Legislature(2013 - 2014)HOUSE FINANCE 519
04/13/2014 01:00 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB89 | |
| SB138 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 138 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | SB 140 | TELECONFERENCED | |
| + | HB 197 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 89 | TELECONFERENCED | |
| += | HB 287 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
April 13, 2014
1:05 p.m.
1:05:40 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 1:05 p.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Lindsey Holmes
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
Representative Mark Neuman, Vice-Chair
ALSO PRESENT
Joe Balash, Commissioner, Department of Natural Resources;
Michael Pawlowski, Deputy Commissioner, Strategic Finance,
Department of Revenue; Angela Rodell, Commissioner,
Department of Revenue.
SUMMARY
HB 89 AQUATIC INVASIVE SPECIES
CSHB 89(FIN) was REPORTED out of committee with a
"do pass" recommendation and with one new fiscal
impact note from the Department of Fish and Game,
one new fiscal impact note from the Department of
Natural Resources, one new zero fiscal note from
the Department of Revenue, one new zero fiscal
note from the Department of Environmental
Conservation, one new zero fiscal note from the
Department of Environmental Conservation, and one
new zero fiscal note from the Department of
Natural Resources.
HB 287 APPROVE TESORO ROYALTY OIL SALE
HB 287 was SCHEDULED but not HEARD.
CSSB 138(FIN) am
GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
CSSB 138(FIN) am was HEARD and HELD in committee
for further consideration.
1:06:29 PM
Co-Chair Stoltze addressed the fiscal notes for HB 89
before embarking on the presentation on SB 138.
HOUSE BILL NO. 89
"An Act relating to the rapid response to, and control
of, aquatic invasive species and establishing the
aquatic invasive species response fund."
Representative Costello discussed the fiscal notes attached
to the bill. She cited the new fiscal impact note from the
Department of Fish and Game (DFG) for $299.1 thousand in FY
15 and $154.9 thousand in FY 16. She noted the new fiscal
impact note from the Department of Natural Resources in the
amount of $94.1 thousand in FY 15 and was indeterminate for
FY 16 through FY 20. The remaining zero fiscal notes were
from the Department of Natural Resources (DNR), the
Department of Environmental Conservation (DEC), and the
Department of Revenue.
Representative Costello MOVED to REPORT CSHB 89(FIN) out of
committee with individual recommendations and the
accompanying fiscal notes. There being NO OBJECTION, it was
so ordered.
1:10:35 PM
AT EASE
1:12:29 PM
RECONVENED
CS FOR SENATE BILL NO. 138(FIN) am
"An Act relating to the purposes, powers, and duties
of the Alaska Gasline Development Corporation;
relating to an in-state natural gas pipeline, an
Alaska liquefied natural gas project, and associated
funds; requiring state agencies and other entities to
expedite reviews and actions related to natural gas
pipelines and projects; relating to the authorities
and duties of the commissioner of natural resources
relating to a North Slope natural gas project, oil and
gas and gas only leases, and royalty gas and other gas
received by the state including gas received as
payment for the production tax on gas; relating to the
tax on oil and gas production, on oil production, and
on gas production; relating to the duties of the
commissioner of revenue relating to a North Slope
natural gas project and gas received as payment for
tax; relating to confidential information and public
record status of information provided to or in the
custody of the Department of Natural Resources and the
Department of Revenue; relating to apportionment
factors of the Alaska Net Income Tax Act; amending the
definition of gross value at the 'point of production'
for gas for purposes of the oil and gas production
tax; clarifying that the exploration incentive credit,
the oil or gas producer education credit, and the film
production tax credit may not be taken against the gas
production tax paid in gas; relating to the oil or gas
producer education credit; requesting the governor to
establish an interim advisory board to advise the
governor on municipal involvement in a North Slope
natural gas project; relating to the development of a
plan by the Alaska Energy Authority for developing
infrastructure to deliver affordable energy to areas
of the state that will not have direct access to a
North Slope natural gas pipeline and a recommendation
of a funding source for energy infrastructure
development; establishing the Alaska affordable energy
fund; requiring the commissioner of revenue to develop
a plan and suggest legislation for municipalities,
regional corporations, and residents of the state to
acquire ownership interests in a North Slope natural
gas pipeline project; making conforming amendments;
and providing for an effective date."
JOE BALASH, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
related that SB 138 was the enabling legislation that
supported all of the concepts and documents that the
committee had been reviewing the last several weeks
regarding a major natural gas project. He stated that there
were a number of specific concepts and principles embodied
in the Heads of Agreement (HOA) and the Memorandum of
Understanding (MOU) that the state would pursue in the
Alaska liquefied Natural Gas project (AK LNG) agreements.
He reported that the department would provide a sectional
analysis and describe how the legislation provided the
tools for DNR, the Department of Revenue (DOR), and the
Alaska Gasline Development Corporation (AGDC) to accomplish
the agreements that had been outlined in the HOA.
MICHAEL PAWLOWSKI, DEPUTY COMMISSIONER, STRATEGIC FINANCE,
DEPARTMENT OF REVENUE, pointed out that the House Finance
Committee had listened to many hours of testimony from
consultants regarding the HOA and the MOU. He clarified
that the flow chart (copy on file) that was distributed to
members should have been referenced as originating from DNR
and DOR.
Mr. Pawlowski relayed that during his review of the
legislation, he would refer to the flow chart and sectional
analysis (copy on file) for HCS CSSB 138 (RES) provided to
the committee. He directed the committee's attention to
Section 1 of the legislation found on page 3, line 2.
Co-Chair Stoltze requested that during the presentation the
departments address prior concerns that had been raised
during the committee's public testimony on the bill.
Mr. Pawlowski agreed and noted that there were two
particular areas of concern that would be addressed during
the sectional analysis.
In response to a question by Co-Chair Austerman, Mr.
Pawlowski responded that he would be referring to language
in the bill, the sectional summary, and the Summary of
Changes (copy on file).
Mr. Pawlowski explained that previous discussions had
focused on the three "P's" that were necessary to advance a
liquefied natural gas (LNG) project. The enabling
legislation had to allow the state to participate in the
project, establish a process to negotiate the project's
enabling contracts, and define the percentage of the
state's share of the project. He pointed out that the bill
was broken up into three general areas; the first described
how the state would participate in the project. He spoke to
Section 1 of the bill and related that it amended AS
31.25.005, which were the powers and duties of AGDC as
enacted by the prior legislature. He related that HB 4
provided for narrow and targeted participation for the
state in a specific North Slope Gas project. He explained
that Section 1 expanded the powers of AGDC to perform a
dual mission and provided flexibility to the board to
advance the small diameter pipeline project and the large
scale AK LNG project. He cited page 3, lines 2 through 4 of
the bill:
…develop and have primary responsibility for
developing natural gas pipelines, an Alaska liquefied
natural gas project, and other transportation
mechanisms to deliver natural gas…
Mr. Pawlowski noted that it granted AGDC a broader purpose
as the "lead agency in developing the commercial agreements
as a public corporation." He related that subsections 2 and
3 were added to Section 1 to give AGDC further direction in
developing the projects for the purpose of delivering in-
state gas and provide economic benefits and revenue to the
state.
Mr. Pawlowski added that subsection 3, lines 9 through 11
authorized AGDC to:
…assist the Department of Natural Resources and the
Department of Revenue to maximize the value of the
state's royalty natural gas, natural gas delivered to
the state as payment of tax…
Mr. Pawlowski referenced subsection 4, page 3 beginning on
line 13 and pointed out that subsection 4 contained the
existing language from HB 4 related to advancing the in-
state natural gas pipeline and the new language in
subsection 5 advanced the Alaska Liquefied Natural Gas
Project (AK LNG). He pointed to a key provision of
subsection 5 on line 24 through line 28 and read:
…if the corporation provides a service under this
paragraph to the state, a public corporation or
instrumentality of the state, a political subdivision
of the state, or another entity of the state, the
corporation may not charge a fee for the service in an
amount greater than the amount necessary to reimburse
the corporation for the cost of the service…
Mr. Pawlowski elaborated that the administration requested
the language to explicitly prohibit AGDC from profiting
from its services to the state. He continued with Section 2
on page 4 and stated that it provided conforming language
to the structure of AGDC and recognized that AGDC was
acting in the "best interest" of the state for the purposes
delineated in Section 1. In addition, on page 4, line 19
the language reiterated that AGDC would have a dual mission
to advance an in-state natural gas pipeline or the AK LNG
project.
Mr. Pawlowski moved to Section 3 beginning on page 4, line
21, which was new and removed a provision from the original
HB 4 legislation that allowed the Commissioner of
Department of Natural Resources (DNR) and the Commissioner
of Department of Revenue (DOR) to serve on the AGDC board
after the project under the Alaska Gasline Inducement Act
(AGIA) had been abandoned. The original language bracketed
on page 4 lines, 27 through 31 was deleted. He detailed
that the prohibition recognized a potential conflict in the
relationship between DOR and DNR as gas owners utilizing
the services of the corporation [AGDC] that provided the
services. He ensured the committee that the legislation
contained language in later sections that established a
working relationship between the departments and AGDC in
order to advance the project together.
1:24:04 PM
Mr. Pawlowski turned to the newly added Section 4 beginning
on page 5, lines 1 through 5 and pointed out that the
section contained clarifying language that "a public member
of the AGDC board was not required to be or has been a
registered voter, and was not required to reside in the
state."
Mr. Pawlowski related that Section 5 beginning on page 5,
lines 6 through 22 was a new section related to the powers
of AGDC and that it added some important parts. He noted
that the language on page 5, line 8 directed the board to:
…maximize the efficient use of state resources…
Mr. Pawlowski explained that since AGDC was advancing two
projects the administration guided the board to avoid
duplicative expenditures for the state when possible.
Conversely, subsection 2, beginning on line 9 mandated that
AGDC:
…establish appropriate separation within the
corporation…
Mr. Pawlowski explicated that the board needed to maintain
"appropriate firewalls" between the sensitive information
of two projects "not governed under the cooperation
agreements." He furthered that subsection (d) on page 5,
lines 15 through 19 authorized the board to appoint program
directors for the two projects that reported to the AGDC
executive director.
Mr. Pawlowski examined Section 6 on page 5, beginning on
line 22. He stated that the section amended the provisions
regarding legal counsel for AGDC and Section 7 contained
the "substantive" changes. He acknowledged that the
Department of Law (DOL) provided the commercial attorneys
and commercial and technical expertise for the negotiation
process. He elaborated that Section 6 and 7 intended to
recognize that the AK LNG project was a larger endeavor
that required collaboration between the different agencies.
The administration wanted unified legal counsel for the
multiple agreements involved in the negotiations. He noted
that AGDC retained the authority to retain legal counsel and
that Section 7 clarified that the attorney general was the
counsel for AGDC when involved in the development of
contracts for AK LNG. The attorney general would provide
legal counsel to DOR, DNR, and AGDC to maintain "a unified
legal voice."
Mr. Pawlowski cited page 5, line 31 to page 6, line 1 and
specified that the attorney general must consult with AGDC
when procuring outside counsel for legal services.
Typically, DOL contractually retained outside counsel that
were experts from exceptional law firms to provide legal
support for negotiations.
Mr. Pawlowski related that Section 8 contained clarifying
language that added references for the powers and duties of
AGDC in relation to the AK LNG project where needed.
Mr. Pawlowski stated that beginning on page 8, line 13 the
legislation included the addition of a new power and duty
in subsection 23 that granted AGDC the power to be directly
involved in liquefaction. He stated that subsequent to the
passage of HB 4 there had been a question whether AGDC
could be primarily involved in liquefaction. The bill
authorized AGDC to convey "the state's interest in the
liquefaction plant." Subsection 23 gave AGDC the authority
to acquire an ownership or participation interest
specifically in the Alaska Liquefied Natural Gas Project.
He related that subsection 24 on page 8 beginning on line
15 granted AGDC the authority to enter contracts for
services related to the AK LNG project after consultation
with the commissioners of DOR and DNR. The language
clarified that the consultative relationship between the
agencies and AGDC would be maintained prior to the
execution of contracts. He noted that the bill contained
similar language in relation to both commissioners' powers.
In response to a request by Co-Chair Stoltze, Mr. Pawlowski
responded that the commercial agreements AGDC would enter
into related to the described sections would not need
subsequent legislative authorization but would require
legislative appropriations. He voiced that advancing the
project required the "commitment of capital." The
legislative oversight for the commercial agreements would
be maintained through the appropriation process. He
reminded the committee that AGDC would enter into the
contracts after consultations with the state agencies
clarified on page 8, line 20. He noted that the contracts
were dependent on the gas committed by the agencies. The
agreements to commit the gas for the LNG plant would be
entered into through the commissioner of DNR and would
require legislative approval on an individual basis. The
administration attempted to build checks and balances but
the AGDC commercial contracts were a corporate activity
with board oversight and "not necessarily a state
disposition."
Mr. Pawlowski spoke to Section 9 of the bill and explained
that the section clarified that the requirement for AGDC to
submit a report to the legislature subsequent to an open
season specifically applied to the in-state natural gas
pipeline open season currently in AGDC statutes. The AK
LNG project did not have an open season. He moved to
Section 10 found on page 9, lines 7 through 10 and
elaborated that AGDC's authority to be involved in
liquefaction was limited to the AK LNG project.
Mr. Pawlowski referenced Section 11 on page 9, lines 11
through 15 and stated that the provision enabled AGDC to
share information with the commissioners of DOR and DNR
related to the AK LNG project negotiations "subject to the
limitations of confidentiality agreements." He cited the
statute on line 15; AS 38.05.020(b)(10) and AS
38.05.020(b)(11) and pointed out that the statute was the
broad reference that granted authority to the commissioners
to negotiate contracts. He related that Section 13, line 9
established a specific fund for the AK LNG project as a way
to advance the project and maintain legislative oversight.
Therefore, Section 12 on page 9, lines 26 and 27 was
necessary to clarify that money appropriated to the in-
state natural gas pipeline fund was used solely for
advancing the in-state gas pipeline project and maintained
the separation of assets.
1:37:38 PM
Mr. Pawlowski addressed Section 14 on page 10, line 12 that
revised AGDC's authority to create subsidiaries that were
"used as a corporate tool" to advance projects. The
bracketed language on page 10, line 25 that cited AS
10.20.146 through AS 10.20.166, which may have been read to
limit subsidiary formation to not for profit subsidiaries,
was removed from statute. He related that AGDC may use any
"subsidiary mechanism" that could advance the AK LNG
project. In addition, the language on page 10, lines 17 and
18 that related to the state's share of royalty natural gas
was eliminated. The amendment clarified that AGDC may
create subsidiaries for the advancement of the project and
provide infrastructure, but the state agencies (DOR and
DNR) "retained its role as the constitutional custodian of
the state's royalty or tax resource."
Mr. Pawlowski identified Section 15 on page 11, lines 6 and
7 and lines 21 and 22 that made a conforming amendment to
AGDC's budgetary reporting to the legislature to include
the AK LNG project. He reported that Section 16 added a
definition of the Alaska liquefied natural gas project
according to the HOA and MOU agreements. He summarized that
Sections 1 through 16 were the provisions related to AGDC
which reflected how the state would participate in the
project; AGDC will act as the state's corporate entity.
Mr. Pawlowski discussed Section 17 beginning on page 12,
line 28 related to exemptions to the application of the
state procurement code AS 36.30.850(b). The amendment
exempted contracts for professional and technical services
by the DNR and was added in support of AS 38.05.020(b) (10)
and AS 38.05.020(b) (11) related to the authority of the
commissioners to negotiate contracts.
Commissioner Balash related that highly specialized work
would be conducted subsequent to adoption of the
legislation and required aggressive timelines. In addition,
the department needed some latitude that was not contained
in the procurement code when evaluating contractors. He
felt that under the "magnitude of the project," the
department did not want to be constrained by choosing the
lowest bidder in every situation. He pointed out that in
cases of some of the "upstream work" related to off take
and balancing agreements and "downstream" work involving
the management of capacity and "disposition" of the state's
share of natural gas and LNG the department needed the
flexibility to work "quickly and nimbly" and exercise
discretion when evaluating potential bidders. He believed
the amendment was a "fairly narrow crafting of the
exemption."
Mr. Pawlowski noted that there was an additional exemption
for DOL on page 13 beginning on lines 1 through 5.
Mr. Pawlowski reviewed Section 18 starting on page 13,
lines 6 through 25 that established the Alaska Affordable
Energy Fund as a special non-dedicated account in the
general fund used to develop infrastructure for the
delivery of energy to areas in the state without direct
access to a North Slope natural gas pipeline. He offered
that there were areas in the Railbelt that were relatively
far from direct access to the gas. The language recognized
that not all parts of the state would have direct access to
the resource. The fund helped provide resources for the
infrastructure to deliver energy commensurate with the
areas of the state with direct access to natural gas. He
stated that the amount designated in the fund was found in
subsection (b), line 14 and amounted to 20 percent of the
money received from the state's royalty gas after payments
to the Alaska permanent fund under AS 37.13.010. He
reminded the committee that the project's deposits into the
permanent fund resulted from royalty gas as a share of gas
that would be liquefied and portions would be exported. The
revenues DNR received after the payment of costs would be
the royalty revenue. Twenty five percent of the royalty
revenue would be deposited into the Permanent Fund and the
Alaska Affordable Energy Fund would receive 20 percent out
of the remaining 75 percent of the royalty. He estimated
that the energy fund would receive $180 million per year.
Mr. Pawlowski remarked that the next several sections of
the legislation focused on the process. He moved to Section
19, beginning on page 13, line 26 that amended AS
38.05.020(b); the Alaska Land Act and expanded the powers
of the commissioner of DNR. He stated that the substantive
changes began on page 14, subsection 10. The subsection
allowed the DNR commissioner to enter into commercial
agreements of not more than two years duration for project
services related to a North Slope Natural Gas project. The
agreements would not require legislative approval. The
agreements were "operating agreements" that governed the
project while the "firm agreements" that advanced the
project were developing. He noted that the operating
agreements and the "precedent agreement" with TransCanada
governed the project during the two years of the PreFeed
(pre-front-end engineering and design work) phase prior to
the firm transportation services agreement, which actually
was the full commitment to TransCanada. He added that the
principle level agreements between DNR and the producers
relating to off-take were interim agreements and would not
come back to the state for approval.
1:50:54 PM
Commissioner Balash noted that Co-Chair Stoltze had
instructed the department to highlight concerns that had
been previously raised in public testimony. He related that
the amendment granted the department the authority to enter
into the agreements in the near-term. Once the project was
operational the department retained the ability to deal
with short-term needs such as a disruption in service. The
longer-term contracts that obligated the state for long
periods of time, as specified in subsection 11 required
legislative approval. He pointed to subsection 12 on page
15, line 7 and noted that the provisions allowed DNR to
enter into confidentiality agreements with other project
entities that required the information remained
confidential until the contracts were ready for public
review and approval. He cited Page 15, line 12 and relayed
that the terms of a proposed final contract must be made
available to the public at least 90 days before the
proposed effective date. He added that beginning on line 17
the confidentiality agreements allowed the commissioner of
DNR to share confidential information during the contract
negotiation process with the legislature in executive
session.
Co-Chair Stoltze requested that the commissioner describe
for the public what confidentiality agreements were.
Commissioner Balash replied that as various contract
options were considered with commercial entities
confidentiality agreements would be entered into in order
not to avoid compromising or exposing the entities position
and negotiating strategies to its competitors. He stated
that the department's goal was to bring forward contracts
that would be approved by the legislature and that if it
was to be successful, the department had to confer with
both legislative bodies regarding the terms of the contract
to determine the confines of acceptability for the
legislature.
Mr. Pawlowski added that the administration understood the
need for guidance from the legislature and the ability to
interact with the legislature and its agents in order to
move the process forward. He pointed to Page 15, lines 17
through 21 and stressed the importance of the
administration's ability to confer with the legislature,
its agents, staff, or consultants and keep the information
updated. He believed the provisions invited the legislature
to have an active role in the development of the project as
it unfolds. He added that on page 15, lines 22 through 26
the provision directed the DNR commissioner to consult with
AGDC on specific contracts related to project services for
gas treatment, the gas treatment plant, the pipeline,
liquefaction facility, marine terminal, and transportation
services.
Mr. Pawlowski addressed Section 20 on page 15, line 29 and
noted that it amended Section 19. He indicated that the
bill contained two series of effective dates. One is an
immediate effective date that authorized confidential
negotiations and the other effective date was January 1,
2015 related to tax provisions. On page 17, lines 29
through 31, Section 20 allowed the DNR commissioner, in
consultation with the DOR commissioner, to take custody of
gas delivered to the state under AS 43.55.014(b), to manage
project services for the gas. The provision created
efficiency in allowing the DNR commissioner to manage tax
gas on behalf of the state while managing royalty gas. All
of the same precedents and conditions on tax gas applied to
royalty gas.
Commissioner Balash interjected that DOR would absorb the
management costs of the provision on behalf of DNR.
Mr. Pawlowski reported that Section 21 contained additions
to some of the agreements and contracts under AS
38.05.020(b) (11). He reminded the committee that the
statute referred to the contracts that would need
legislative approval for a specified duration of time. He
delineated that the section required that any agreement or
contract negotiated under 38.05.020(b) (11) granted the
state access to the data developed under the contracts if
the commissioner of DNR determined the project was not
adequately progressing. The state's terms of access should
not be more restrictive than any other party to the
agreement. He read the language on Page 18, lines 13
through 15:
(b) A proposed agreement or contract associated with a
North Slope natural gas project may not include a
provision that changes a payment in lieu of property
tax on property that was previously taxable under AS
43.56.
Mr. Pawlowski explained that AS 43.56. was the statewide
oil and gas property tax statute. Article 9, Sections 3 and
4 of the Alaska Constitution clearly stated that exemptions
to property tax were provided by law not by contract. The
administration added the limiting language to assure
municipalities that the administration was not attempting
to make property tax changes that were prohibited by the
Constitution. He added that the governor established a
municipal advisory group via administrative order. The
advisory group was comprised of mayors or their designees
and would engage in an open public process to discuss the
property tax issues related to the project, such as payment
in lieu of tax and impact payments designed to address the
infrastructure impact on municipalities. The administration
would bring the advisory group recommendations back to the
legislature for authorization of any necessary statute
changes before engaging in property tax contract
negotiations.
2:06:29 PM
Mr. Pawlowski related that Section 22 on page 18, beginning
on line 16 was conforming language to a DNR exploration
incentive credit. The broad production tax (AS 43.44) cited
on line 28 was deleted and replaced with AS 43.55.011 (the
traditional payment of production tax). The section
clarified that a credit could be levied against AS
43.55.011 but not against a payment where the state
received a share of gas as royalty. The situation appeared
in several other sections throughout the bill related to
the film tax credit and some education credits. He
summarized that if a producer was paying its tax with gas
the credits could not be used to offset a tax payment.
Mr. Pawlowski turned to Section 23 beginning on page 19,
line 1. He pointed out that the section permitted the DNR
commissioner to propose modifications to existing leases
that related to switching between taking royalty gas in kind
or in value, provided a method to establish a fair market
value, and clarified what must happen before the
commissioner can make changes to the lease. He noted that
page 18, lines 21 through 24 allowed the modification of
net profit sharing and sliding scales unless they transfer
value. The commissioner must determine that the rate
yielded the same value under the terms the state would have
received before a modification.
Commissioner Balash emphasized that the section of statute
was giving the commissioner of DNR the authority to modify
leases. He reported that DNR had leases in place for over
50 years and a great many of those involved in the project
had been in place since the original sale in 1969 at
Prudhoe Bay. The department could only go as far as the law
allowed in making changes to the leases. He voiced that AS
38.05.180 (hh) [Section 23 of the bill] authorized the
commissioner of DNR to modify leases under very specific
circumstances following the determination process specified
in AS 38.05.180 (ii). The authorities granted the
commissioner needed to be broad enough to accommodate any
variety of circumstances. The department could not predict
what other projects would present themselves in the future.
Commissioner Balash referenced DNR's ability to switch back
and forth between in kind and in value. He explained that
LNG was sold under very specific long-term agreements. He
expected that the AK LNG contracts would be long-term. The
state's ability to switch options needed to be constrained
in order to avoid commercial instability that created a
lower price climate. Currently, the state had 90 and 180
day options to switch. He believed that under certain
circumstances the state wanted to retain the right to
switch albeit, under longer periods of time and in other
circumstances the state would want to permanently modify
the right to switch. He noted that Section 24 repeated the
modifications to the commissioner's authority on lease
changes related to gas delivered to the state under AS
43.55.014 found on Page 20, line 21.
Commissioner Balash spoke to Section 25 on page 21, lines 4
through 12 that amended AS 38.05.182. He expounded that the
original statute directed DNR to take all of the states
resource royalties in value except for oil and gas. He
observed that the statute directed DNR to take its gas in-
kind unless the commissioner finds that taking the royalty
in value was in the state's best interest. He mentioned a
study DNR conducted last year that determined a number of
risks were associated with taking gas in kind and could
eventually lead to a finding that taking gas in kind was
not in the best interest of the state. He qualified that
the department was aware of the issues with taking gas in
kind and held discussions with the counterparties involved
in the project. The issue was viewed as a "major stumbling
block". He expressed major concerns with the state's
ability to manage capacity, market LNG, and receive a price
equal to the state's counterparties. The issue was
addressed in the HOA in 8.3.1 wherein each of the companies
individually agreed to negotiate disposition agreements at
the state's request. The agreements allowed the state to
leverage the producers marketing expertise and sales
agreements to sell the state's share of the LNG.
2:17:00 PM
Commissioner Balash stated that in some instances it could
be more beneficial for the state to market its LNG
independently. He cited the new language on page 21, lines
8 through 12 that read:
It is not in the best interest of the state to take
royalty on gas in money from a lessee transporting gas
in the North Slope natural gas project if the lessee
has committed to dispose of or market the state's
royalty gas taken in kind on the same terms and
conditions as the lessee markets or disposes of the
lessee's gas.
Commissioner Balash reported that the language was added in
the previous committee in an attempt to add limits to the
circumstances under which the state takes its royalty in
kind. He thought that the issue might be better addressed
or improved through the House Finance Committee process. He
pointed out that the HOA contemplated the risk and
addressed mechanisms to mitigate the risk for the state. He
thought that better language could be crafted that provided
"sideboards" and established a comfort level for the
legislature and public regarding the circumstances under
which the state would take its gas in kind.
Mr. Pawlowski turned to Sections 26, 27, 28, and 29, that
added language that referenced AS 43.55.014(b); the statute
that allowed production tax to be paid in kind. He
explained that each section governed how DNR disposed of
royalty gas. The disposition and sale of tax gas would be
governed exactly the same as the disposition and sale of
oil. The bill was leveraging the same statutory precedents
regarding the disposition of gas in kind.
Mr. Pawlowski moved to Section 30 on page 22, line 26
through page 23, line 6 and reported that the section added
definitions employed throughout the section. He directed
attention to the definition for "project services" found on
page 23, line 4. He explained that the definition was used
in the definition of "consultation" between DNR and AGDC.
He read the language, "services provided by a gas treatment
plant, pipeline, liquefaction facility…" and noted that the
language reflected the types of agreements such as, the
firm transportation services agreement with TransCanada;
subject to legislative approval for use of a pipeline. He
interjected that the contract allowing the state's use of
the LNG plant would occur between the state and AGDC and
was also subject to legislative review and approval.
Mr. Pawlowski related that Sections 31, 32, and 33 were
conforming amendments to DNR. He explained that agencies
must expedite a review on permit applications from any AGDC
project.
Mr. Pawlowski indicated that Section 34 dealt with DOR. He
reiterated the process of the agreements outlined in the
legislation. He exemplified the relationship between the
state and TransCanada and detailed that if SB 138 passed,
the state would enter into a precedent agreement using AS
38.05.020b (10), which limited the agreement's duration to
two years. Subsequently, a term sheet attached as "Exhibit
C" to the MOU would be used to create operating agreements
between the state and TransCanada. He addressed some key
items in the MOU. He detailed that the state would approve
the work plan and budgets according to the terms contained
in the term sheet and the relationship set up by the
precedent agreement. The initial PreFEED stage of the joint
venture agreement was a cost sharing activity. The state,
in consultation with AGDC would review plans submitted by
TransCanada and approve or deny expenditures. The precedent
agreement would also commit the state to paying for
development costs plus the AFUDC (allowance for funds used
during construction) [a rate of 7.1 percent]. He reminded
the committee that the development costs were the costs the
state would have encumbered if it developed the project
alone. A comparable agreement would be struck with AGDC
over the LNG portion of the project. The next step in the
process was development of a firm transportation services
agreement between TransCanada and AGDC lasting more than
two years and governed under AS 38.05.020b (11), which
required legislative approval. He restated that as the
agreements were developing the legislation granted the
administration authority to consult directly with
legislators. He believed that when the final contracts were
presented to the legislature for approval 90 days before
the effective date, the agreements would withstand public
scrutiny.
2:27:30 PM
Mr. Pawlowski communicated that the rest of the
legislation's focus was on the state's percentage of the
project related to the tax sections under DOR. He indicated
that the legislation was establishing a tax rate up front
which provided predictability for investors. How the
contract terms related to the tax rate would be developed
with the legislature and the public through the process
established in the legislation.
Mr. Pawlowski turned to Section 34 beginning on page 23,
line 28 that exempted DOR from confidentiality related to
information under AS 38.05.020(b) (12), which enabled DNR
to share information with DOR. He reported that Section 35
on page 24, line 11 required public notifications on any
taxes paid as gas and would be noticed in the Revenue
Source Book. The administration believed that receiving gas
in kind needed to be a transparent process.
Mr. Pawlowski addressed Section 36 on page 26, lines 26
and 27 that contained conforming confidentiality language
under AS 38.05.020(b) (11) and AS 38.05.020(b) (12)
relating to the commissioner of DOR.
Mr. Pawlowski observed that Section 37 related to the
duties of the commissioner of DOR. He cited page 28, line 1
that modified the powers of the commissioner of DOR to
consult with the DNR commissioner on the management of
contracts and the management of tax as gas.
Mr. Pawlowski spoke to Section 38 on page 29, lines 11
through 14 relating to AS 43.55.014(b), the reference to
tax as gas, which was a conforming amendment to a
previously amended section. He noted that throughout the
legislation, there were two core sections; AS 38.05.020(b)
(10) and AS 38.05.020(b) (11) concerning the powers of the
DNR commissioner to negotiate, and AS 43.55.014(b)
providing for gas in kind. The majority of the rest of the
sections were conforming to the two concepts and the
references to the statutes were repeated throughout the
legislation.
Mr. Pawlowski moved to Section 39, page 29, line 15 that
exempted the taxpayer confidentiality provisions and
allowed the department to disclose the taxpayer's name
paying the production tax in gas, the amount of gas, and
the lease the production came from.
Mr. Pawlowski addressed Section 40 that amended the
corporate income tax statutes to conform to paying tax in
gas. He cited page 30, lines 1 through 6 that affected the
sales factor of the state's corporate income tax and
explained that subsection (ii) clarified for the taxpayer
that DNR would not "deem" the payment of tax as a sale.
Similarly, the state does not tax "inter-company"
transactions as sales. He noted that subsection (iii) on
page 30, line 4 clarified that the fees on the project were
not sales on corporate income tax.
Mr. Pawlowski drew attention to Section 41, page 31, lines
2 through 3 that clarified gas paid as a tax was included
in the extraction factor. He elucidated that the payment of
gas as tax was still produced gas and the administration
wanted the gas included in the corporate income tax.
Section 41 "ensured an adequate and appropriate share of
corporate income tax for the state." He commented that
Section 42 amended the actual production tax AS
43.55.011(e), on page 31, line 31, and read "…on and after
January 1, 2022…" He shared that after 2022, the tax on oil
remained at 35 percent provided for in SB 21 [OIL AND GAS
PRODUCTION TAX - Adopted 2013] but the tax on gas would
change to 13 percent of the gross value at the point of
production. He delineated that the administration had
selected 2022 in order to allow the tax ceiling on gas
produced on the North Slope and used in-state and subject
to the same tax ceiling as Cook Inlet gas tax to expire as
specified in statute. Taxes on gas were transferred through
the sales contract on to rate payers. Currently, North
Slope gas was contractually involved to supply the Interior
energy project. The administration did not want to increase
the cost of the contracts. In addition, the administration
wanted to provide a predictable planning environment for
both the in-state and AK LNG project so investment
decisions would not be affected in the future. He qualified
that the 13 percent production tax established in the
legislation was in value and not in kind. The legislation
established limited circumstances where in kind was
authorized to pay tax as gas.
Mr. Pawlowski spoke to Section 43 beginning on page 32 that
adjusted the minimum tax. He cited page 33, lines 3 through
35 that provided that the minimum tax would only apply to
oil on and after January 1, 2022. The tax on gas production
would be 13 percent of the gross value, well above the
minimum set at 4 percent of gross value.
2:40:17 PM
Mr. Pawlowski pointed to Section 44 on page 33 that added
AS 43.55.014, related to the payment of production tax in
gas and page 33, line 28 that specified the option was
available after January 1, 2022. He read the following:
"…the department shall allow a producer to make an
election, under regulations adopted by the department,
to pay in gas the production tax levied by this
section in lieu of the tax otherwise levied for the
gas…"
Mr. Pawlowski emphasized the importance of page 33, line 31
to page 34, and read:
…An election under this subsection applies only to gas
produced from oil and gas leases modified under AS
38.05.180(hh)
Mr. Pawlowski explicated that the option to take royalty
gas in kind was only available for leases modified by DNR.
The provision had two important effects from DNR's
perspective; it was consistent with the HOA. The commitment
to accept in kind was subject to the development of project
enabling contracts and satisfactory agreements for the
disposition of the state's gas. Secondly, it allowed DNR to
participate with DOR at the negotiation table. The state's
production tax applied to more than just state land,
without the commitments to produce gas and without the
ability to interact with the leaseholder the state would
not be able to obtain the contracts to provide the
certainty to take gas in kind. The administration limited
the provision solely to leases the commissioner modified.
He noted that the provision did not apply to the National
Petroleum Reserve Alaska, which were federal lands and
leases.
Mr. Pawlowski turned to page 34, line 4 that set the rate
and page 34, line 9, which allowed DNR to manage the gas
["the custody and disposition of gas delivered to the
state"].
Mr. Pawlowski relayed that page 34, line 12 through page
35, line 10 established how DOR would deal with the over
payment or underpayment of taxes and in particular allowed
the interest rate to be paid in value or in kind. Sections
45 and 46 were amendments to the education credit. He
stated that the language on page 35, line 20 was specific
to the production tax since credits could not be taken
against gas in kind. The provision included an addition of
qualified expenditures for the education credit that
included nonprofit regional training centers recognized by
the Department of Labor and Workforce Development. He
stated that Section 46 contained similar language due to
the repeal and reenactment of the education credit.
Mr. Pawlowski addressed Section 47 on page 36, line 30,
which clarified that the production tax was to be taken in
value for the purposes of the credit.
Mr. Pawlowski spoke to Section 48 and related that it was a
long section because the state had multiple production tax
segments; the North Slope, middle earth, Cook Inlet, gas
produced and used in the state, and Cook Inlet Gas. He
noted the section directed the taxpayer on how to pay the
tax. He delineated that the state currently collected tax
in monthly installments based on estimates and were settled
at the end of each year. On page 42, line 4 through page
44, line 19 the language specified that the tax ceiling for
middle earth applied beyond January 1, 2022 and directed
the taxpayer on how to pay the monthly tax.
Mr. Pawlowski discussed Section 49 and Section 50 that were
conforming changes related to the monthly installment
payments on the calculation of interest on underpayments or
overpayments.
Mr. Pawlowski pointed out that Section 51 and Section 52
were conforming amendments related to a private landowner
royalty owner. The state was not amending production taxes
for private landowners.
Mr. Pawlowski spoke to Section 53 on page 47, lines 22
through 24 that required reporting by the taxpayer on the
amount of gas produced from a lease for which tax is levied.
Mr. Pawlowski commented that Section 54 required
calculation of annual production tax values to clarify the
levy of tax under AS 43.55.011(e) (2) for oil and gas
produced before January 1, 2022.
Mr. Pawlowski stated that Section 55 was related to lease
expenditures. He delineated that lease expenditures would
still be deductible under the legislation because it was
extremely difficult to determine which portion of a lease
expenditure was made for gas or and which expenditure was
made for oil. Lease expenditures would most likely be
deducted from the 13 percent tax on the gross value of the
gas. The language would allow for the deduction. The result
impacted the oil tax revenue in the near term but benefited
from production and revenue when the production comes
online. "Lease expenditures were still deductible in the
calculation of an oil tax whether the calculation was made
for gas or oil."
Mr. Pawlowski remarked that Section 56 and Section 57 were
related to the gross value reduction established in SB 21
for certain oil and gas produced and did not apply to the
value of gas produced after January 1, 2022.
2:52:05 PM
Mr. Pawlowski directed the committee's attention to Section
60 and Section 61 beginning on page 56. He explained that
the "point of production" was the main factor in
determining lease expenditures. Any expenditure "upstream"
of the point of production was a lease expenditure and the
costs were written off. Any expenditure downstream of the
lease expenditure were recovered through tariffs. He
emphasized that determining the point of production was
significant in order to demark where deductible expenses
occurred and where the expenses that were rolled into a
tariff occurred. He cited Section 61 on page 57, lines 25
through 30 which deleted the definition of "the point of
production" as defined in existing statute. He elaborated
that the administration wanted to establish clarity on
where the point of production for the AK LNG project was.
He revealed that the point was "the entrance where the gas
was leaving Pt. Thompson into the transmission line." The
administration did not want the point of production to move
downstream so that the pipelines and portion of the gas
treatment plant were included as a lease expenditure. He
illuminated that the effect of the amendments were to place
the point of production upstream.
Mr. Pawlowski summarized that the first part of the
legislation guided how the state would participate in AK
LNG by expansion of the powers of AGDC. The second piece
described how DNR would lead the process of negotiations
along with AGDC and work with the legislature to develop
the contracts slated for legislative approval. The third
part dealt with the 13 percent tax rate on gross
production. He noted that after royalty the state's share
was approximately 25 percent. He offered that the following
sections were concerned with other issues that were raised
during the bills deliberations. He related that Section 65,
page 59, lines 14 through 25 amended the powers of the
Alaska Competitiveness Review Board to include
recommendations to the legislature before January 15, 2017
regarding the state's tax structure, rates, and incentives
for oil and gas production south of 68 degrees North
latitude. The date allowed time for potential developers
and investors to plan for any potential changes before the
existing incentives expired.
Mr. Pawlowski reported that section 66 repealed an AGDC
statute that directed AGDC to cooperate with a large
project as long as it did not delay progress on the in-
state project. The statute was unnecessary since ADGC's
purpose had been broadened to both projects.
Mr. Pawlowski reported that Section 67 required DNR to report
to the legislature on how to make North Slope gas available
for delivery and use in the state and recommend ways to
address any risks identified in the report.
Commissioner Balash voiced that Section 67 addressed
concerns that had been identified centered on the state's
long term gas needs. The gas project was anticipated to
last twenty to thirty years. He delineated that the demand
for gas in the state was expected to grow over time. Since
the state would own a certain percentage of the
infrastructure and gas, the concern focused around how the
states growing gas needs would be met, who would provide
the gas, and whether the infrastructure's capacity would
need to be expanded or reallocated, which created increased
capacity downstream. The decisions around who would be
responsible or how the gas would be allocated or
reallocated amongst the parties currently remained
undecided in negotiations. He thought that when the issues
were addressed in contracts the required report and
analysis would help the overall process and contract
ratification. He noted that DNR supported but did not
initiate the reporting provision in the legislation. The
department would have the responsibility for the report and
would consult with AGDC. He felt that the bill's language
left out some matters that the committee might want to
consider. The questions around the size and ultimate
capacity of the pipeline after compression was added to
increase capacity needed to be addressed. A 42 inch
pipeline allowed for additional capacity with additional
compression. A key question was how much more additional
capacity the pipeline could handle efficiently until the
need for more costly pipeline was necessary. He offered
that there needed to be a set of terms and mechanisms built
into the legislation that allowed for future exploration in
the areas beyond Prudhoe Bay and Pt. Thompson. Discussions
with the producers concluded that building a larger
diameter pipeline might be warranted. The questions
addressing need, cost, and capacity needed to be answered.
He recommended addressing the issue in the same report
since some of the same issues linking back to the question
of capacity would be examined.
3:03:17 PM
Mr. Pawlowski spoke to Section 68 on page 61 that
established an interim advisory board to advise the governor
on municipal involvement as requested by Mayor Hopkins
[Fairbanks North Star Borough]. The board was established
through executive order. He noted the reference to AS
44.19.028 on page 61, line 9 that established the board and
felt that the statute was not as "durable" as the statute
employed in the executive order. He noted that the bill's
language was specifically designed to match the
administrative order developed in consultation with
municipal mayors. The Department of Revenue was designated
as the lead agency for recommendations regarding property
taxes in relation to the AK LNG project.
Mr. Pawlowski interjected that the administration did not
request an additional appropriation in support of the
advisory board. He related that when DNR initiated its
royalty study last summer DOR joined in to leverage the
allocation for consultants therefore, additional funding
was not necessary. He notified the committee that the
departments were creating efficiencies whenever possible.
Mr. Pawlowski spoke to Section 69 and pointed out that the
section addressed the development of regional energy plans
to benefit areas of the state not expected to have direct
access to a natural gas pipeline at the direction of Alaska
Energy Authority (AEA), in consultation with AGDC, other
energy groups [including Alaska Industrial Development and
Export Authority (AIDEA)], and DOR.
Mr. Pawlowski stated that Section 70 instructed the
commissioner of DOR to identify and report to the
legislature on financing options for state ownership and
participation in a North Slope natural gas project. He
noted that DOR was requesting an additional fiscal note
appropriation for the effort.
ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE,
reiterated that Section 70 mandated the development of a
financing options plan. The provision required two reports;
an interim report due before the beginning of next session
to guide the legislature through the session and in
preparation for a special session and a final report due
prior to submitting contracts for approval. She expounded
that the purpose of the comprehensive financing report was
to outline all of the financing and investment options. The
report would consider all of the state's financial
resources as well as investment opportunities from
individuals, regional corporations, and municipalities. The
report would also examine all of the risks involved in
financing the project for the state and individual
investors, and any potential impacts on the state's bond
rating. She informed the committee that tax attorneys and
financial consultants were needed to assist in the
preparation of the report and required additional fiscal
note appropriation.
Mr. Pawlowski noted that the previous committee wanted an
in-depth investigation regarding the financing alternatives
in consideration of the time when the project advances past
the Pre-FEED stage.
Mr. Pawlowski moved to Section 71 beginning on page 65 that
required the parties to the AK LNG project to provide
briefings to interested legislators, their staff, and
consultants on the progress of the project at least once
every four months and a report from DNR specified on page
65, lines 13 through 15:
…A briefing under this section must be accompanied by
a written report provided by the Department of Natural
Resources of the amount of money the state may be
obligated to pay a third party under an agreement or
contract under AS 38.05.020(b)(10) or (11)…
Mr. Pawlowski reminded the committee that within the next
two years the precedent agreement required the state to pay
development costs which represented the relationship with
TransCanada and the AFUDC. The provision mandated that DNR
would report the amount expenditures at every four month
briefing. He reiterated that the bill contained three main
areas; participation, which expanded AGDC's powers;
process, DNR leads contract negotiations developed in
consultation with the legislature requiring legislative
approval; and finally, the percentage of the state's share;
a 13 percent tax on gas after 2022.
3:12:51 PM
Co-Chair Austerman instructed the committee members to
submit their questions in writing.
Mr. Pawlowski pointed out that all of the questions and
answers from previous committee hearings were included in
the members' bill packets (copy on file).
CSSB 138(FIN) am was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 287
"An Act approving and ratifying the sale of royalty
oil by the State of Alaska to Tesoro Corporation and
Tesoro Refining and Marketing Company LLC; and
providing for an effective date."
HB 287 was SCHEDULED but not HEARD.
ADJOURNMENT
3:15:07 PM
The meeting was adjourned at 3:15 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 138 Updated 4.13.14 AKLNG Project Flow Chart TC letter.pdf |
HFIN 4/13/2014 1:00:00 PM |
SB 138 |
| HB 197 Testimony.docx |
HFIN 4/13/2014 1:00:00 PM |
HB 197 |