
receive credits until the judgment is satisfied.
Commissioner Galvin reiterated and clarified the amendment
regarding receipt of a production credit.
Representative Gara WITHDREW his OBJECTION. Representative
Kelly OBJECTED.
4:41:35 PM
Representative Kelly spoke about judgments against a
producer. Commissioner Galvin said that the purpose of the
provision is to address a judgment in court. He felt that
the provision is a disincentive for prolonged litigation as
the moneys owed are held in trust, not allowing interest to
accrue.
Representative Kelly WITHDREW his OBJECTION. Co-Chair Meyer
OBJECTED.
4:44:35 PM
Co-Chair Meyer asked for clarification of "producer".
Commissioner Galvin explained that the provision would only
apply to the entity that had the judgment against them.
Representative Stoltze questioned if the Administration was
in favor of the amendment. Commissioner Galvin stated that
they did not object to the amendment.
Co-Chair Chenault asked about litigation against
corporations throughout the state. Commissioner Galvin
responded that he did not know of any current judgment
greater than $100,000 in appeal.
4:46:48 PM
Co-Chair Meyer WITHDREW his OBJECTION.
There being NO further OBJECTION, Amendment 15 was adopted.
4:47:14 PM
Representative Gara MOVED to ADOPT Amendment 16.
Representative Hawker OBJECTED.
Representative Gara explained that the amendment allows the
state to apply a "just and reasonable" rate for
transportation costs. He elaborated on the current
overcharging and the effect it has on the state and small
explorers. He maintained that the overcharges deter
production by small explorers and cost the state $53 million
per year in taxable revenue.
He concluded by saying the state is precluded from
establishing just and reasonable rates due to current
language in statute. Representative Gara requested the
Administration's opinion.
Commissioner Galvin spoke of the potential affect of the
amendment to future production. He clarified that it would
not affect the price being paid by explorers for their oil
in the line. The amendment addresses how much a company can
deduct in transportation costs. The provision outlined in
the amendment would allow the department to establish a rate
on transactions outside already established thru a
regulatory body. He further clarified that the estimated
loss to the state would be closer to $160 million.
Representative Gara asked if the Regulatory Commission of
Alaska, under existing law, can regulate the in-state
shipment. Commissioner Galvin stated that it can regulate
shipment as it relates to the actual charge for "the
interstate rate". That rate sets the payment the third party
pays the pipeline owner. The tax code establishes the
appropriate deduction.
Representative Gara asked if the Administration supports the
amendment or anything further regulating the rates that are
charged on the pipeline. Commissioner Galvin replied that
the Administration does support the amendment because it
insures the appropriate deduction is allowed under the tax
code. He further clarified that the tariff charged is
regulated by FERC.
4:54:23 PM
Representative Gara WITHDREW Amendment 16.
RECESSED: 4:55:07 PM
RECONVENED: 6:15:14 PM
Representative Stoltze MOVED to ADOPT New Amendment 17,
labeled 25-GH0014\N.29, Mischel/Bullock, 11/10/07.
Representative Hawker OBJECTED.
Representative Stoltze explained that the Administration
requested the amendment regarding lease expenditures. It
directs that the lease expenditures are those that would be
allowed by the department by regulation. It authorizes the
department to use Unit Operating Agreements and DNR Net
Profit Regulations as guidance to establish standards. It
removes the provision which would require the department to
consider operating agreements the final word on lease
expenditures.
6:16:46 PM
Commissioner Galvin stated that the amendment would restore
one of the key provisions in the ACES bill; restoring the
definition of what are allowable lease expenditures.
He pointed out that the amendment places joint interest
billings in their appropriate role as an important tool, but
yet the department is not bound by the structure of the
joint interest billings.
Representative Kelly asked if the Commissioner thought the
language on page 3, line 9, was strong. Commissioner Galvin
said that the language requires that expenditures for non-
"arms length transactions" do not exceed fair market value.
6:21:28 PM
Representative Hawker spoke against the amendment. He felt
the legislature was being requested to "trust" without clear
guidance in statute. He warned about the danger of
regulation taking precedence over statute. Commissioner
Galvin said that though the department will have to
implement regulations, the legislature has the ability to
decide if the regulations are in line with intent.
6:24:14 PM
Representative Gara asked which portion of the amendment
addressed joint interest billings. Commissioner Galvin
pointed to two different places in the bill: page 2, line
23, and page 3, lines 19-20. Representative Gara thought it
was difficult for legislators to determine the lists of
allowable costs. He emphasized that it is the function of
the legislature to provide guidance to the department for
writing the regulations, not create the regulations.
Co-Chair Meyer voiced a concern regarding the possibility of
regulations changing with a change of Administrations.
Commissioner Galvin replied that it is a possibility that
could happen but it would happen within the public process.
Co-Chair Chenault asked if joint interest billings were not
used, what steps the Administration would take to make sure
that industry meetsthe criteria. Commissioner Galvin
replied that there would be requirements established for
what type of information would need to be provided by the
taxpayer. He explained that joint interest billings are
one component that provides information already established
between the operator and partners. If the department
chooses not to use joint interest billings, there are
information requirements in place to guide the taxpayer as
to what kind of information they would need to provide. He
noted that it is the intention of the department to use
joint interest billings to the full extent they are able.
6:29:02 PM
A roll call vote was taken on the motion.
IN FAVOR: Nelson, Stoltze, Thomas, Crawford, Gara, Joule
Kelly, Meyer
OPPOSED: Foster, Hawker, Chenault
The MOTION PASSED (8-3).
There being NO further OBJECTION, Amendment 17 was adopted.
6:29:48 PM
Representative Crawford MOVED to ADOPT Amendment 18, labeled
25-GH0014\N.21, Luckhaupt/Bullock, 11/9/07.
Representative Hawker OBJECTED.
Representative Crawford explained that Amendment 18 provides
a formula dealing with legacy fields producing more than 1
million barrels. The purpose of the amendment is to make the
audit process easier for the department by providing a
standard deduction - the impetus for the taxpayer is to
control costs, rather than maximize expenditures to lessen
the tax. The amendment provides for a 3 percent standard
deduction per year remaining in effect until 2010.
6:33:54 PM
Commissioner Galvin testified that the concept has merit and
should be considered. He acknowledged that there are still
legislators uncertain about the net concept. He said it is
a reasonable compromise to stick with a net approach while
holding the cost picture constant. He reiterated that the
Administration does not object to the amendment.
Representative Chenault asked Mr. Dickenson to come forward
and discuss the amendment and some of the history regarding
operating cost average.
DAN DICKINSON, CONSULTANT, LEGISLATIVE BUDGET AND AUDIT,
provided an overview of the amendment. He mentioned the
operating cost increase and maintained that this is the
result of price increase. He asserted that the unfortunate
aspect of the amendment is that if the standard is
established, those with higher expenses will be penalized.
By allowing a flat deduction, producers will not be allowed
to deduct the costs.
6:40:06 PM
Commissioner Galvin commented that one of the adjustments to
be made to the increase in costs would be to move away from
the deduction being calculated on a per barrel basis and
allowing it, instead, to be based on the total actual costs
within the unit; recognizing that a large part of the
operating costs, production decline, would bring the overall
costs down. He reminded the committee that the language is
intended to be a transitional provision and would be re-
evaluated. He clarified that the cap is on total costs, not
adjusted costs.
Representative Gara commented that Mr. Dickinson overstated
the flaw and understated the benefit of the provision. He
reviewed the intent of the amendment. He said the greatest
benefit is that the standard deduction encourages
exploration and capital expenditures.
Representative Gara continued saying that Alaska is new at
regulating a profit's tax. He stressed that the provision is
a well-thought-out, important provision, and he urged
passage of Amendment 18.
6:46:23 PM
Mr. Dickinson reiterated the concern that the provision
could penalize those explorers with higher costs of
extracting and producing heavy oil.
Representative Crawford mentioned that the Administration
does have the ability to adjust an audit. He referenced the
testimony from Gaffney Kline that illustrates that high
progressivity can result in a lower tax rate. He further
pointed out that a company pays on an aggregate of the
entire portfolio. He urged passage of the amendment.
Representative Gara stated that for heavy oil exploration
and expenditures, a company would still receive all the
deductions and credits under PPT and ACES. He also pointed
out that the amendment sunsets in 2011 and currently, there
is no expectation for the expansion to heavy oil before that
date.
Mr. Dickinson pointed out that there is not actually a
sunset, but rather a report due. Representative Gara
acknowledged that was correct.
Commissioner Galvin clarified the intent of the audit
recognition: if the 2006 numbers which provide the base for
deductions each year overstate the lease expenditures by
more than 10 percent, then the provision would require that
the actual amount of the costs be reflected.
Mr. Dickinson reiterated concerns. Commissioner clarified
intent to continue to receive the tax returns with the cost
information in order to provide a report on the relationship
between the actual costs and the standard deductions costs.
He reported that the potential impact of this is not known -
whether costs are going to go up in the aggregate for a
particular unit or not. It is a matter of weighing
respective risks. He agreed with Representative Gara's
description of what is being balanced in this particular
provision as it relates to perceived risk.
6:55:33 PM
Representative Crawford provided concluding comments about
the ability to take a standard deduction and urged a yes
vote.
6:57:32 PM
A roll call vote was taken on the motion.
IN FAVOR: Thomas, Crawford, Gara, Joule, Nelson
OPPOSED: Stoltze, Foster, Hawker, Kelly, Meyer, Chenault
The MOTION to ADOPT Amendment 18 FAILED (5-6).
6:58:20 PM
Representative Gara MOVED to ADOPT Amendment 19, labeled 25-
GH0014\N.25, Cook/Bullock, 11/9/07.
At Ease: 6:58:55 PM
Reconvened: 6:59:27 PM
(audio inoperative - audio resumes at 7:30 PM)
Representative Joule spoke in favor of alternative energy.
Representative Gara WITHDREW Amendment 19.
Representative Gara MOVED to ADOPT Amendment 20.
Representative Hawker OBJECTED.
Representative Gara explained that the intent was to
disallow costs for lobbying, public relations, public
reactions advertising or policy advocacy, and other
activities not related to the direct costs of production or
operation.
Representative Foster OBJECTED. He felt that it was unfair
to allow the expenses.
A roll call vote was taken on the motion.
IN FAVOR: Crawford, Gara, Hawker, Joule, Nelson,
Stoltze
OPPOSED: Thomas, Foster, Kelly, Chennault, Meyer
The MOTION PASSED (6-5).
There being NO further OBJECTION, Amendment 20 was adopted.
7:04:34 PM
Representative Gara WITHDREW Amendment 21.
Representative Gara MOVED to ADOPT Amendment 22.
Representative Hawker OBJECTED.
Commissioner Galvin explained that the amendment would
restore ACES language and felt that without the amendment
there would be no release of information. He maintained that
the amendment would restore public confidence.
Representative Hawker emphasized the need to protect, but
collect, and referenced the umbrella statute for taxpayer
confidentiality.
Commissioner Galvin said that nothing prohibits the
publication of statistics. He emphasized that the intended
balance is to allow the release of statistical information
while protecting individual taxpayer's rights.
7:11:33 PM
Mr. Dickinson explained that exposure to the state would
occur if confidential information were released that would
normally remain confidential. If there are fewer than three,
the information is not published until there is an
aggregation. He felt that the Revenue Source Book has a
wealth of information and allows citizens to receive
aggregated information. If broken down to three players
their tax information would be jeopardized. Commissioner
Galvin argued that the level of information would be low. He
did not believe the knowledge of costs for operation would
affect potential business.
A roll call vote was taken on the motion.
IN FAVOR: Crawford, Gara, Joule
OPPOSED: Foster, Hawker, Kelly, Nelson, Stoltze, Thomas,
Chenault, Meyer
The MOTION to ADOPT Amendment 22 FAILED (3-8).
7:16:17 PM
Representative Nelson MOVED to ADOPT Amendment 23, labeled
25-GH0014\N.10, Kurtz/Bullock, 11/9/07.
Representative Stoltze OBJECTED.
Representative Nelson explained low income heating energy
assistance program (LIHE). The amendment would match the
federal appropriation and times it by five to capture a
higher portion of low income homes. Alaska is benefiting
from the high costs and the amendment would provide a state
match.
Co-Chair Chenault acknowledged the issue, but did not feel
that it was the appropriate time for it to be addressed.
Representative Thomas noted the high cost of fuel and the
detrimental affects on seniors.
Representative Nelson pointed out that the trigger would be
at $50 a barrel, which would be the same as the current
progressivity level. She stressed the difficulty of finding
an alternative mechanism and pointed out that the LIHE
administration is in place.
7:23:14 PM
Representative Hawker questioned the position of the
Administration.
Commissioner Galvin explained the desire to support energy
assistance, but acknowledged the double edge sword of
wanting to support the amendment. He spoke in support of
addressing the issue during regular session.
Representative Joule pointed out that there is a trigger
mechanism and felt the amendment was balanced.
Representative Stoltze felt that there would be many issues
addressed in the next year including LIHE.
Representative Stoltze WITHDREW his OBJECTION.
There being NO further OBJECTION, Amendment 23 was adopted.
7:29:23 PM
Representative Joule MOVED to ADOPT Amendment 24, labeled
25-GH0014\N.13, Kurtz/Bullock, 11/9/07.
Representative Stoltze OBJECTED.
Representative Joule spoke in support of developing a long-
term energy plan, including alternative energy. He stressed
the importance of the issue.
Representative Joule WITHDREW Amendment 24 with the caveat
that he intends to review the issue during the regular
session.
RECESSED: 7:34:50 PM
RECONVENED: 7:57:08 PM
Representative Gara MOVED to ADOPT Amendment 25.
Co-Chair Chenault OBJECTED.
Representative Gara explained the amendment, which provides
a "whistle-blower" provision with a "reward". The reward
can not be more than 10 percent of the value of what is
collected. He asserted that these types of penalties
enforce compliance.
7:59:52 PM
Commissioner Galvin commented that the Administration does
not object to the amendment; however, concern with the
language is that the information provided is not otherwise
information that the state would either have or would have
acquired thru the normal operations of business. He said on
line 9, "leads to" is intended to include the limitation
that if the state acquires the information otherwise, then
there would be no reward awarded.
Co-Chair Chenault WITHDREW his OBJECTION.
Representative Kelly OBJECTED saying that he felt the
amendment went too far and that it might be better to put
the money towards auditor wages.
Representative Stoltze asked if there were unintended
consequences. Commissioner Galvin said it was a concern.
Representative Gara clarified two parts of the amendment. In
order to receive compensation a person has to provide the
information that "leads to" the collection of additional
taxes. The second part required that the legislature
appropriate funds. The intention is that the reward would
not go to a state employee. He offered to amend the
language to further clarify it.
8:06:23 PM
A roll call vote was taken on the motion.
IN FAVOR: Gara, Hawker, Joule, Nelson, Thomas, Crawford
OPPOSED: Kelly, Stoltze, Foster, Chenault, Meyer
The MOTION PASSED (6-5).
There being NO further OBJECTION, Amendment 25 was adopted.
8:07:13 PM
Representative Kelly MOVED to ADOPT Amendment 26.
Co-Chair Chenault OBJECTED.
Commissioner Galvin commented that the language was intended
to allow DNR to make (net profit share leasing program)
regulations retroactive to April 1, 2006, (when PPT was
enacted). Because of the inclusion of the credits the
existing regulations are ambiguous as it relates to how the
credits would be accounted for. The Department of Law (DOL)
advised that without explicit statutory authority, DNR
couldn't make the regulations retroactive.
Mr. Dickinson responded to a question from Co-Chair
Chenault, explaining that the amendment deals specifically
with how oil and gas production taxes will be handled in a
net profit share. Under current law, net profit share
payments are not deductible.
8:10:46 PM
Mr. Banks clarified that net profit share payments are not a
deduction under a production tax. The profit share in the
lease is an after-tax calculation. In current regulations
the lessee is allowed to deduct the production tax from the
calculation of their net profit payment. He referenced the
potential ambiguity of including credits in the calculation.
Alaska Administrative Code, Title 11, Chapter 83, Article
240 (b) 4 references the calculation that the production tax
may be deducted as a direct operating expense in the
calculation of a net profit share. It also states the
inclusion of early development incentive credits. He
suggested the way to handle the lack of clarity is to revise
the regulations and make sure the lessees are aware of how
production tax will be managed.
He further pointed out that the production tax is a
corporate wide tax and some allocation methodology will need
to be developed to be associated for a profit on a single
lease. He maintained that the regulations need to be
adjusted to be fair and reasonable, accounting for the
production tax payment the lessee makes.
In response to concerns voiced by Representative Kelly, Mr.
Banks said the net profit share payment should be reflected
in the calculation margin used by the taxpayer in
calculating progressivity.
Mr. Banks said the provision provides clear authority to the
department to go back to April 1, 2006, to correctly account
for a corporate-wide production tax and allocate it to a net
profit share lease. Representative Gara asked if this
provided for more deductions. Mr. Banks replied no.
Co-Chair Chenault WITHDREW his OBJECTION. There being NO
further OBJECTION, AMENDMENT 26 was adopted.
8:18:31 PM
Representative Gara MOVED to ADOPT Amendment 27.
Representative Hawker OBJECTED.
Representative Gara explained how the amendment addresses
retroactivity. He requested the department testify on what
the revenue would be in the event the retroactivity
amendment passes and a comparison if it does not. He spoke
to saving the future from the oil tax.
8:20:21 PM
Commissioner Galvin stated that with the retroactivity
provision, the difference in revenue would be (for 2008 July
1 - December 31) $483 million. He went on to say adding the
6 months preceding that, the amount would be approximately
$130 million for a total of just over $600 million.
Representative Gara pointed out that the Constitutional
Budget Reserve has been drawn down and needs to be
replenished.
Commissioner Galvin stated that the Administration does
support retroactivity. Co-Chair Chenault questioned the
support of retroactivity, but the lack of support for the
ability of the taxpayer to retroactively receive credits.
Additionally, he expressed concern for how the retroactivity
could be seen as further changes to the tax structure and be
interpreted as unstable. Commissioner Galvin appreciated
the concerns expressed. He went on to say that retroactivity
was not an original part of the bill but that the
Administration supports it. In closing, he agreed that tax
stability was important and that the Administration's goal
is to have an effective tax system in place long term.
8:25:23 PM
Co-Chair Meyer discussed the retroactivity claims under PPT
and asked for clarification on dates. Commissioner Galvin
stated that the State is still in the same calendar year and
the timeframe is legally defensible. Co-Chair Meyer pointed
out that retroactivity was not included in the original ACES
bill. Commissioner Galvin acknowledged that the
Administration wanted to make it a collaborative effort with
the legislature.
Representative Thomas was concerned about a precedence being
set by adopting retroactivity.
8:29:41 PM
Representative Gara WITHDREW Amendment 27. Amendment 28 was
rolled over to be heard after Amendment 29.
8:30:10 PM
Co-Chair Chenault MOVED to ADOPT Amendment 29, labeled 25-
GH0014\N.2, Cook/Bullock, 11/9/07.
Representative Stoltze OBJECTED.
Co-Chair Chenault explained that the amendment would change
the base tax rate from 25 percent to 22.5 percent, which he
believes is the correct number. If the price of oil was $85
per barrel, the original Governor's bill would bring in $835
million. In the HouseFinance version it would be $1.6
billion. Co-Chair Chenault agreed that the state should
receive a portion from the high prices and registered a
concern about the potential effects this may have on
investment decisions. If the state attempts to take too much
on the low end, there could be less investment, thereby
impacting jobs. He stressed that the lower rate would spur
development. He maintained that the current version is
better than the ACES bill. He pointed out that ACES was
similar to the House Finance PPT version as far as
progressivity and base rate.
8:36:39 PM
Representative Stoltze stressed his respect for the Co-
Chair's perspective and intent, but stated that he supports
the original ACES bill.
Representative Thomas stated that he had supported 25
percent until he saw a movement toward retroactivity. He
stressed the need to protect jobs.
8:40:41 PM
Representative Kelly pointed out that the retroactivity
provision is not in the bill. He observed that the price of
oil is over $85, but it may not remain high. He expressed
respect for those that support the lower rate, but felt that
the trust of the people of Alaska requires a higher rate to
ensure the tax law is not revisited. He emphasized
consultants' testimony indicating that a 25 percent base tax
rate is easily defensible and conservative. He felt that the
Administration had been reasonable and pointed to the
adoption of a net tax on base rate with progressivity. He
noted the professionalism of the Chair.
8:47:24 PM
Co-Chair Meyer acknowledged that he did not know the
definitive "right rate". He observed that the House is split
on the issue (O&G adopted 22.5 percent and RES adopted 25
percent.) He expressed concern with the decline of
production and observed that it has been masked by the high
oil prices. He went on to stress the importance that
whatever rate is adopted, it needs to result in more
production and jobs. He felt that the lower rate would be
more successful in increasing investment. He maintained that
with the higher tax rate, Alaska would be less competitive.
He emphasized that members should consider what rate would
stimulate more jobs. He observed that public testimony was
predominately in support of the lower tax.
8:53:00 PM
Representative Joule noted that his district warehouses the
resource and that he supports a 22.5 percent base tax rate.
He noted the right of members to disagree. Representative
Gara expressed respect for his colleagues' opinions. He
stressed the validity of changing votes from the previous
year based on additional information. He acknowledged that
he doesn't have the votes for retroactivity. He concluded
that a 30 percent tax would not reduce investment according
to Gaffney Cline and Associates. He further discussed merits
of the bill.
9:03:01 PM
Representative Thomas noted that he would probably support
25 percent if retroactivity is not adopted.
A roll call vote was taken on the motion.
IN FAVOR: Hawker, Joule, Thomas, Foster, Meyer, Chenault
OPPOSED: Nelson, Kelly, Stoltze, Crawford, Gara
The MOTION PASSED (6-5).
There being NO further OBJECTION, Amendment 29 was adopted.
Representative Kelly WITHDREW Amendment 28.
Representative Hawker asked for an explanation of the
amendment. Representative Kelly explained that the intent of
the amendment was to remove the sunset provision, if the 25
percent base rate with the progressivity portion passed. He
emphasized this would send a message of stability to the oil
companies.
Representative Crawford MOVED to ADOPT Amendment 30, labeled
25-GH0014\N.24, Cook/Bullock, 11/10/07.
Representative Hawker OBJECTED.
Representative Crawford explained the amendment, which
would:
· Maintain all previous sections except for
applicability to the "legacy fields" on the North
Slope. The definition of legacy field is written to
encompass Prudhoe, Kuparuk and Alpine fields.
· Implements a 17% tax for oil on the gross value at
the point of production.
· Implements a 13% tax for gas on the gross value at
the point of production.
· Intent language to allow the legislature to save up
to 50% of the annual surcharge revenue in the
Constitutional Budget Reserve (CBR).
· A .025 percent progressivity tax that is applied
once the gross price of oil reaches $40 and
increases to 0.35 percent once the gross price of
oil reaches $70. The tax is capped at 25%. The
progressivity structure also decreases the tax .025
percent when the price falls below $40.
· A 40% credit applicable to all eligible capital
expenditures after exceeding $100 million .
9:14:47 PM
Representative Stoltze commented on the role of the
Administration and the current outcome. He stated that he
supports the tax being based on the net value and he agreed
that the issue was complicated.
Representative Joule noted he would be a no vote.
Representative Hawker stated support for the amendment.
9:23:24 PM
A roll call vote was taken on the motion.
IN FAVOR: Nelson, Crawford, Gara, Hawker
OPPOSED: Joule, Kelly, Stoltze, Thomas, Foster, Chenault,
Meyer
The MOTION to ADOPT Amendment 30 FAILED (4-7).
9:24:18 PM
Co-Chair Chenault itemized the cleanup language regarding
effective date. He added that unless the amendments had
other specific dates in them, they would be effective July
1, 2008.
RECESSED: 9:24:51 PM
RECONVENED: 9:25:45 PM
st
Co-Chair Chenault restated that the date will be January 1,
2008.
Co-Chair Chenault thanked all members of the Committee and
their staff.
9:27:49 PM
Representative Stoltze MOVED to REPORT CSHB 2001 (FIN), as
amended, out of Committee with individual recommendations
and with the forthcoming revised fiscal notes.
Representative Foster OBJECTED. He said he believed that
linking all oil companies to corruption is slanderous.
9:29:45 PM
A roll call vote was taken on the motion to report the CS
from committee.
IN FAVOR: Kelly, Nelson, Stoltze, Thomas, Gara, Hawker,
Joule, Meyer, Chenault
OPPOSED: Crawford, Foster
The MOTION PASSED (9-2).
CSHB 2001(FIN) was REPORTED out of Committee with a "no
recommendation" and with the forthcoming revised fiscal
notes.
ADJOURNMENT
The meeting was adjourned at 9:30 P.M.
| Document Name | Date/Time | Subjects |
|---|