Legislature(2009 - 2010)HOUSE FINANCE 519
03/17/2010 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB280 | |
| HB273 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 273 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 280 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
March 17, 2010
1:35 p.m.
1:35:12 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 1:35 p.m.
MEMBERS PRESENT
Representative Mike Hawker, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Vice-Chair
Representative Allan Austerman
Representative Mike Doogan
Representative Anna Fairclough
Representative Neal Foster
Representative Les Gara
Representative Reggie Joule
MEMBERS ABSENT
Representative Mike Kelly
Representative Woodie Salmon
ALSO PRESENT
Jan Levy, Staff, Representative Mike Hawker; Larry Persily,
Staff, Representative Mike Hawker; Roger Marks, Consultant,
House Finance Committee; Representative Peggy Wilson,
Sponsor; Reid Harris, Staff, Representative Peggy Wilson;
Steve Prysunka, Director, Alaska Crossings, Wrangell; Mark
Galla, Owner/Operator, Alaska Peak & Seas, Wrangell.
PRESENT VIA TELECONFERENCE
Bob Pickett, Chairman, Regulatory Commission of Alaska;
Stuart Goering, Assistant Attorney General, Commercial/Fair
Business Section, Civil Division (Anchorage), Department of
Law; Carol Rushmore, Economic Development Director, City &
Borough of Wrangell; Timothy Rooney, Manager, City &
Borough of Wrangell.
SUMMARY
HB 273 MUNICIPAL GENERAL GRANT LAND
HB 273 was HEARD and HELD in Committee for
further consideration.
HB 280 NATURAL GAS
HB 280 was HEARD and HELD in Committee for
further consideration.
HOUSE BILL NO. 280
"An Act relating to natural gas; relating to a gas
storage facility; relating to the Regulatory
Commission of Alaska; relating to the participation by
the attorney general in a matter involving the
approval of a rate or a gas supply contract; relating
to an income tax credit for a gas storage facility;
relating to oil and gas production tax credits;
relating to the powers and duties of the Alaska Oil
and Gas Conservation Commission; relating to
production tax credits for certain losses and
expenditures, including exploration expenditures;
relating to the powers and duties of the director of
the division of lands and to lease fees for the
storage of gas on state land; and providing for an
effective date."
1:35:47 PM
REPRESENTATIVE MIKE HAWKER, SPONSOR, explained that the
purpose of the bill was to address the shortage of fuel in
Southcentral Alaskan communities. He introduced staff who
had worked on the legislation.
1:38:55 PM
Co-Chair Hawker directed attention to the sectional
analysis (copy on file). He emphasized the increasing
difficulty of meeting the demand for fuel in Southcentral
due to growing population in the area and the depletion of
natural gas in the Cook Inlet basin. He reported that
studies conducted by utilities, government, and industry
have universally concluded that gas storage capacity is a
critical element in achieving energy security. He argued
that the empty or nearly empty reservoirs left after
extracting the original natural gas could be used as
storage vessels for gas produced from new wells. The
warehoused gas could then allow for flexibility in meeting
demands during times of peak use.
Co-Chair Hawker anticipated that adding storage capacity to
the supply chain would result in increased costs. He stated
that HB 280 would enable the legislature to effectively
provide consumer cost relief without cost to the state
through an investment tax credit for the development of gas
storage businesses when the stored gas is used for consumer
utilities. He stressed that the tax credits in the
provision would not apply to existing warehouses.
Co-Chair Stoltze noted that market forces do not supply the
necessary incentive.
1:43:26 PM
Co-Chair Hawker called the legislation a market-driven
solution, not a government-driven one; government would not
provide a subsidy for the service but would facilitate
lowering the cost to consumers through third-party
developed storage.
Co-Chair Hawker continued that the bill resolves current
regulatory uncertainty that has been impeding gas storage
facility development. He reminded the committee that the
Regulatory Commission of Alaska (RCA) had recently asked
the legislature for clarification of its regulatory
responsibilities related to gas storage facilities
providing gas to Southcentral consumers; HB 280 establishes
that the activity is regulated.
Co-Chair Hawker added that regulatory clarification related
to the management of inventory was needed for potential
owners of gas storage facilities. He defined "inventory" as
the gas in the facility that would be cycled back to the
market when needed. The legislation adopts a "last in and
first out" inventory management structure. Production taxes
were not paid on any original gas remaining in the reserve,
but those molecules are indistinguishable from gas that has
been put in for storage. To address this classic accounting
challenge related to any kind of inventory, the bill does
not tax gas pulled out until it exceeds the amount put in.
1:47:14 PM
Co-Chair Hawker pointed out that HB 280 explicitly mandates
that investment tax credit utilized for the construction of
a qualified gas facility be passed on to the consumer. In
addition, the bill provides for gas deliverability
requirements in Southcentral by making it as attractive as
possible for the exploration and development industry to go
after undiscovered gas in Cook Inlet.
Co-Chair Hawker described challenges getting companies to
explore and develop potential reserves in the Cook Inlet
basin. When Cook Inlet was first developed around 50 years
ago, there were several large domes of natural gas that
were relatively easy to locate and to exploit, allowing
Southcentral access to inexpensive energy. Although there
may still be a great deal of gas, it is located in smaller
stratigraphic traps. In addition, most of the basin is
under water, and large portions are under land that is not
available for exploration and development.
Co-Chair Hawker maintained that the small traps are
unattractive to large oil and gas exploration and
development companies such as ExxonMobile, ConocoPhillips,
and Chevron. He noted that the state must attract a new
kind of explorers who are very reluctant to work in Alaska
because of oil and gas taxes currently in place; HB 280
modifies some provisions to make existing credits or tax
advantages more accessible with minimal enhancement to
other credits.
Co-Chair Hawker detailed that HB 280 would eliminate the
prohibition against utilization of credits. Current statute
requires that the credits be amortized over two years; HB
280 allows amortization over one year. The bill also
eliminates the penalty against existing Cook Inlet tax
credits from earlier PPT/ACES [Petroleum Production
Tax/Alaska Clear and Equitable Share] legislation. He noted
that the Cook Inlet tax structure is based on the ELF
[Economic Limit Factor] formula, which was meant to provide
consumer cost relief. A company exploring in Cook Inlet is
required to discount tax credits it owns, eliminating the
benefit based on the differential between the ELF rate and
the ACES rate. The result has been investment outside the
Cook Inlet.
1:53:12 PM
Co-Chair Hawker concluded that HB 280 is about making gas
available to consumers and relieving future cost increases
related to gas storage. The bill would also impose
regulation on the emerging gas storage industry for the
benefit of consumers and provide potential operators with
the assurances needed to move forward.
Co-Chair Stoltze noted energy challenges in Southcentral
and concerns about a coming shortage. Co-Chair Hawker
opined that the state has been fortunate so far to have
sufficient production and the ability to divert excess
production in times of less demand, but he anticipated the
demand would exceed supply. He expected that the March 31,
2011 expiration of the federal export permit could
eliminate the production buffer in Southcentral. He
underlined that without the proposed storage, the average
daily flow would not meet peak demands.
Vice-Chair Thomas queried the transferability of tax
credits. Co-Chair Hawker replied that under current
statute, the credits are not transferable; however, an
individual entity has the ability to apply to the
Department of Revenue for reimbursement if it cannot
utilize all the credit.
1:56:49 PM
Representative Austerman questioned whether stored gas that
is tapped when needed would fluctuate in price or be
amortized across the year. Co-Chair Hawker replied that the
RCA would regulate gas flowing to consumers through a
storage facility. The commission might level prices
throughout the year; alternatively, it could allow lower
prices in the summer when demand is low and gas storage is
"off-line" and require higher prices during peak winter
demand.
Representative Fairclough referred to refunds collected
through the Oil and Gas Tax Credit Fund and queried the
balance of the fund. Co-Chair Hawker replied that the
credit fund was originally established with $400 million
and is recharged annually based on expected demands. The
determination was made the previous year that the fund was
overfunded and the legislature reappropriated $200 million
out of the fund through the supplemental budget. The
governor requested $140 million be added to the fund in the
current year's budget. He anticipated that $20 million to
$25 million would be needed considering the $15 million
credit limit per facility (for the one or two 10 billion
cubic feet storage facilities needed for Cook Inlet).
2:00:53 PM
Representative Fairclough referenced ownership in Section 4
and asked what would happen if a company sold a facility.
Co-Chair Hawker responded that there are two components to
storage facility enhancements: Section 10 addresses an
investment tax credit and Section 4 directs DNR to waive
land lease fees for the first ten years for a qualified gas
storage facility. In addition, an anti-churning provision
stipulates that a facility in operation prior to the bill
cannot receive credits, and if the storage facility is
sold, credits cannot be obtained on the purchase.
JAN LEVY, STAFF, REPRESENTATIVE MIKE HAWKER, specified that
the provision was in Section 10(g) on page 10 of HB 280.
Co-Chair Hawker pointed to Section 10(h) on page 10 and
emphasized the importance of providing recapture provisions
when providing investment tax credits in case a storage
facility ceases commercial operations. He did not intend a
business to get a credit in year one, go out of business in
year two, and then pocket the credit. The recapture
provision requires a ten-year step-down in order to fully
vest in the tax credit.
Representative Fairclough turned to a Section 4 requirement
that the credits be reflected in the fuel base rate. She
asked how to ensure protection for rate payers once the
credits are passed on to the owner of the gas.
2:04:36 PM
Co-Chair Hawker responded that the RCA would regulate the
operations of gas storage facilities operated for consumer
purposes.
Representative Fairclough asked about royalties and the
relationship between the market price a utility would pay
for gas and the price a consumer would pay. Co-Chair Hawker
pointed out that a utility does not pay royalties; only the
producer of the gas pays royalties when the gas is taken
from the ground during original production. He stressed
that the storage facilities are only warehousing
facilities.
Representative Fairclough remarked that the rate paid by a
utility includes the tax. She was concerned that utilities
would buy low, store the gas, and charge consumers more.
LARRY PERSILY, STAFF, REPRESENTATIVE MIKE HAWKER, explained
that for third-party gas storage, the utility would buy gas
during the year and pay the contract price to the
producers. He emphasized that the price for the gas would
not change when it comes back out of storage because
utilities are not allowed to make a profit on the gas. The
RCA would allow the utility to only recover what it paid
for the gas plus the cost of storage.
Co-Chair Hawker added that the contracts are typically
long-term upstream procurement contracts.
2:08:09 PM
Representative Gara queried the current tax structure in
Cook Inlet. He wanted to know more about the additional tax
incentives as well as the current production tax in Cook
Inlet. He agreed that gas storage is needed and supported
passage of some form of gas storage incentive in the
current year. Regarding incentives to promote exploration
in Cook Inlet, he believed that the tax rate was not too
high, but that no one would spend the money to get the gas
unless they knew they could sell it. He relayed concerns
that the remaining gas resource is hard to explore for
without a long-term buyer. He wondered why more tax credits
on Cook Inlet gas was the answer.
Mr. Persily responded that the tax structure for gas
produced in Cook Inlet and used in Alaska is hardwired
under ELF at about $0.17 per thousand cubic feet.
Representative Gara asked for more information. Mr. Persily
explained that the tax essentially comes in at $0.17 and
cannot go above that number; he did not know whether it
could go under. He noted that the tax rate would not be
changed; the legislation deals with exploration credits.
2:12:14 PM
ROGER MARKS, CONSULTANT, HOUSE FINANCE COMMITTEE, detailed
that Cook Inlet taxes were originally crafted under PPT and
carried over into ACES and used the ELF structure that was
in place when PPT came into effect April 1, 2006. For both
oil and gas, the average ELF structure that was in place
the prior twelve months is hardwired in through 2022; for
any field that went into production after the PPT effective
date, the average ELF rate for all other fields became the
actual ELF structure for new fields.
Mr. Marks explained that the ELF structure was a product of
two things: the nominal rate of 10 percent for gas and the
ELF, which was a number that gave every gas well 10,000 mcf
per well per day tax free. The ELF number (a fraction)
times the 10 percent tax rate comes to $0.17/mcf for Cook
Inlet.
Mr. Marks continued that oil works in a similar way; the
ELF structure for oil was 300 barrels per well per day tax
free coupled with a 15 percent gross rate. For oil, the ELF
rate happened to be zero, so Cook Inlet oil pays no
severance tax under the current production tax law.
Representative Gara queried the percentage tax rate charged
on the gross on Cook Inlet gas currently. Mr. Persily
responded that the number would depend on the price; if the
price is $8 per thousand cubic feet, the tax rate would be
2 percent using the $0.17. The rate would fluctuate with
the price the producers get under a particular contract.
Mr. Marks pointed out that the $0.17 is independent of the
price; ELF reflected 10,000 mcf per well per day tax free
regardless of the price.
Representative Gara asked the range of current gas prices
to understand the relative value of the $0.17.
2:16:16 PM
Mr. Marks replied that a wide spectrum of contracts exist
in Cook Inlet, including old contracts with low prices and
others that reflect the current Henry Hub [natural gas
spot] price based on a three-year rolling average. He added
that the $0.17 tax rate applies whether the contract is
currently receiving $1 or $8 for the gas.
Representative Gara queried the current Henry Hub price.
Co-Chair Hawker replied that the price was currently $4.20
and has been shifting between $4.25 and $5 for the past
several months.
Representative Gara surmised the benchmark would be a 3
percent gross tax. Mr. Persily replied that the number
would be 4 percent.
Co-Chair Hawker commented that one of the things driving
the market was that people who had gas to produce and sell
were unable to get a long-term contract approved by the
RCA. He reported that the commission had rejected a couple
of viable long-term contracts with minimal explanation and
that there had been conflict over the issue. He referred to
a shift within the commission towards understanding that it
has been part of the problem.
Co-Chair Hawker informed the committee that he had wanted
to remove the RCA from regulating procurement contracts. He
recognized that allowing the market to operate freely would
not be consumer-friendly. He noted that language had been
put into HB 280 providing specific guidance to the RCA; RCA
had helped with the language and felt it would aid the
agency in evaluating future long-term contracts. In Section
5, the commission is directed to consider the impact of
long-term gas supply contracts on consumers. He stressed
that the criteria was very different than in the past; the
consequence of rejecting two major contracts has severely
exacerbated problems with securing deliverability.
Companies are no longer willing to enter into long-term
contracts under the same terms.
2:20:00 PM
BOB PICKETT, CHAIRMAN, REGULATORY COMMISSION OF ALASKA (via
teleconference), acknowledged that the commission had
declined to approve a series of contracts in the past. He
noted that HB 280 asks RCA to consider and articulate the
reasons for declining contracts and the impact on
consumers. The bill requires wrap-up and that other parties
to the proceedings take into account the same
considerations.
Representative Gara asked whether HB 280 would change RCA's
analysis of rulings such as the denial of the ENSTAR
contract the previous year. Mr. Pickett believed the
commission had considered the impact of declining the
contracts and pointed out that the proceedings involved
other parties. He emphasized that the commission makes
decisions on the basis of developments in proceedings. He
felt the world was significantly different than when the
contracts were being considered. He underlined the
seriousness of issues such as the lack of gas supply under
contract for Southcentral utilities and deliverability
issues. He believed HB 280 was a move in the appropriate
direction, although he did not think it would correct all
problems in Cook Inlet.
Representative Gara emphasized that he did not intend to
criticize the RCA. He asked whether the proposed
legislation would affect how the commission would rule on
similar issues in the future. Mr. Pickett did not think
future RCA rulings could be pre-judged. He emphasized that
RCA does not regulate producers in Cook Inlet and cannot
compel producers to enter into any kind of contract with
any utility. The commission has to respond to the filings
that the utilities make and the contracts that they present
for review. He viewed the Cook Inlet market as small and
disconnected.
2:24:13 PM
Representative Gara clarified that he wanted to know
whether there was a provision in HB 280 that would affect
how the commission would rule on future cases.
Co-Chair Hawker noted that Section 5 was the relevant
section.
STUART GOERING, ASSISTANT ATTORNEY GENERAL, COMMERCIAL/FAIR
BUSINESS SECTION, CIVIL DIVISION (ANCHORAGE), DEPARTMENT OF
LAW (via teleconference), informed the committee that he
was assigned to RCA. He explained that Section 5 would add
a new provision to the basic authority of the commission,
requiring it to look at specifically named factors when
determining whether or not a contract should be considered
just and reasonable and therefore approved. In particular,
the provision points RCA and parties presenting evidence to
the commission to considerations of whether or not a
utility has alternatives to the contract presented, and if
not, the impact the rejection of a contract would have on
the reliability of the utility's service. The provision
would change the commission's behavior as well as require
parties to bring relevant evidence to the commission.
Representative Gara queried the role of the Attorney
General's Office related to consumer protection on RCA
matters. Mr. Goering replied that there are two statutory
roles for the department regarding utilities and pipeline
regulation. He described his role as advisor to the RCA
directly. The other role relates to the Regulatory Affairs
& Public Advocacy (RAPA) section of the Department of Law;
that function is filled by Daniel Patrick O'Tierney.
Mr. Persily directed attention to Section 20 of HB 280,
which uses the same language as Section 5 and directs RAPA
to consider the same issues when weighing in on the side of
the public.
2:28:26 PM
Representative Gara asked the department's opinion on the
section. Mr. Goering opined that language in both sections
will be beneficial to the RCA in that it will cause the
parties to bring additional relevant evidence into
proceedings when the commission is considering whether or
not to approve gas sales agreements and rates related to
natural gas transactions. He emphasized that more evidence
is always good and encouraged guidance from the legislature
regarding the kinds of evidence that should be considered
when making such an important public interest
determination.
Mr. Persily informed the committee that he had worked with
Mr. O'Tierney on the section.
Representative Gara requested input from Mr. O'Tierney.
Co-Chair Hawker suggested more explanation of the increased
access to existing credits offered by the bill. Mr. Persily
explained that the hope is that third-party gas storage
would foster more of a market and therefore more
production. He anticipated that the credits in the bill
would remove the limitation so that someone investing in
Cook Inlet exploration receives credit, can use the full
credit for their state-wide tax return, and allows Cook
Inlet explorers to recover their full tax credit in the
first year rather than over two years.
Mr. Persily noted that currently in Cook Inlet a company
can get a 30 or 40 percent credit on exploration depending
on how far it is from the existing well; Section 16 puts
the credit at 40 percent and applies it to all well-related
lease expenditures in Cook Inlet, which includes
delineation wells, service wells, and anything related to
producing oil and gas.
Co-Chair Hawker added that after HB 280 had been introduced
and identified impediments in the Cook Inlet, the
administration brought forward a state-wide bill to adjust
some of the oil and gas credits. He assured the committee
that HB 280 does not apply beyond the Cook Inlet.
2:32:56 PM
Representative Gara requested analysis of estimated
subsidies under HB 280. He wondered whether the $0.17 tax
rate and 40 percent credit could result in paying people to
produce Cook Inlet gas. Mr. Persily responded that the
amount was unknown; to calculate how much tax credit a
company could get he needed to know how much it would
invest in the inlet during the next ten years. The fiscal
effect would be a percentage of eligible expenses in future
years; if no one spends, the state pays no credits. If a
company finds gas, the state would come out ahead through
its royalty and production tax. In addition, there would be
the indirect benefit of more gas in Cook Inlet.
Mr. Persily responded to the second question regarding
whether the state could end up paying someone to produce
gas. He explained that the state would not end up paying a
producer. However, a company could possibly invest so much
in a single year that available tax credit for the year
would exceed production tax liability; in that case the
credit could be carried forward to a future year or
essentially refunded by the state. He added that regardless
of where a producer made the investment that earned the tax
credit, the credit would be applied to the company's tax
return for its total statewide production tax liability.
[Under state law, production taxes are assessed on the
value of a company's total statewide production, not
individual wells or fields.]
Co-Chair Stoltze regarded the measure as a tax credit for
constituents who are using natural gas. He believed the
ultimate subsidy was for the consumers in Southcentral. Co-
Chair Hawker agreed that corporate entities do not pay
taxes; consumers pay the taxes. The Cook Inlet is unique in
that the majority of the gas produced there is for Alaskan
consumption. The state needs a reasonable tax structure;
considerations are different than for larger projects aimed
at export.
Co-Chair Stoltze believed some would view the issue as a
Southcentral subsidy. Co-Chair Hawker agreed the political
argument could be raised. He asked members to be
"statesmanlike" and emphasized the number of citizens
affected. He stressed that nothing was being asked of the
state treasury in the bill; the measure intends to
incentivize third-party investment in Cook Inlet in order
to provide greater development of resources.
Co-Chair Stoltze viewed the measure as a consumer credit.
2:37:53 PM
Representative Doogan questioned who would take advantage
of the gas storage in the legislation. Co-Chair Hawker
responded that the issue was inventory management; part of
inventory management is who owns the inventory. He listed
possible alternatives:
· A public utility constructs its own gas storage
facility, acquires a lease, and develops the storage
facility that is operated as part of the utility;
· A public utility acquires gas under long-term purchase
contracts from a producer and further contracts with a
third-party storage owner/operator; or
· A producer needs a warehouse for their own produced
gas prior to meeting contractual delivery demands.
Co-Chair Hawker pointed out that the gas storage facility
investment tax credits in HB 280 are not available to a
producer developing storage capacity for their own gas. The
credits are available to a public utility that will benefit
the consumer.
Mr. Persily commented that Chevron and Marathon already
have their own gas storage facilities; they put the gas in
year-round and draw to meet contractual deliverability
requirements for utilities. He noted that such proprietary
storage would not get the incentives and would not be
regulated by the RCA under HB 280. The incentives and
regulation apply to open-access storage for utilities that
buy gas through contracts; the utilities pay for the
storage fee as an unbundled price.
Representative Doogan questioned whether pricing and
regulatory structure would be sufficient to assure that
consumers would not be paying a premium for the gas when it
comes out of the warehouse.
2:42:35 PM
Mr. Persily replied that a utility has to get the gas
contracts approved by the RCA. He stressed that a company
would only be able to charge the price they paid for the
gas plus the cost of storage; HB 280 would regulate the
cost of storage, while the utilities and gas supply
contracts are already regulated. The RCA would determine
whether the price was appropriate to pass on to the
consumer. The utility could determine how to deal with the
cost of storage service; for example, it could use a winter
surcharge, or spread the cost over the whole year. He
underlined that the utility cannot make a profit on the
gas.
Representative Doogan asked whether he meant to say a
utility cannot make "any additional profit on the gas." Mr.
Persily replied that utilities are not allowed to make any
profit on the gas. Co-Chair Hawker added that a long-term
supply contract by the regulated utility would be done
through the RCA.
Representative Doogan wanted further clarification
regarding consumers paying too much for the storage after
costs have been decided. Co-Chair Hawker replied that the
regulations and pricing structure work to assure that a
utility does not make a profit on gas. The utility makes
its earnings on invested capital in the transportation
system. He referred to an Institute of Social and Economic
Research (ISER) study showing that from 1996 to 2007,
consumer prices declined as utilities developed more
efficient transportation systems, but commodity prices
drove consumer prices up substantially.
Representative Doogan wanted people to have a clear idea of
what is being asked and what is being offered.
2:46:30 PM
Co-Chair Hawker assured him that the receipt of any
financial advantage is under RCA regulation.
Representative Gara queried the change in the tax credit
from 30 percent to 40 percent. He questioned whether a
larger tax credit would result in more production; he
believed the lack of long-term contracts has deterred
exploration in Cook Inlet, not tax rates. Co-Chair Hawker
replied that they would have to agree to disagree on the
point; some people believe industry can be motivated to
produce through taxes, and others do not. He felt that the
consumer benefited the most and new explorers/producers
would be attracted when government takes less from the
value of the resource.
Mr. Persily added that exploration in Cook Inlet is
increasingly costly as well as risky; he argued that the
state paying more in tax credits was cheaper than
subsidizing fuel or paying towards a gas pipeline if there
is not enough gas in Cook Inlet.
Co-Chair Hawker noted that the 40 percent credit is not new
but makes the existing tiered 30/40 percent credit (crafted
for the North Slope) more appropriate to Cook Inlet.
2:50:39 PM
Representative Gara wanted evidence that more tax credit
would mean more gas. He did not think it was fair to say
the people in Southcentral would suffer if more tax credits
are not offered. He pointed out that there has not been
enough exploration in Cook Inlet in spite of extensive tax
relief granted in the last ten years through exemption from
ACES and PPT, as well additional tax credits for Cook Inlet
exploration. He questioned adding another form of tax
relief before analyzing how the past ten years of tax
credits have worked. Co-Chair Hawker replied that Cook
Inlet has not been granted tax relief; exempting the basin
by allowing retention of the existing tax structure had
been determined to be in the best interest of the region's
consumers.
Co-Chair Stoltze added that people in Chugiak and Wasilla
believed the state did not require as much.
Co-Chair Hawker stated that attracting capital is about
being competitive. He believed the basin would be more
attractive to investors through elimination of the Cook
Inlet penalty and the 30/40 percent tier.
Representative Gara requested a history of Cook Inlet tax
credits adopted in the past decade. Mr. Persily replied
that he would get the information.
Representative Gara did not think the bill reflected
discussion that production and exploration tax credits
would benefit consumers. Co-Chair Hawker explained that the
cost of the product to the utility is the basis of the rate
making; the less government takes, the less the consumer
will pay.
Representative Gara recalled a past argument made connected
to an RCA application about charging market or Henry Hub
rates without an adjustment for tax credits. He asked
whether there would be an adjustment for tax credits. Mr.
Persily replied that there is not a statutory, direct
dollar-for-dollar requirement that tax dollars flow
through; the tax rate is reflected in that the utilities
pay the production tax under Cook Inlet supply contracts.
2:55:59 PM
Representative Doogan noted that one part of the bill is
about gas storage and another is about incentivizing more
exploration in Cook Inlet. He asked whether there was a
reliable estimate of when the stored gas would not be
enough to meet the demand. Mr. Persily believed that the
utilities would need more gas around 2013 in order to meet
the need.
Co-Chair Stoltze pointed out that there have already been
some close calls. Co-Chair Hawker added that the situation
could be exacerbated if the production buffer provided by
the export facility is lost in March 2011. Co-Chair Stoltze
emphasized the seriousness of the issue.
Co-Chair Hawker MOVED to ADOPT Amendment 1 (26-LS1185\C.1,
Bullock, 3/10/10):
Page 7, following line 14:
Insert a new bill section to read:
"*Sec.7.AS 42.05.711 is amended by adding a new
subsection to read:
(q) The service of natural gas storage
furnished by operating a natural gas storage
facility that is (1) part of a pipeline facility
operated by a pipeline carrier, (2) part of a
natural gas pipeline facility operated by a
natural gas pipeline carrier, or (3) part of a
North Slope natural gas pipeline facility
operated by a North Slope natural gas pipeline
carrier is exempt from this chapter. In this
subsection, "natural gas pipeline carrier,"
"natural gas pipeline facility," "North Slope
natural gas pipeline carrier," "North Slope
natural gas pipeline facility," "pipeline
carrier," and "pipeline facility" have the
meanings given in AS 42.06.630."
Renumber the following bill sections accordingly.
Page 9, line 9:
Delete "for"
Co-Chair Stoltze OBJECTED for discussion.
Co-Chair Hawker explained that there is not law related to
gas storage facilities and that a regulatory distinction
needed to be made between storage facilities and gas
storage in something such as a pipeline (called "packing").
He informed the committee that Amendment 1 clarifies that a
gas storage facility that is part of a natural gas pipeline
and already regulated under the RCA is not subject to
regulation under HB 280, which intends to create storage
facilities in order to meet consumer demands.
3:00:38 PM
Mr. Persily expanded that the language in the amendment was
drafted by Mr. Goering, the Assistant Attorney General
assigned to the RCA. Mr. Goering had felt clarification was
needed for two sections of RCA regulation: AS 40.205
(utilities, under which gas storage would be regulated),
and AS 40.206 (which regulates pipelines). Mr. Goering felt
the bill referred to a storage facility that is part of a
regulated natural gas pipeline under 40.206 and does not
need to be regulated a second time under 40.205.
Co-Chair Stoltze queried the removal of the word "for" on
page 9, line 9. Co-Chair Hawker replied that the language
was preferred by the Department of Revenue.
Co-Chair Stoltze WITHDREW his OBJECTION. There being NO
further OBJECTION, Amendment 1 was ADOPTED.
Co-Chair Hawker MOVED to ADOPT Amendment 2 (26-LS1185\C.3,
Bullock, 3/16/10):
Page 15, following line 9:
Insert a new subsection to read:
"(o) For the purposes of (m) and (n) of this
section, a Cook Inlet well lease expenditure is a
lease expenditure that is incurred in the Cook Inlet
sedimentary basin that is directly related to a well.
A lease expenditure is directly related to a well if
(1) during exploration and development, the lease
expenditure is characterized as an intangible
drilling and development cost under 26 U.S.C.
263(c) (Internal Revenue Code) or 26 C.F.R.
1.612-4 regardless of any election made under
those provisions;
(2) during production, the lease expenditure is an
expenditure that is directly related to the
processes of operating a well and moving fluids
to the assembly of valves, pipes, and fittings
used to control the flow of oil and gas from
the casinghead, but does not include the
processes of gathering, separating, and
processing well fluids downstream from that
assembly;
(3) it is an overhead expenditure authorized under
AS 43.55.165(a)(2) for exploring for,
developing, or producing, as applicable, the
oil or gas deposits, or an expense for seismic
work conducted within the boundaries of a
production or exploration unit."
Co-Chair Stoltze OBJECTED for discussion.
Co-Chair Hawker explained that the amendment provides a
clear definition of Cook Inlet well lease expenses. He
pointed to vagueness in current law that needs to be
addressed. The amendment focuses on IRS rules for
determining eligible well expenses.
Co-Chair Stoltze WITHDREW his OBJECTION. There being NO
further OBJECTION, Amendment 2 was adopted.
3:03:47 PM
Co-Chair Hawker wanted to discuss an amendment that had not
yet been drafted. He believed DNR would object to the
amendment, and that he did not view the department as
amenable to furthering the production of Cook Inlet gas. He
explained that the undrafted amendment related to
proprietary storage lease operations, particularly
connected with gas storage.
Co-Chair Hawker listed three storage scenarios:
· A regulated public utility owns and operates storage;
· Open-access third-party storage is offered for a
price; or
· An investor in Cook Inlet builds a warehouse for their
own benefit, not available to the public on a third-
party basis.
Co-Chair Hawker reminded the committee that HB 280 is
crafted so that either open-access third-party storage or
utility-owned storage gets the benefits of the incentives,
but would be subject to regulation.
Co-Chair Hawker referred to a DNR decision to not permit
proprietary storage; the department wanted open-access
storage. He felt the decision was unfair and an over-
application of regulatory authority. He also believed the
position violates an important free-market principle: the
state grants exploration/production leases to an entity and
then tells the entity it cannot build the assets it
believes are commercially reasonable, appropriate, and
necessary to operate the business of developing the state's
natural resources.
Co-Chair Hawker informed the committee that his proposed
amendment would specifically allow third-party proprietary
storage and say that DNR may not deny an application for a
lease solely on the grounds that it would be used
exclusively for the entity's own product. He believed the
amendment would protect investors in Cook Inlet and at the
same time not compromise what the bill is attempting to
accomplish by creating incentives for open-access storage.
Co-Chair Stoltze wanted DNR to testify before the full
committee. He thought the proposed amendment would raise
policy questions.
3:08:11 PM
Representative Gara requested an analysis of HB 280 by both
DNR and REV.
Co-Chair Stoltze reported that he had issued invitations.
He wanted committee members to have the testimony needed.
HB 280 was HEARD and HELD in Committee for further
consideration.
3:10:47 PM AT EASE
3:14:40 PM RECONVENED
HOUSE BILL NO. 273
"An Act relating to general grant land entitlements
for the City and Borough of Wrangell; and providing
for an effective date."
3:14:48 PM
REPRESENTATIVE PEGGY WILSON, SPONSOR, explained that HB 273
would increase the land entitlement to the City and Borough
of Wrangell, correcting a deficit in the borough formation
process. She noted that the state grants state land to
support the development of a new borough.
Representative Wilson detailed that Wrangell's original
entitlement in 2008 was only 1,952 acres. Negotiations with
the Department of Natural Resources (DNR) resulted in an
agreement regarding acreage; however a new amendment was
required to bring the total entitlement to 9,006 acres. The
additional acreage would allow the City and Borough of
Wrangell to select the Sunny Bay section of the Cleveland
Peninsula. She emphasized that the land is important to
provide for the needs of the borough and to address the
economic, cultural, and resource-based goals of the
residents. The parcel was not included originally because
boundaries had not been set.
Representative Austerman asked whether the requested parcel
was connected to the rest of the borough's land.
REID HARRIS, STAFF, REPRESENTATIVE PEGGY WILSON, replied
that Wrangell is on an island, but the borough encompasses
other pieces.
Representative Austerman queried the proximity of the
proposed land to the existing borough. Mr. Harris replied
that a boat was needed to access the parcel.
3:19:15 PM
STEVE PRYSUNKA, DIRECTOR, ALASKA CROSSINGS, WRANGELL, spoke
to concerns regarding the legislation. He testified as
representative of a large community-service organization in
Wrangell that provides medical, dental, pharmaceutical, and
therapeutic services to the surrounding areas. Alaska
Crossings also runs the largest wilderness therapy program
in Alaska. About 250 Alaskan young people travel to a
floating facility off Deer Island, a renovated logging camp
moored near the island.
Mr. Prysunka told the committee that the area under
consideration on Cleveland Peninsula is important to Alaska
Crossing's operation. The waters are protected and can be
used by the kids. He was concerned about the potential for
development in the area. He stressed that Alaska Crossings
with 85 employees is the largest employer in the community
and has been a significant financial contributor to the
local economy. He noted that there are not other mooring
options in the borough for the floating facility.
MARK GALLA, OWNER/OPERATOR, ALASKA PEAK & SEAS, WRANGELL,
spoke in opposition to the legislation. He explained that
he runs a guide/charter operation out of Wrangell. He was
concerned about development in the land selection, such as
logging or construction, which would severely limit his
operations, especially brown bear hunting.
Mr. Galla emphasized that development of the area would
displace him from the area; the parcel covers over 30
percent of the area he operates in and would result in a 30
percent negative impact to his business. He stated his
support of Wrangell acquiring the piece of land to better
serve the community.
3:25:19 PM
Vice-Chair Thomas noted that the borough would have
jurisdiction over the area and could make land-use
decisions, including to log. Mr. Galla understood, but
hoped the borough would consider the interests of small
businesses such as his.
CAROL RUSHMORE, ECONOMIC DEVELOPMENT DIRECTOR, CITY &
BOROUGH OF WRANGELL (via teleconference), testified in
support of the legislation. She strongly stressed the
importance of the entitlement for long-term economic
sustainability in the borough. She pointed out that the
borough has been negotiating with DNR regarding the
additional entitlement; agreement had been secured related
to the 6,506 acreage amount. However, the Sunny Bay parcel
on the Cleveland Peninsula never came up during
negotiations because of inadequate information from DNR
regarding the possibility of selecting the area.
Ms. Rushmore informed the committee that in 2005, when the
University of Alaska land bill had come forward, Wrangell
had lobbied successfully to have three other areas within
the proposed borough set aside for possible selection.
However, after the 2005 land bill passed, Meyers Chuck
approached Wrangell about becoming part of the forming
borough instead of the Ketchikan borough (which was going
through an annexation process at the same time). In
response, the borough boundary line was modified to include
part of the Cleveland Peninsula. She emphasized the
importance of Meyers Chuck to the borough and requested the
additional acreage.
Vice-Chair Thomas noted that Amendment 1 would address the
issue.
3:28:13 PM
TIMOTHY ROONEY, MANAGER, CITY & BOROUGH OF WRANGELL (via
teleconference), stated that the borough is interested in
the area for its economic potential and benefits. He
reported that the borough is working closely with Alaska
Crossings and local businesses on current and future
potential use of the area, and noted that Meyers Chuck
residents use it for recreation and subsistence.
Representative Wilson read a paragraph from the third page
of a handout, "Section 14.40.365. University land grant"
(copy on file):
(o) Notwithstanding (a) of this section, the state
land identified in this subsection and described in
the document entitled "University of Alaska Land Grant
List 2005," dated January 12, 2005, may not be
conveyed by the University of Alaska under this
section if the land is included in a borough formed
before July 1, 2009, that includes Wrangell or
Petersburg. If a borough is not formed before July 1,
2009, land described in this subsection shall be
conveyed to the University of Alaska on July 1, 2009.
If a borough is formed before July 1, 2009, and the
borough does not select land described in this
subsection before January 1, 2013, the land not
selected by the borough shall be conveyed to the
University of Alaska on June 30, 2013.
Representative Wilson reminded the committee that Wrangell
became a borough in 2008 and that the proposed portion of
Cleveland Peninsula was not on the list only because the
boundaries were unknown at the time. She noted that when
the university land grant became law, it was decided that
Wrangell would get first pick of the land.
Vice-Chair Thomas noted that the amendments would be
further discussed at a future hearing.
Representative Fairclough asked whether DNR would be
present to speak to the amendments.
3:32:33 PM
Vice-Chair Thomas CLOSED public testimony.
HB 273 was HEARD and HELD in Committee for further
consideration.
ADJOURNMENT
The meeting was adjourned at 3:34 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CSHB 273 Land Selection.pdf |
HFIN 3/17/2010 1:30:00 PM |
HB 273 |
| HB 273 - Yakatat Borough Acreage Press Release[1].pdf |
HFIN 3/17/2010 1:30:00 PM |
HB 273 |
| HB 273 Sponsor CS.docx |
HFIN 3/17/2010 1:30:00 PM |
HB 273 |
| Sunny_Bay_Area_Calcs2.pdf |
HFIN 3/17/2010 1:30:00 PM |
|
| HB 280 Pipeline Amendment #1.pdf |
HFIN 3/17/2010 1:30:00 PM |
|
| HB 280 (RES) Sponsor Statement.pdf |
HFIN 3/17/2010 1:30:00 PM |
HB 280 |
| HB 280 (RES) Sectional.pdf |
HFIN 3/17/2010 1:30:00 PM |
HB 280 |
| HB 280 (RES) Overview.pdf |
HFIN 3/17/2010 1:30:00 PM |
HB 280 |
| HB 280 (RES) Background.pdf |
HFIN 3/17/2010 1:30:00 PM |
HB 280 |
| Motion in support of additional land selection.pdf |
HFIN 3/17/2010 1:30:00 PM |
HB 273 |
| CSHB 273 amendment support letter.pdf |
HFIN 3/17/2010 1:30:00 PM |
HB 273 |
| Well lease expenditure amendment#2.pdf |
HFIN 3/17/2010 1:30:00 PM |
|
| HB 273 statute 2005 Univ. Land Grant.pdf |
HFIN 3/17/2010 1:30:00 PM |
HB 273 |
| HB 273 Cleveland Peninsula Map.pdf |
HFIN 3/17/2010 1:30:00 PM |
HB 273 |