Legislature(2009 - 2010)HOUSE FINANCE 519

03/18/2010 01:30 PM House FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 280(FIN) Out of Committee
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 18, 2010                                                                                            
                         1:37 p.m.                                                                                              
1:37:14 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 1:37 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                                                                                                     
Representative Mike Kelly                                                                                                       
MEMBERS ABSENT                                                                                                                
Representative Woodie Salmon                                                                                                    
ALSO PRESENT                                                                                                                  
Marcia   Davis,   Deputy   Commissioner,   Office   of   the                                                                    
Commissioner, Department of Revenue; Derek Miller, Staff,                                                                       
Representative Mike Kelly.                                                                                                      
PRESENT VIA TELECONFERENCE                                                                                                    
Kevin Banks, Director, Division of Oil & Gas, Department of                                                                     
Natural Resources; Cody Rice, Petroleum Economist, Tax                                                                          
Division, Department of Revenue.                                                                                                
HB 280    NATURAL GAS                                                                                                           
          CSHB 280 (FIN) was REPORTED out of Committee with                                                                     
          a "do pass" recommendation and with a new zero                                                                        
          note by the House Finance Committee for the                                                                           
          Department of Revenue and previously published                                                                        
          fiscal notes: FN1 (ADM), FN2(CED), FN3 (DNR).                                                                         
HJR 8     CONST. AM: APPROP. LIMIT/MINERAL REVENUE                                                                              
          HJR 8 was HEARD and HELD in Committee for further                                                                     
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."                                                                                                           
1:38:01 PM                                                                                                                    
Co-Chair   Hawker  discussed   previous  committee   actions                                                                    
related to  HB 280  amendments. He noted  that conversations                                                                    
had  led  to the  conclusion  that  Amendment 2,  previously                                                                    
adopted  by   the  committee,  could  be   more  effectively                                                                    
Co-Chair Hawker MOVED to RESCIND Amendment 2. There being                                                                       
NO OBJECTION, it was so ordered. Amendment 2 was RESCINDED.                                                                     
Co-Chair Hawker MOVED to ADOPT Amendment 5:                                                                                     
     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 that                                                                     
          is incurred in the Cook Inlet sedimentary basin                                                                       
          that is                                                                                                               
               (l)  directly  related  to a  well.  A  lease                                                                    
               expenditure is directly related to a well if                                                                     
                    (A) during exploration and development,                                                                     
               the lease expenditure  is a qualified capital                                                                    
               expenditure as  that term  is defined  in (1)                                                                    
               of this section;                                                                                                 
                    (B)   during   production,   the   lease                                                                    
               expenditure   is  an   expenditure  that   is                                                                    
               intended  to  increase, enhance  or  mitigate                                                                    
               the decline  of well production  and 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;                                                                                    
               (2) an overhead  expenditure authorized under                                                                    
               AS  43.55.165(a)(2)  and  calculated  on  the                                                                    
               Cook  Inlet well  lease expenditures  allowed                                                                    
               under (1) of this section; or                                                                                    
               (3)  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  Amendment 5 accomplishes the                                                                    
same  intent  as  Amendment  2   with  better  language  and                                                                    
specifically   utilizes  existing   statute  with   existing                                                                    
MARCIA   DAVIS,   DEPUTY   COMMISSIONER,   OFFICE   OF   THE                                                                    
COMMISSIONER, DEPARTMENT OF REVENUE,  added that Amendment 5                                                                    
addressed  Department of  Revenue  (REV) concerns  regarding                                                                    
use  of  the  term  "lease   expenditures"  with  a  only  a                                                                    
reference to Internal Revenue Code  (IRC) 263 for describing                                                                    
the types of costs that would  be allowed as a credit in the                                                                    
exploration  and development  phase. She  reported that  the                                                                    
sponsor had  become more comfortable with  using the current                                                                    
clause in  AS 43.55.023 [Alaska's Clear  and Equitable Share                                                                    
(ACES),  Alaska oil  and gas  production  tax credits,  here                                                                    
called   "023"],   which    references   qualified   capital                                                                    
expenditures and  has a definition that  encompasses the IRC                                                                    
263 intangible cost concept. Instead  of creating a new term                                                                    
that means roughly the same  thing, subsection (o)(1)(A) was                                                                    
modified to reference the qualified capital expenditure.                                                                        
Ms.  Davis  continued  that subsection  (o)(1)(B)  addresses                                                                    
administration  concerns that  the tax  credit given  during                                                                    
the   production   phase   could  potentially   cover   well                                                                    
operations such as well abandonment and suspension.                                                                             
1:41:48 PM                                                                                                                    
Ms. Davis  reported that to  clarify intent the  sponsor had                                                                    
agreed  to   insert  language  specifying  that   the  lease                                                                    
expenditure is  intended to  "increase, enhance  or mitigate                                                                    
the  decline  of well  production."  She  detailed that  the                                                                    
language would tighten the scope  of the costs that would be                                                                    
allowed in the production phase.                                                                                                
Representative Gara  asked whether the  overhead expenditure                                                                    
language in  (o)(2) incorporates the existing  rule with the                                                                    
formula  determining what  can  be written  off as  overhead                                                                    
expenditures.  Ms. Davis  responded  that  the current  rule                                                                    
would not allow  overhead expense as a  credit. She believed                                                                    
the  issue would  be a  policy call  for the  committee. She                                                                    
pointed out  that the  sponsor was  open to  adding language                                                                    
directing  the  department  how to  calculate  the  overhead                                                                    
expenditure portion of the  credit. The amendment subsection                                                                    
includes the  language. The overhead credit  (4.5 percent of                                                                    
costs  under current  regulation)  will  be calculated  with                                                                    
reference  to the  costs listed  in (o)(1)(A)  and (B).  The                                                                    
calculation would apply  4.5 percent to the  costs to derive                                                                    
the  overhead element  of  the credit.  She  added that  the                                                                    
underlying overhead  lease expense  that is  deductible will                                                                    
not change; there  is more clarity to the  extent that there                                                                    
is  now credit  that  incorporates  an additional  financial                                                                    
incentive related to overhead.                                                                                                  
Ms. Davis  clarified that the  4.5 percent was of  the costs                                                                    
listed in either (1)(A) or (1)(B).                                                                                              
Representative  Gara  asked  whether  overhead  expenditures                                                                    
would be allowed  to be deducted on top of  the 4.5 percent.                                                                    
Ms.  Davis  replied  yes.  She  explained  that  costs  that                                                                    
qualify as  lease expenditures are  first deducted  from the                                                                    
gross proceeds to arrive at a net production tax value.                                                                         
Representative  Gara queried  whether overhead  expenditures                                                                    
are  allowed   under  ACES  (referring  to   deduction,  not                                                                    
credit).  Ms.  Davis responded  yes.  She  added that  under                                                                    
ACES,  overhead  is  only allowed  as  a  lease  expenditure                                                                    
deduction; the  cost element is  not picked up in  any other                                                                    
credit under  current law. The credit  being discussed would                                                                    
be the only credit existing with an overhead element.                                                                           
1:45:38 PM                                                                                                                    
Representative  Gara queried  the relationship  between ACES                                                                    
and the proposed legislation regarding  the 4.5 percent. Ms.                                                                    
Davis  responded  that  they  were the  same;  in  order  to                                                                    
understand  how   much  overhead  is  associated   with  the                                                                    
incursions  of  any  category  of  cost  (related  to  lease                                                                    
expenditures), the  department derives an allowed  amount of                                                                    
overhead which  is deemed  to be 4.5  percent of  the costs.                                                                    
The rule is  used to derive the amount of  overhead. All the                                                                    
lease  expenditures  are  a   deduction;  in  addition,  4.5                                                                    
percent  of  the  lease   expenditures  are  considered  the                                                                    
overhead  expense.   The  two   added  together   equal  the                                                                    
deduction  at  the  basic  level   of  calculating  the  net                                                                    
production tax value. Credits are  applied when the tax rate                                                                    
has been  calculated and a  tax amount is  established. When                                                                    
REV  came to  interpreting the  credit being  discussed, the                                                                    
department  would  look at  the  costs  that are  either  in                                                                    
category  (1)(A) or  (1)(B) and  determine if  they qualify.                                                                    
Forty   percent   of   the  qualifying   amount   would   be                                                                    
characterized as a (o)(11)(m)  credit. In addition, a credit                                                                    
would  be created  that is  4.5 percent  times whatever  was                                                                    
deemed  to  be  the   base  underlying  lease  expenditures,                                                                    
creating  an  overhead element  that  would  then become  an                                                                    
expense to which the 40 percent credit is applied.                                                                              
Representative  Gara  summarized  that  a  credit  would  be                                                                    
received on  top of  the deduction and  the credit  would be                                                                    
based  on overhead,  defined  as roughly  4  percent of  the                                                                    
lease expenditures. Ms. Davis agreed.                                                                                           
Co-Chair   Hawker  concurred   completely.  He   pointed  to                                                                    
concerns  that previous  language could  apply to  statewide                                                                    
activities of  an organization. He believed  the language in                                                                    
Amendment  5  clearly  limited   the  subject  to  qualified                                                                    
capital  expenditures specifically  related  to activity  in                                                                    
the Cook Inlet basin.                                                                                                           
Representative Gara asked whether  the intent of language in                                                                    
subsection (o)(1)(B)  was to limit  the credit to  work that                                                                    
expands  or prevents  mitigation  of  production. Ms.  Davis                                                                    
replied that  the language intends  to target the  credit at                                                                    
any activity  that will cause  production to  increase, such                                                                    
as  well reworking.  The goal  is to  encourage expenditures                                                                    
that  would maintain  and keep  up  production. The  natural                                                                    
course of a well is  decline; anything done to forestall the                                                                    
decline adds production.                                                                                                        
1:50:14 PM                                                                                                                    
Representative Gara summarized that  a producer could choose                                                                    
either  40 percent  of  the credit  for  work that  promotes                                                                    
production or the  existing 20 percent for  the flat credit.                                                                    
Ms. Davis agreed.                                                                                                               
Co-Chair  Stoltze WITHDREW  his  OBJECTION.  There being  NO                                                                    
OBJECTION, it was so ordered. Amendment 5 was adopted.                                                                          
Co-Chair Hawker MOVED to ADOPT Amendment 3:                                                                                     
     Page 5, following line 22:                                                                                                 
          Insert a new bill section to read:                                                                                    
     "*Sec.4. AS 38.15.035 is amended by adding a new                                                                           
     subsection to read:                                                                                                        
               (n) The director may not deny an application                                                                     
          for  a lease  or assignment  of a  lease of  state                                                                    
          land for  the development  and operation of  a gas                                                                    
          storage  facility solely  because the  gas storage                                                                    
          facility  would be  used exclusively  or primarily                                                                    
          to store  gas owned  by the  owner or  operator of                                                                    
          the  gas  storage  facility. In  this  subsection,                                                                    
          "gas storage  facility" has  the meaning  given in                                                                    
          AS 31.05.032."                                                                                                        
     Renumber the following bill sections accordingly.                                                                          
Co-Chair Stoltze OBJECTED for discussion.                                                                                       
Co-Chair Hawker  summarized that  there were three  types of                                                                    
storage that could exist in Cook Inlet:                                                                                         
   · Gas storage owned by a public utility for its own                                                                          
     benefit and the benefits of its customers.                                                                                 
   · Third-party open-access storage that could be owned by                                                                     
     someone in the business of providing storage for a                                                                         
    fee. This category would be available to a utility.                                                                         
   · Proprietary storage owned by a producer in the inlet                                                                       
     to warehouse their own gas.                                                                                                
Co-Chair  Hawker  stressed  that  HB 280  is  structured  to                                                                    
provide  incentives  for the  first  two  types of  storage.                                                                    
Rates for  both are  regulated by the  Regulatory Commission                                                                    
of Alaska (RCA) and both  qualify for the incentives offered                                                                    
in  HB  280.  He  noted  that  the  third  type  of  storage                                                                    
(warehouse storage used by a  producer for their own gas) is                                                                    
specifically not regulated in  the bill and specifically not                                                                    
rewarded by  the bill,  in order  to incentivize  storage to                                                                    
promote energy security for individual Alaskan consumers.                                                                       
Co-Chair Hawker  pointed out that there  are people involved                                                                    
in  regulation that  do not  wish to  allow any  further gas                                                                    
storage  permits  in  Cook Inlet  for  proprietary  storage.                                                                    
Amendment 3  would direct the  regulators at  the Department                                                                    
of Natural  Resources (DNR)  to not  deny application  for a                                                                    
storage  lease "solely"  because  the  gas storage  facility                                                                    
would  be  used  exclusively or  primarily  for  proprietary                                                                    
1:54:51 PM                                                                                                                    
Co-Chair Hawker  informed the committee  that the  issue had                                                                    
been brought  to his  attention by  producers in  Cook Inlet                                                                    
who  want to  establish storage  facilities to  manage their                                                                    
own gas.  The producers  were told  by DNR  that proprietary                                                                    
storage  is  not  going  to  be  allowed,  only  open-access                                                                    
Co-Chair Hawker believed the  regulators should not prohibit                                                                    
producers from  the development of needed  storage capacity.                                                                    
He   expected  disagreement   from  DNR.   He  argued   that                                                                    
restricting  producers would  compromise  the state's  long-                                                                    
term objective of having  ample in-state storage, especially                                                                    
not  offering tax  and inventory  incentives  that would  be                                                                    
allowed to open-access third-party storage.                                                                                     
Co-Chair Hawker concluded that  the amendment would preserve                                                                    
an option for an independent  producer to create storage for                                                                    
their own inventory management.                                                                                                 
1:58:04 PM                                                                                                                    
KEVIN BANKS, DIRECTOR, DIVISION OF  OIL & GAS, DEPARTMENT OF                                                                    
NATURAL  RESOURCES (via  teleconference),  noted that  there                                                                    
are currently  three storage facilities  in Cook  Inlet. Two                                                                    
of the facilities have been leased  by DNR and would fall in                                                                    
the category of proprietary storage.  He stated that DNR has                                                                    
had discussions with producers and  has tried to accommodate                                                                    
an expansion in the marketplace for storage requirements.                                                                       
Mr.  Banks   informed  the  committee  that   there  are  no                                                                    
opportunities for  underground storage  of any sort  in Cook                                                                    
Inlet in  anything but  an existing oil  and gas  lease; the                                                                    
current oil  and gas leases  do not allow for  the injection                                                                    
of outside substances  into the reservoirs. In  order to use                                                                    
a depleted  resource reservoir as  storage, a  storage lease                                                                    
has to be promulgated.                                                                                                          
Mr.  Banks  believed  that issuing  a  storage  lease  would                                                                    
create a  private right to  a public land resource  that had                                                                    
not existed  before. The department judged  that the storage                                                                    
leases  could  last  forever  and  believed  that  a  public                                                                    
purpose should  be served when allowing  private rights over                                                                    
public land.                                                                                                                    
Mr. Banks  continued that DNR  views proprietary  storage as                                                                    
an issue of supply management  for a particular producer who                                                                    
has certain obligations under  various commitments that have                                                                    
already been  made. The producer  makes a choice to  use the                                                                    
storage to  provide for their  customers because it  is less                                                                    
expensive  than other  alternatives, such  as drilling  more                                                                    
wells or  adding more compression in  existing fields. There                                                                    
may also be reasons that  a producer cannot drill more wells                                                                    
or add  compression, such  as commercial  misalignments with                                                                    
business partners. He described  an example: one producer in                                                                    
a field has  a customer with steady  gas supply requirements                                                                    
and a second producer in the  same field has a customer with                                                                    
dramatic  fluctuation  in  gas requirements  from  month  to                                                                    
month.  The second  producer  must come  up  with a  storage                                                                    
solution,  but is  unable to  drill more  wells without  the                                                                    
agreement of  the first  producer. The  two producers  go to                                                                    
DNR to try and solve the problem.                                                                                               
Mr.   Banks   stressed   that    there   are   issues   with                                                                    
deliverability  and supply  and demand,  but there  are also                                                                    
institutional economic challenges to  each of the producers.                                                                    
The challenges are not necessarily physical problems.                                                                           
2:03:28 PM                                                                                                                    
Mr.  Banks  believed  that  some  principle  of  third-party                                                                    
access should  be realized in  offering a storage  lease. He                                                                    
pointed  to  a category  that  had  not been  considered  in                                                                    
discussions so far: new producers  in Cook Inlet who want to                                                                    
drill  for gas  and could  potentially help  by adding  more                                                                    
supply. Without access to storage,  the producers would only                                                                    
be able to  produce gas during winter months.  He wanted DNR                                                                    
to be able to anticipate  the challenge by insisting on some                                                                    
kind of third-party access.                                                                                                     
Mr.  Banks  disagreed  that DNR  was  creating  difficulties                                                                    
related  to  how  third-party   access  would  work.  During                                                                    
discussions  regarding  third-party access,  the  department                                                                    
had  wanted  to  consider  the  particular  situation  of  a                                                                    
company coming  to them needing proprietary  storage to meet                                                                    
existing contracts.  The department wanted to  allow for the                                                                    
supply requirement  to be met  and provide for some  kind of                                                                    
third-party  access as  the contracts  fall off  and storage                                                                    
space  becomes  available. He  thought  the  AS 42  (utility                                                                    
regulations) would  apply in the  situation. Under AS  42, a                                                                    
regulated storage facility may  have only one customer using                                                                    
it, but  as space becomes  available and people  want access                                                                    
to  the  storage,  appeal  could  be made  to  the  RCA  for                                                                    
permission  to have  the utility  provide the  storage on  a                                                                    
non-discriminatory basis.                                                                                                       
Mr.  Banks offered  that another  option  would be  allowing                                                                    
third-party access when a lease  was assigned or transferred                                                                    
to someone else. He noted  that new producers coming to Cook                                                                    
Inlet would be discouraged without access to storage.                                                                           
Mr.  Banks  stressed  that  DNR  wanted  to  "unbundle"  the                                                                    
service of  storage so that  there was a clear  price signal                                                                    
in the  marketplace and utilities, consumers,  and producers                                                                    
would know that  gas would cost more in  the wintertime than                                                                    
in the  summer. He suggested limited  gas consumption during                                                                    
the higher use time to improve deliverability.                                                                                  
2:08:25 PM                                                                                                                    
Mr.  Banks commended  the evolution  of the  legislation. He                                                                    
thought the department had worked well with the sponsor.                                                                        
Mr.  Banks agreed  with the  goal  of achieving  third-party                                                                    
storage. He commented  on the credits built  into Section 10                                                                    
that  would  be  awarded  only to  a  storage  facility.  He                                                                    
pointed  to line  26, page  9: "where  the storage  facility                                                                    
must be available for the storage  of gas that is owned by a                                                                    
utility   regulated  under   AS  42.05"   and  opined   that                                                                    
"available" was a  "quirky" word to use,  but he interpreted                                                                    
it  to mean  that if  a utility  needs the  storage and  the                                                                    
storage is available, the credit would be awarded.                                                                              
Mr.  Banks remarked  that  there may  not  be a  proprietary                                                                    
storage problem if the credits  are valuable and working and                                                                    
effectively creating  third-party storage. He  was concerned                                                                    
that all  the applications  could be for  third-party access                                                                    
storage  if companies  choose  to take  a  credit and  build                                                                    
utility storage.                                                                                                                
Co-Chair Stoltze queried DNR's  position on Amendment 2. Mr.                                                                    
Banks urged  caution regarding the amendment.  He noted that                                                                    
the storage leases would last a  very long time and that the                                                                    
market is changing.  He wanted the state to  evolve with the                                                                    
market  so it  has something  like  the gas  markets in  the                                                                    
Lower-48, where  almost all storage is  third-party storage.                                                                    
He opined  that third-party  access type  storage is  a step                                                                    
towards deregulating  the market  rather than  imposing more                                                                    
2:13:11 PM                                                                                                                    
Co-Chair Hawker believed his position  on Amendment 2 was in                                                                    
alignment  with  DNR's  position.  He  maintained  that  the                                                                    
amendment  delineates  an  outer   perimeter  and  does  not                                                                    
establish the  standard or norm  for storage in  Cook Inlet.                                                                    
The   legislation  would   create  reasonable   benefits  to                                                                    
encourage  producers  to  manage  their  own  inventory  and                                                                    
perhaps  go  beyond that.  The  central  focus is  promoting                                                                    
third-party  regulated facilities.  He  underlined the  word                                                                    
"solely" in  the amendment: application  will not  be denied                                                                    
"solely" because it will be proprietary storage.                                                                                
Co-Chair Hawker did not believe  DNR would be compromised on                                                                    
determining  lease terms.  He noted  that even  the original                                                                    
production  leases  create  a private  property  right;  the                                                                    
storage lease  would create  a private  property right  in a                                                                    
public asset,  but the storage  would only exist to  serve a                                                                    
public asset.                                                                                                                   
2:16:03 PM                                                                                                                    
Representative  Gara voiced  concerns about  creating enough                                                                    
storage. He  asked whether there  were enough wells  in Cook                                                                    
Inlet to use for storage  if one-party storage were allowed.                                                                    
Mr.  Banks replied  that all  the available  storage already                                                                    
belongs  to  current  producers.  He  could  not  imagine  a                                                                    
situation  in which  a third  party  would drill  a well  in                                                                    
order to create new storage.  He thought it more likely that                                                                    
some kind of  commercial arrangement would be  made with the                                                                    
oil and gas lessee, and that  the gas storage lease would be                                                                    
awarded eventually because  of the deal between  the oil and                                                                    
gas lessee and the storage sponsor.                                                                                             
Representative Gara  asked what would happen  if one company                                                                    
dominated  available  storage  and  would  not  lease  to  a                                                                    
utility.  He  wondered  whether  there  were  other  storage                                                                    
opportunities.  Mr. Banks  answered that  there were  enough                                                                    
opportunities  and  that  companies were  planning  for  the                                                                    
storage  they would  need,  though  some opportunities  were                                                                    
more  efficient than  others. He  stated that  every company                                                                    
currently in  business could  develop their  own proprietary                                                                    
storage in order to get through the cold months.                                                                                
Representative Gara  queried the  possible harm  of allowing                                                                    
exclusive  storage. Mr.  Banks  believed that  HB 280  would                                                                    
provide the  incentives needed for new  gas development, but                                                                    
that the state would also need  to rely on other lessees who                                                                    
do not  currently have access and  may not have it  when the                                                                    
time  comes.  He  provided the  example  of  Armstrong:  the                                                                    
company could  develop the North  Fork Unit and  deliver gas                                                                    
to  ENSTAR, but  if ENSTART  cannot find  storage, Armstrong                                                                    
would  have  to find  it  or  be  limited to  the  expensive                                                                    
prospect of running wells in the wintertime.                                                                                    
2:22:04 PM                                                                                                                    
Representative  Gara  asked  whether a  company  would  want                                                                    
regulated  ability to  use someone  else's existing  storage                                                                    
facility because the cost to  build its own storage facility                                                                    
was too high.  Mr. Banks returned to  his Armstrong example:                                                                    
the company does not have  access to subsurface horizon that                                                                    
can be used for storage. They  are producing, but do not yet                                                                    
have depleted reservoirs,  and would have to  find a company                                                                    
that has an empty one.                                                                                                          
Representative  Gara was  concerned about  the inability  to                                                                    
find affordable storage if there  is not regulated access to                                                                    
another  company's  storage.  Mr.  Banks  replied  that  the                                                                    
company  might  be forced  to  produce  only in  the  winter                                                                    
months when the demand is high  enough to take the gas; this                                                                    
might discourage new producers.                                                                                                 
Co-Chair  Hawker  agreed  with   the  hypothetical,  but  he                                                                    
pointed  out that  in  reality there  will  be large,  open-                                                                    
access  storage   facilities  created  in  Cook   Inlet.  He                                                                    
emphasized that  the purpose of  HB 280 was  specifically to                                                                    
resolve  impediments  to   establishing  large,  open-access                                                                    
facilities,   especially  the   need   for  regulatory   and                                                                    
inventory  management  certainty.  He  cautioned  against  a                                                                    
hypothetical reflecting  what would  happen without  HB 280.                                                                    
He stressed  that a working  market is evolving in  the Cook                                                                    
Inlet   area  that   will  include   adequate  storage.   He                                                                    
underlined  the importance  of the  outer perimeter  that HB
280 was attempting to create.                                                                                                   
2:25:55 PM                                                                                                                    
Representative  Gara  asked  whether the  measure  could  be                                                                    
written so that  other companies could use  the storage. Mr.                                                                    
Banks  suggested a  sunset provision  for  Amendment 3;  for                                                                    
example, that  leases could  require third-party  access for                                                                    
applications that came after 2014.                                                                                              
Co-Chair  Hawker believed  the  department  already had  the                                                                    
latitude   to   make  public-interest   determinations.   He                                                                    
emphasized  the  limitation   "solely"  on  the  open-access                                                                    
criteria.  He was  hesitant  to  micromanage the  regulatory                                                                    
process. He argued  that the bill would  protect the ability                                                                    
of an individual producer to manage their own inventory.                                                                        
2:28:58 PM                                                                                                                    
Co-Chair Hawker  pointed out  that ConocoPhillips  and other                                                                    
producers  have already  diverted  gas to  the community  in                                                                    
recent winters, to  their own detriment. He did  not want to                                                                    
cast big oil as bad.                                                                                                            
Co-Chair Stoltze WITHDREW his OBJECTION to Amendment 3.                                                                         
Representative Gara OBJECTED.                                                                                                   
A roll call vote was taken on the motion.                                                                                       
IN  FAVOR: Thomas,  Austerman,  Doogan, Fairclough,  Foster,                                                                    
Joule, Kelly, Hawker, Stoltze                                                                                                   
OPPOSED: Gara                                                                                                                   
The MOTION PASSED (9-1). Amendment 3 was ADOPTED.                                                                               
2:31:34 PM                                                                                                                    
Representative  Kelly stated  that  Amendment  5 had  solved                                                                    
problems he  had had  with HB  280, especially  the "solely"                                                                    
language.  He  queried the  possibility  of  a negative  tax                                                                    
situation.  Co-Chair Hawker  replied that  the drafters  had                                                                    
taken care to prevent the situation.                                                                                            
Co-Chair Hawker  noted that fiscal  note 4 was  outdated and                                                                    
requested an updated note by REV.  He spoke to funding for a                                                                    
continuing auditor  position. He did not  expect gas storage                                                                    
to happen quickly  or for there to be a  lot of applications                                                                    
in the near  future. He advised zeroing  out the incremental                                                                    
expense, leaving  the change  in revenues  as indeterminate,                                                                    
and submitting  the question of additional  positions to the                                                                    
continuing budget process.                                                                                                      
Co-Chair Hawker highlighted mistakes  in the outdated fiscal                                                                    
note,  including that  the maximum  credit  amount had  been                                                                    
reduced by half.                                                                                                                
2:36:37 PM                                                                                                                    
Representative  Kelly   read  from   fiscal  note   4  (REV)                                                                    
     The language  relating to credits has  the potential to                                                                    
     be  interpreted quite  broadly with  the potential  for                                                                    
     large  reductions in  state revenues  when compared  to                                                                    
     future developments that might  occur under the current                                                                    
Representative Kelly  commented that the obvious  number was                                                                    
the reduction [of  allowed credits] from $30  million to $15                                                                    
million. He asked  if there were other concerns  that he was                                                                    
not seeing.                                                                                                                     
Co-Chair  Stoltze  stated  his  intent to  have  REV  submit                                                                    
fiscal  notes   and  any  commentary  or   analysis  to  the                                                                    
committee on department letterhead.                                                                                             
Co-Chair Hawker pointed out concerns  brought by REV related                                                                    
to opportunity  to "game the  system." He asserted  that the                                                                    
issues  were   already  specifically   addressed,  including                                                                    
delineating that  pipe packing would  not used as  a storage                                                                    
facility under the bill.                                                                                                        
Representative Gara  questioned whether the credit  of $1.50                                                                    
per  Mcf might  in some  years  be greater  than the  amount                                                                    
expended by an  entity; the first year they  would get $1.50                                                                    
per Mcf to develop the  storage facility but the fiscal note                                                                    
says the  cost is not expected  to be higher than  $0.72 per                                                                    
Mcf.  He wanted  assurance that  during the  first year  the                                                                    
state would not pay a credit larger than expenditures.                                                                          
Co-Chair  Hawker  believed  the  fiscal  note  analysis  was                                                                    
misleading.  He  stated  that   the  investment  tax  credit                                                                    
related to the construction of  a storage facility is a one-                                                                    
time credit offered only at  construction; it is not a cost-                                                                    
of-service calculation. He gave the  example of a person who                                                                    
decides to  go into the  taxi business  and buys a  taxi cab                                                                    
for $15,000 and  then charges a customer $0.50  per mile for                                                                    
a ride.                                                                                                                         
Co-Chair  Hawker  asserted  that  the  credit  in  the  bill                                                                    
functioned differently. The credit  is one time. He reported                                                                    
that information gathered shows  that capital cost estimates                                                                    
between $7 million and $15  million per Bcf are expected for                                                                    
Cook Inlet gas storage  facilities. Approximating roughly at                                                                    
10  percent  on cost  credit  provides  the $1.50  front-end                                                                    
credit. The  credit has nothing  to do with the  annual cost                                                                    
of service.                                                                                                                     
2:41:48 PM                                                                                                                    
Representative Gara questioned where  in Section 10 the bill                                                                    
limits someone  to the  cost of  development of  the storage                                                                    
facility and not the  cost-of-service. Co-Chair Hawker noted                                                                    
that he would entertain an  amendment to allow the credit on                                                                    
an annual  basis. He explained  that Section 10  describes a                                                                    
tax credit being  available in an amount equal  to $1.50 per                                                                    
Mcf  of  working  storage   capacity  (certified  under  the                                                                    
provisions of  the bill).  He detailed  that the  Alaska Oil                                                                    
and Gas  Conservation Commission  (AOGCC) would  certify the                                                                    
working storage  capability; the credit would  be calculated                                                                    
on  that basis.  He  added  that there  was  nothing in  the                                                                    
section about a  benefit occurring more than  once; the bill                                                                    
is  an investment  tax credit  bill. He  pointed to  line 11                                                                    
saying the credit  would be available against  a tax imposed                                                                    
for the  "taxable year"  in which  the gas  storage facility                                                                    
commences commercial  operations. He  felt the  language was                                                                    
clear about the fact that the item was one time.                                                                                
Representative  Gara was  comforted that  the expense  was a                                                                    
one-time  expense  for  the   development  of  storage,  and                                                                    
comforted by Amendment 5. However,  he wanted assurance that                                                                    
the $1.50  per Mcf granted  would never be greater  than the                                                                    
cost  of  constructing  the   storage  facility.  He  wanted                                                                    
correct  numbers.  Co-Chair  Hawker stated  that  the  $1.50                                                                    
amount  arrived  at  in  the  bill  was  based  on  analysis                                                                    
resulting from  proprietary discussions with proposers  of a                                                                    
significant  natural gas  storage  facility in  Southcentral                                                                    
Alaska.  His understanding  based  on preliminary  estimates                                                                    
was  that  the cost  of  gas  storage development  would  be                                                                    
between  $7  million and  $15  million  per Bcf  of  storage                                                                    
capacity.  He recognized  the latitude  of  the figures.  He                                                                    
added  that subsequent  conversations with  the some  of the                                                                    
same people indicated to him that costs would escalate.                                                                         
2:45:40 PM                                                                                                                    
Representative  Gara pointed  to line  19 on  page 9  of the                                                                    
bill saying  that someone would  be eligible for  the credit                                                                    
if they  had storage  capacity of one-half  Bcf or  more. He                                                                    
questioned  the numbers.  Co-Chair Hawker  replied that  the                                                                    
section   referred   to   also   contains   the   additional                                                                    
requirements for a  facility to receive and  qualify for the                                                                    
credit. He  asserted that the requirements  include that the                                                                    
working gas  storage capacity be  at least one-half  Bcf, or                                                                    
500  Mcf.  He   noted  the  importance  of   also  having  a                                                                    
withdrawal capacity  in case operations  are too  slow; that                                                                    
is  the   reason  for  the  minimum   withdrawal  capability                                                                    
requirement of 10  Mcf per day, also certified  by AOGCC. In                                                                    
addition,  there are  requirements related  to anti-churning                                                                    
and  provisions  stipulating  that an  existing  proprietary                                                                    
facility cannot  receive credit for  converting to  an open-                                                                    
access facility.  The facility  must also be  accessible for                                                                    
utility-owned gas.                                                                                                              
Representative Kelly thought the  proposition was a good one                                                                    
given the numbers described. Co-Chair Hawker agreed.                                                                            
CODY RICE, PETROLEUM ECONOMIST,  TAX DIVISION, DEPARTMENT OF                                                                    
REVENUE  (via  teleconference)  clarified  that  a  cost  of                                                                    
service includes  capital and  operating expenses.  He added                                                                    
that a  cost of  service is typically  a levelized  cost and                                                                    
includes  the   allowable  rate   base,  or  the   costs  of                                                                    
construction and the operating  expenses as deemed allowable                                                                    
by  the  regulating  entity,  and  an  allowable  return  on                                                                    
Co-Chair  Stoltze asked  that the  analysis be  submitted in                                                                    
writing to  the committee.  Mr. Rice  replied that  he would                                                                    
pass the information on.                                                                                                        
Vice-Chair  Thomas MOVED  to report  CSHB 280  (FIN) out  of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal notes.                                                                                                      
CSHB  280 (FIN)  was REPORTED  out of  Committee with  a "do                                                                    
pass" recommendation and  with a new zero note  by the House                                                                    
Finance  Committee   for  the  Department  of   Revenue  and                                                                    
previously published fiscal notes:  FN1 (ADM), FN2(CED), FN3                                                                    
2:51:56 PM               RECESS                                                                                               
3:01:25 PM               RECONVENE                                                                                            
HOUSE JOINT RESOLUTION NO. 8                                                                                                    
     Proposing amendments  to the Constitution of  the State                                                                    
     of Alaska limiting  appropriations from certain mineral                                                                    
     revenue, relating  to the balanced budget  account, and                                                                    
     relating to an appropriation limit.                                                                                        
3:02:01 PM                                                                                                                    
REPRESENTATIVE MIKE KELLY,  SPONSOR, introduced the proposal                                                                    
to  change the  constitution  to include  a balanced  budget                                                                    
mechanism. He  believed Alaska was  moving in  the direction                                                                    
of  revenue  shortages  and   cuts  in  government  services                                                                    
because of declining oil revenue  and growth in state budget                                                                    
at  the rate  of 10  percent  per year.  He stated  concerns                                                                    
about possible consequences.                                                                                                    
Representative Kelly noted that  Alaskans had signaled their                                                                    
desire  to have  costs controlled  in 1982  with a  spending                                                                    
limit  measure  and in  1990  with  a Constitutional  Budget                                                                    
Reserve  (CBR)  measure. He  asserted  that  neither of  the                                                                    
mechanisms had solved the fiscal problems.                                                                                      
Representative   Kelly  reminded   the  committee   about  a                                                                    
previous  attempt at  ten-year  forecasting legislation.  He                                                                    
referred  to other  work on  the  unfunded liability,  which                                                                    
saved municipalities from sinking and  set a course to repay                                                                    
the debt over  a 25-year period. He believed  more should be                                                                    
DEREK MILLER,  STAFF, REPRESENTATIVE MIKE  KELLY, introduced                                                                    
a   PowerPoint  presentation,   "HJR   8,  Balanced   Budget                                                                    
Resolution, March  18, 2010" (copy on  file), beginning with                                                                    
Slides 2 and 3:                                                                                                                 
   · In  1982, voters  approved an  amendment to  the Alaska                                                                    
     Constitution to control state spending.                                                                                    
   · The  amendment  established   an  annual  appropriation                                                                    
     limit of  $2.5 billion plus adjustments  for changes in                                                                    
     population and inflation.                                                                                                  
   · In  today's   dollars:  For  FY   09,  the   Office  of                                                                    
     Management  and  Budget  estimated   the  limit  to  be                                                                    
     approximately $8.3 billion.                                                                                                
Mr. Miller turned to the FY 09 budget passed (Slide 4):                                                                         
   · The   unsustainable  FY   09  budget   passed  by   the                                                                    
     legislature    after    vetoes   was    $6.7    billion                                                                    
     (unrestricted  General Fund  revenue), or  $1.6 billion                                                                    
     less than the 1982 constitutional spending limit.                                                                          
   · Translation: The  1982 spending limit passed  by voters                                                                    
     is  ineffective;  or,  we're   doing  a  great  job  of                                                                  
     controlling government growth.                                                                                             
Mr. Miller spoke to the  Constitutional Budget Reserve Fund,                                                                    
(Slides 5 and 6):                                                                                                               
   · In 1990, another  attempt was made by  voters to impose                                                                    
     budget  stability.  Voters  approved  a  Constitutional                                                                    
     Amendment  creating the  Constitutional Budget  Reserve                                                                    
     Fund (CBRF).                                                                                                               
   · The  CBRF was  created  to receive  and protect  excess                                                                    
     revenues generated  in high  revenue years  rather than                                                                    
     leaving excess  funds in the  General Fund  (where they                                                                    
     could  be easily  spent). Taking  money  from the  CBRF                                                                    
     requires  a  supermajority  ¾   vote,  making  it  more                                                                    
     difficult  to tap  and  therefore  arguably a  spending                                                                    
Mr. Miller turned to a graph  on Slide 7 depicting through a                                                                    
steadily rising line what state  general fund spending would                                                                    
have been  FY 1990  through FY  2010 if  it had  been simply                                                                    
adjusted for inflation at 3 percent.                                                                                            
Mr. Miller  described the graph  on Slide 8, with  a second,                                                                    
contrasting  line  depicting  actual general  fund  spending                                                                    
throughout the same period. The  second line is volatile and                                                                    
erratic compared  to the steady inflation-adjusted  line. He                                                                    
noted the sharp  rise in recent years when the  price of oil                                                                    
went up and there was more money to be appropriated.                                                                            
3:08:48 PM                                                                                                                    
Mr.  Miller pointed  to  a third  graph on  Slide  9 with  a                                                                    
third, green line added illustrating  the total general fund                                                                    
revenue (including non-mineral  revenue). He highlighted the                                                                    
sharp  peak in  the green  line for  FY 08  and argued  that                                                                    
mineral   revenue,   including    mineral   lease   rentals,                                                                    
royalties,  bonuses, and  production taxes  on oil  and gas,                                                                    
are the most volatile part of the state's revenue base.                                                                         
Mr.  Miller  turned to  Slide  10,  the  same graph  with  a                                                                    
fourth, black line  added in order to  compare what spending                                                                    
would have  looked like over  the time  period if HJR  8 had                                                                    
been  imposed in  2000. He  noted that  spending would  have                                                                    
been significantly  lower than what was  actually spent over                                                                    
the period until FY 10. In  FY 10, the state would have been                                                                    
able to access account funds.                                                                                                   
Mr. Miller described Slide 11 as  a clear visual of what the                                                                    
measure would  do. The  left column  shows revenue  from oil                                                                    
after the permanent  fund is paid. The  five-year average is                                                                    
calculated and  if revenue from  the year is lower  than the                                                                    
five-year average,  funds could  simply be  transferred from                                                                    
the Balanced Budget  Account (BBA) by the  legislature up to                                                                    
the  five-year limit.  Revenue received  during the  year in                                                                    
excess   of   the   five-year   average   is   automatically                                                                    
transferred  back into  the BBA,  which the  legislature can                                                                    
access during low-revenue years.                                                                                                
Mr.  Miller assured  the  committee that  the  BBA does  not                                                                    
touch certain "Sacred Cows" (Slide 12):                                                                                         
   • Permanent Fund Dividend                                                                                                    
   • Permanent Fund Corpus                                                                                                      
   • Permanent Fund Earnings                                                                                                    
   • Amerada Hess                                                                                                               
Mr. Miller  also assured the  committee that the BBA  is not                                                                    
subject to the  CBR sweep. He pointed to a  bar graph (Slide                                                                    
14) covering  calendar years (CY) 2006  through 2010. Adding                                                                    
the numbers  from CY  2006 through CY  1200 and  dividing by                                                                    
five produces the five-year average.                                                                                            
   • HJR 8 transfers funds into  the BBA when oil prices are                                                                    
     high and, with a  simple majority vote, transfers funds                                                                    
     out of  the BBA  to fill  the gap  when oil  prices are                                                                    
     low.  When  the  balance  of BBA  exceeds  2  years  of                                                                    
     appropriations,  excess will  be  transferred into  the                                                                    
Mr. Miller spoke  regarding a similar graph on  Slide 15. He                                                                    
then  turned  to  Slide 16  and  detailed  the  relationship                                                                    
between the BBA and CBR:                                                                                                        
   · The BBA  is limited  to a maximum  amount equal  to oil                                                                    
     appropriations  for   2  years.  Any  excess   will  be                                                                    
     transferred to the CBR.                                                                                                    
   · The CBR:  HJR 8 transfers  funds into the CBR  when the                                                                    
     BBA  exceeds its  2 year  limit. The  legislature would                                                                    
     still need a ¾ vote to access the CBR.                                                                                     
3:12:12 PM                                                                                                                    
Mr.   Miller   stressed  that   HJR   8   is  about   fiscal                                                                    
responsibility (Slide 17):                                                                                                      
   • Encourages  a better  budgeting system  than "when  you                                                                    
     have it, spend it - when you don't, cut."                                                                                  
   • Provides a simple but effective  mechanism to help save                                                                    
     budget surpluses  and avoid deficits  while encouraging                                                                    
     government to live within its means.                                                                                       
   • Eliminates  need  for   complicated  "rat  holing"  and                                                                    
     "parking" of excess funds to avoid ¾ vote.                                                                                 
Mr. Miller addressed  the issue of why the  budget should be                                                                    
a constitutional amendment (Slide 18):                                                                                          
   • The legislature can easily  overpower, ignore or change                                                                    
     statutory appropriation constraints.                                                                                       
   • Let  the people  speak  concerning  this simple  fiscal                                                                    
     framework. It  may be  the only  fiscal plan  they will                                                                    
     endorse at this time.                                                                                                      
Mr. Miller  maintained that the measure  would dovetail with                                                                    
a  Percent  of  Market  Value  (POMV)  approach  to  funding                                                                    
government.  He  concluded  with  excerpts  from  Brandner's                                                                    
Legislative Digest No. 29/07 Dec. 19, 200& (Slide 20):                                                                          
   • Fiscal policy is more than savings and sound bites; it                                                                     
     requires long-haul skilled political crafting.                                                                             
   • Long term fiscal policy has been elusive in Alaska,                                                                        
     especially since  the beginning [of] the  pipeline flow                                                                    
     and  the flow  of  easy money.    The citizen  taxpayer                                                                    
     close scrutiny faltered  and was replaced by  all of us                                                                    
     with  our hands  out.   There are  reasons why  we have                                                                    
     failed, and continue to do so.                                                                                             
   • We play the budget game from the seat of our pants.                                                                        
   • Lawmakers are besieged with demands to spend,                                                                              
     especially when there is the  perception or the reality                                                                    
     as  is the  current case,  that there  is money  on the                                                                    
     table.   Fiscal restraint  then becomes  someone else's                                                                    
     business,  or   the  business  of   tomorrow,  although                                                                    
     tomorrow brings the same appetites.                                                                                        
   • The same people who demand that they see a critical                                                                        
     need  in  their  community,  or in  relation  to  their                                                                    
     institution   or   industry,   will   still   say   the                                                                    
     Legislature "spends too much."                                                                                             
3:13:15 PM                                                                                                                    
Representative  Kelly  summarized  by calling  the  proposed                                                                    
measure  a  gentle  movement towards  fiscal  stability.  He                                                                    
calculated  that the  state's savings  would have  generated                                                                    
about $4  billion more  if HJR  8 had  been in  effect since                                                                    
2000. He pointed  out that change thus far  had assured that                                                                    
the  state's revenue-sharing  dollars  are  average now;  he                                                                    
believed the  proposed legislation would have  the same sort                                                                    
of impact.                                                                                                                      
Co-Chair Stoltze  recalled taking up similar  legislation in                                                                    
the past. He commended the work done.                                                                                           
Representative  Austerman agreed  and believed  the proposal                                                                    
fit into discussions that the committee had been having.                                                                        
Vice-Chair Thomas  commented that  the fiscal  framework was                                                                    
not simple.                                                                                                                     
HJR  8  was   HEARD  and  HELD  in   Committee  for  further                                                                    
The meeting was adjourned at 3:15 PM.                                                                                           

Document Name Date/Time Subjects
01 Sponsor Statement HJR 8.pdf HFIN 3/18/2010 1:30:00 PM
06 HJR 8 Backup.pdf HFIN 3/18/2010 1:30:00 PM
HJR 8 House Finance.ppt HFIN 3/18/2010 1:30:00 PM
HJR 8 State Affairs Press Release.pdf HFIN 3/18/2010 1:30:00 PM
State Affairs Q&A.pdf HFIN 3/18/2010 1:30:00 PM
HJR 8 House Finance V1 (2)03182010.ppt HFIN 3/18/2010 1:30:00 PM
HB 280 Amendment # 5 Hawker.pdf HFIN 3/18/2010 1:30:00 PM
HB 280