Legislature(2009 - 2010)HOUSE FINANCE 519

03/31/2010 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HB 7 ROBERT E. BUSH VETERANS' MEMORIAL BRIDGE TELECONFERENCED
Moved CSHB 7(TRA) Out of Committee
+ HB 229 GAS EXPLORATION\DEVELOPMENT TAX CREDIT TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 6HOUSE FINANCE COMMITTEE                                                                                       
                      March 31, 2010                                                                                            
                         9:06 a.m.                                                                                              
                                                                                                                                
9:06:49 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 9:06 a.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                                                                                                       
Representative Woodie Salmon                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Tom Wright,  Staff, Speaker  Chenault; Mary  Siroky, Special                                                                    
Assistant, Department of  Transportation; Tom Wright, Staff,                                                                    
Speaker Mike  Chenault; Carri Lockhart,  Production Manager,                                                                    
Marathon  Oil Company;  Marcia  Davis, Deputy  Commissioner,                                                                    
Department of Revenue                                                                                                           
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
None                                                                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB   7         ROBERT E. BUSH VETERANS' MEMORIAL BRIDGE                                                                         
                                                                                                                                
               CS HB 7 (TRA) was REPORTED out of Committee                                                                      
               with a "do pass" recommendation and the                                                                          
               previously published fiscal note: FN1 (DOT)                                                                      
                                                                                                                                
HB 229         GAS EXPLORATION\DEVELOPMENT TAX CREDIT                                                                           
                                                                                                                                
               CS HB 229 (RES) was HEARD and HELD in                                                                            
               Committee for further consideration.                                                                             
                                                                                                                                
9:07:00 AM                                                                                                                    
                                                                                                                                
HOUSE BILL NO. 7                                                                                                              
                                                                                                                                
     "An Act naming the bridge over the Kasilof River on                                                                        
     the Sterling Highway the Robert E. Bush, Jr.,                                                                              
     Veterans' Memorial Bridge."                                                                                                
                                                                                                                                
9:07:28 AM                                                                                                                    
                                                                                                                                
TOM  WRIGHT, STAFF,  SPEAKER  CHENAULT,  explained that  the                                                                    
Uncle of Robert  E. Bush, Jr. requested the  bridge be named                                                                    
for Robert E. Bush, Jr. Robert  Bush passed away on July 12,                                                                    
2007, after serving  in the US Army  during Operation Desert                                                                    
Storm.  When he  returned home  upon his  discharge, he  was                                                                    
diagnosed  with Type  1 Diabetes,  which eventually  claimed                                                                    
his  life.  His  children  drove the  Kasilof  River  Bridge                                                                    
daily, and naming  the bridge in his honor  would remind his                                                                    
family and the  public of his contribution  to the community                                                                    
and  country.  He  stated  that  there  are  petitions  from                                                                    
members of the  community of Kasilof signed in  favor of the                                                                    
bridge naming.                                                                                                                  
                                                                                                                                
9:08:40 AM                                                                                                                    
                                                                                                                                
Representative Kelly asked if  anyone in Kasilof was opposed                                                                    
to the bridge  naming. Mr. Wright responded  that there were                                                                    
some who opposed the name  change, but there was no official                                                                    
testimony in opposition.                                                                                                        
                                                                                                                                
Co-Chair Stoltze closed public testimony.                                                                                       
                                                                                                                                
9:09:55 AM                                                                                                                    
                                                                                                                                
MARY    SIROKY,    SPECIAL    ASSISTANT,    DEPARTMENT    OF                                                                    
TRANSPORTATION  explained the  fiscal  note  for the  street                                                                    
signs  and  installation.  The  signs  would  be  brown,  in                                                                    
compliance  with historic  and recreation  sign custom,  and                                                                    
noted they will be on both sides of the street.                                                                                 
                                                                                                                                
Co-Chair  Stoltze asked  if this  would  be consistent  with                                                                    
other memorial signs. Ms. Siroky indicated yes.                                                                                 
                                                                                                                                
9:11:26 AM                                                                                                                    
                                                                                                                                
Vice-Chair  Thomas MOVED  to Report  CS  HB 7  (TRA) out  of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal  note. There being NO  OBJECTION, it was                                                                    
so ordered.                                                                                                                     
                                                                                                                                
CS  HB 7  (TRA) was  REPORTED out  of Committee  with a  "do                                                                    
pass"  recommendation and  the  previously published  fiscal                                                                    
note: FN1 (DOT)                                                                                                                 
                                                                                                                                
9:12:10 AM                                                                                                                    
                                                                                                                                
HOUSE BILL NO. 229                                                                                                            
                                                                                                                                
     "An  Act amending  and  extending  the exploration  and                                                                    
     development incentive  tax credit under the  Alaska Net                                                                    
     Income  Tax  Act  for operators  and  working  interest                                                                    
     owners  directly engaged  in  the  exploration for  and                                                                    
     development of gas  for delivery and sale  from a lease                                                                    
     or property  in the  state; providing for  an effective                                                                    
     date by  amending the  effective date  for sec.  2, ch.                                                                    
    61, SLA 2003; and providing for an effective date."                                                                         
                                                                                                                                
9:12:24 AM                                                                                                                    
                                                                                                                                
TOM  WRIGHT,  STAFF,  SPEAKER MIKE  CHENAULT,  presented  an                                                                    
overview of  the HB  229. He explained  that the  bill would                                                                    
amend and  extend the exploration and  development incentive                                                                    
tax  that was  originally enacted  in 2003.  The tax  credit                                                                    
would continue to apply under  the Alaska Net Income Tax Act                                                                    
for operators and working interest  owners, who are directly                                                                    
engaged in  the exploration  for and development  of natural                                                                    
gas in the Cool Inlet,  to more strongly encourage companies                                                                    
to  invest  additional  capital in  new  gas  reserves.  The                                                                    
legislation  would make  the  following  changes to  current                                                                    
law: it would increase the  amount of credit from 10 percent                                                                    
to 25 percent of the  amount of qualified capital investment                                                                    
and  qualified services  spending;  it would  remove the  50                                                                    
percent  limitation on  the amount  of credits  in a  single                                                                    
year, which would  increase the time value of  money for the                                                                    
credit; it  would remove the successful  efforts requirement                                                                    
that disallows  the credit for  wells that are  drilled with                                                                    
all  the same  cost,  but end  up  being non-productive;  it                                                                    
would clarify  that credits  can be taken  in a  current tax                                                                    
return, a  timely filed tax  return, or a timely  tax return                                                                    
filed  for  the  year  immediately following  the  year  the                                                                    
qualified  tax investment  was made;  it would  clarify that                                                                    
credits  can be  applied  to a  gas  reserve, regardless  of                                                                    
whether  or not  there was  previous gas  production in  the                                                                    
area; it  would clarify  that credits  apply to  North Slope                                                                    
gas that has been brought  into South-central Alaska; and it                                                                    
extends the  sunset date of  the investment tax  credit from                                                                    
January  1,  2013 to  January  1  2020.  The bill  makes  no                                                                    
changes to  definitions of qualified capital  investments or                                                                    
qualified services.  The annual  natural gas  production and                                                                    
supply  in the  Cook Inlet  was in  decline, but  demand was                                                                    
increasing.  He remarked  that the  original investment  tax                                                                    
credit was only a modest  success; he stressed expanding the                                                                    
tax   credit  to   allow  for   much   greater  success   in                                                                    
development.  He  hoped the  changes  outlined  in the  bill                                                                    
would achieve  that goal. He  pointed out that  under Alaska                                                                    
Statute (AS) 4320-043, which was  the original bill that was                                                                    
passed  in  2003, there  was  no  allowance for  double  tax                                                                    
credits, or "double dipping."                                                                                                   
                                                                                                                                
9:15:56 AM                                                                                                                    
                                                                                                                                
Representative Gara  wondered why  someone would  choose the                                                                    
10  percent credit  in the  bill, over  a 20  percent credit                                                                    
written  in  current  legislation. Mr.  Wright  deferred  to                                                                    
Carri Lockhart.                                                                                                                 
                                                                                                                                
Representative Fairclough remarked that  one bill requires a                                                                    
disclosure of all geological  and technical information, and                                                                    
the other bill does not.                                                                                                        
                                                                                                                                
9:17:19 AM                                                                                                                    
                                                                                                                                
Representative Gara  remarked that explorers  and developers                                                                    
wait for supply  contracts to expire, so a  new market opens                                                                    
up. He wondered  how that scenario would relate  to the need                                                                    
for tax credits. Mr. Wright deferred to Carri Lockhart.                                                                         
                                                                                                                                
Vice-Chair Thomas referred  to current legislation regarding                                                                    
an in  state gas pipeline,  and wondered if that  might have                                                                    
an impact on the proposed  tax credit sunset date of January                                                                    
1,  2020. Mr.  Wright explained  that  the hope  for HB  229                                                                    
would  be a  stop-gap measure,  because gas  line production                                                                    
was still unsure. He remarked  that there were not many well                                                                    
defined  fields in  the Cook  Inlet, so  it is  expensive to                                                                    
drill and explore the broad areas for the gas pockets.                                                                          
                                                                                                                                
9:21:05 AM                                                                                                                    
                                                                                                                                
CARRI  LOCKHART, PRODUCTION  MANAGER, MARATHON  OIL COMPANY,                                                                    
stated  that  the focus  of  Marathon  Oil Company's  Alaska                                                                    
Operation is  natural gas production operations,  limited to                                                                    
the  Cook Inlet.  In  2009, natural  gas  sales from  Alaska                                                                    
averaged  about 87  million cubic  feet  a day.  It sold  to                                                                    
local   utilities:  En-Star   Electric,  Chugach   Electric,                                                                    
Tesoro,  and the  Department of  Defense.  It also  provided                                                                    
natural  gas  to  the Conoco  Philips  Marathon  LNG  plant.                                                                    
Marathon had been in business  for Alaska for over 55 years,                                                                    
and she  stressed that  the company  is committed  to South-                                                                    
central   Alaska's  natural   gas   needs  through   current                                                                    
contractual  commitments. She  remarked that  tax incentives                                                                    
are imperative, because of the  long-term decline in natural                                                                    
gas  reserves and  deliverability. She  remarked that  it is                                                                    
unlikely  that Cook  Inlet reserve  additions would  replace                                                                    
annual production  on an ongoing  long-term basis.  As such,                                                                    
natural  gas reserves  and deliverability  were at  risk for                                                                    
continued  decline  at Cook  Inlet,  which  could result  in                                                                    
exposure  to unmet  utility  needs. There  is  a history  of                                                                    
oversupply of  natural gas from  the Cook Inlet,  which kept                                                                    
the price  of gas below the  lower 48 indexed prices.  As of                                                                    
late, the  regulatory processes and deterioration  in market                                                                    
availability have added to  project uncertainty. She pointed                                                                    
to key  issues to ensure  the reliability of natural  gas in                                                                    
South-central Alaska: storage;  market access and certainty;                                                                    
and  economic projects.  She believed  HB  229 would  impact                                                                    
economic  projects.  She  noted that  Marathon  projects  in                                                                    
Alaska compete globally for finite  funding, and stated that                                                                    
HB  229  would  level   the  playing  field  between  Alaska                                                                    
projects  and   other  investment   opportunities.  Marathon                                                                    
believed that HB 229 is one  part of the equation to enhance                                                                    
Cook  Inlet  exploration  and  development  activities.  She                                                                    
reiterated that in  order to qualify for  the investment tax                                                                    
credit, the  producer must  make capital  investments, which                                                                    
would add value back to the state.                                                                                              
                                                                                                                                
9:26:40 AM                                                                                                                    
                                                                                                                                
Representative  Austerman  queried  the impact  of  the  tax                                                                    
incentive   in  decisions   Marathon  might   make  in   new                                                                    
explorations.  Ms. Lockhart  replied that  a 25  percent tax                                                                    
credit  on  expenditures  does have  an  impact  on  overall                                                                    
expenditures,  but was  unsure  if it  would be  influential                                                                    
enough for projects to compete at the corporate level.                                                                          
                                                                                                                                
Representative Austerman  Ms. Lockhart responded  that there                                                                    
was a  portfolio of projects  that Marathon assesses  from a                                                                    
risk   management   perspective.   She  noted   that   those                                                                    
portfolios change,  depending on  wells that are  drilled in                                                                    
advance. Some  wells have continuing projects,  based on the                                                                    
success of  the well; some  projects get eliminated,  if the                                                                    
wells  fail.  Whether a  project  materializes  in the  near                                                                    
future  is   based  on  market  availability.   Marathon  is                                                                    
attempting to  secure new contracts. If  those contracts are                                                                    
not secured the tax incentive  may not matter, because there                                                                    
would be no market for the gas.                                                                                                 
                                                                                                                                
9:30:10 AM                                                                                                                    
                                                                                                                                
In  response  to a  question  by  Representative Kelly,  Ms.                                                                    
Lockhart  stated  that  the amount  of  regulations  on  the                                                                    
marketing side  is a challenge  for producers.  She remarked                                                                    
that  there are  not many  service providers  in Alaska,  so                                                                    
competition for  service is  high; therefore  services often                                                                    
come from the lower 48.                                                                                                         
                                                                                                                                
9:32:54 AM                                                                                                                    
                                                                                                                                
Representative  Gara  illuminated  that   there  was  not  a                                                                    
current  over-supply  issue,  and  wondered if  that  was  a                                                                    
benefit to Marathon. Ms. Lockhart  stated that if supply and                                                                    
demand market functions in Alaska  were the same as those in                                                                    
the  lower  48,  then  it  would  likely  benefit  Marathon.                                                                    
Furthermore,   the  regulations   in  Alaska   restrict  the                                                                    
benefits.  If  producers  do  not have  a  return  on  their                                                                    
investment, they will choose not  to invest, and the decline                                                                    
will continue.                                                                                                                  
                                                                                                                                
In  response  to  a question  by  Representative  Gara,  Ms.                                                                    
Lockhart  stated  there  are many  factors  that  gauge  the                                                                    
marketability of  gas. She pointed to  complex technologies,                                                                    
risks, and  deterioration of reservoirs. There  was a higher                                                                    
cost for  resource recovery, because  there was not  as much                                                                    
gas as there used to be.                                                                                                        
                                                                                                                                
9:35:42 AM                                                                                                                    
                                                                                                                                
Representative Gara  asked how long the  contracts will last                                                                    
for  the Cook  Inlet. Ms.  Lockhart responded  that she  was                                                                    
unsure, but  stated that  she had seen  a study  revealing a                                                                    
gap  starting in  the next  two  years highlighting  utility                                                                    
needs.                                                                                                                          
                                                                                                                                
Representative  Gara wondered  if utilities  wait for  their                                                                    
contracts  to expire,  before they  ask for  more exploring.                                                                    
Ms.  Lockhart  replied  that   utilities  are  proactive  in                                                                    
seeking  new supply  contracts, at  the same  time producers                                                                    
are proactive in securing outlets.                                                                                              
                                                                                                                                
9:37:38 AM                                                                                                                    
                                                                                                                                
Co-Chair Hawker  asked if utilities in  South-central Alaska                                                                    
were frustrated  by the regulatory commission.  Ms. Lockhart                                                                    
responded  that there  had been  three contracts  before the                                                                    
regulatory  commission;   two  of   which  were   long  term                                                                    
contracts, and were denied. She  remarked that these denials                                                                    
had  created  uncertainty  in Marathon's  business.  Because                                                                    
contracts  have  been  denied, Marathon  has  cut  back  its                                                                    
investment in Cook Inlet.                                                                                                       
                                                                                                                                
In  response  to  a question  by  Representative  Gara,  Ms.                                                                    
Lockhart declared  that Marathon  would be drilling,  if the                                                                    
contracts were not denied by the regulatory commission.                                                                         
                                                                                                                                
Representative Gara wondered if  Marathon was confident they                                                                    
would  fine a  gas  supply, even  though  gas resources  are                                                                    
unsure. Ms.  Lockhart replied that Marathon  would have made                                                                    
a  commitment  investment  to  be  sure  the  needs  of  the                                                                    
utilities were met.                                                                                                             
                                                                                                                                
9:40:29 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker   queried  the  success  rate   of  current                                                                    
drilling operations.  Ms. Lockhart  stated that was  never a                                                                    
100 percent  success rate. Some  levels of hydro  carbon are                                                                    
encountered  in most  cases, but  economic expectations  are                                                                    
most often not met. Expectations  are based on the reservoir                                                                    
and risks related to the drilling projects.                                                                                     
                                                                                                                                
Co-chair  Hawker asserted  that there  is risk  in drilling.                                                                    
Ms. Lockhart  agreed, and explained  that as  exploration of                                                                    
reservoirs  encroach the  borders, the  wells become  higher                                                                    
risk.                                                                                                                           
                                                                                                                                
9:42:21 AM                                                                                                                    
                                                                                                                                
Representative Fairclough reported that  she was involved in                                                                    
the Regulatory Commission of Alaska  (RCA) rulings, when the                                                                    
two  contracts  were denied,  as  well  as discussions  with                                                                    
utilities. In  those meetings, it was  acknowledged that gas                                                                    
supply  in 2012  would be  greatly depleted.  The Regulatory                                                                    
Commission  of Alaska  believed the  investment required  to                                                                    
meet the gas  requirement was too high for  the consumers in                                                                    
Anchorage.  Because of  that observation,  she believed  the                                                                    
denial was based  on cost to the  consumer. She specifically                                                                    
asked for  an explanation of the  complexities of geological                                                                    
and technical data that was released under production tax.                                                                      
                                                                                                                                
9:44:37 AM                                                                                                                    
                                                                                                                                
Ms. Lockhart  replied that under the  current production tax                                                                    
incentives, geological  data must be disclosed.  The data is                                                                    
equated  to a  trade secret  of a  company. It  is collected                                                                    
over years, and  it is analyzed and interpreted  in order to                                                                    
determine  an assessment.  After a  certain period  of time,                                                                    
that data  is released  for public  viewing. Marathon  has a                                                                    
problem  with  giving the  public  access  to their  private                                                                    
trade secrets. There  are two sets of  data: geophysical and                                                                    
well-log  data. Current  statute requires  well-log data  be                                                                    
released  to   the  public  domain  after   24  months,  and                                                                    
geophysical data  is released after  10 years.  She remarked                                                                    
that 10 years is a very short period of time.                                                                                   
                                                                                                                                
9:46:59 AM                                                                                                                    
                                                                                                                                
Representative  Austerman   wondered  if  doing   away  with                                                                    
Regulatory  Commission of  Alaska, rather  than passing  the                                                                    
bill might  result in more  drilling. Ms. Lockhart  chose to                                                                    
treat the inquiry as rhetorical.                                                                                                
                                                                                                                                
Representative  Fairclough  stated  that while  she  was  in                                                                    
Regulatory  Commission of  Alaska discussions,  she did  not                                                                    
see the  data the  Regulatory Commission  of Alaska  used to                                                                    
make its final decision. Ms.  Lockhart stated that over past                                                                    
18 months,  there had been extensive  dialogues. She pointed                                                                    
out  that  are many  different  roles  to fix  the  problem:                                                                    
Regulatory Commission  of Alaska, utilities,  producers, and                                                                    
the  state.  The common  goal  is  to  meet the  demand  and                                                                    
reliability. She remarked that  the Regulatory Commission of                                                                    
Alaska has  approved projects,  and they  carefully consider                                                                    
strategic implications on tactical  decisions. She said that                                                                    
HB 229  would further  progress development,  but it  is not                                                                    
the sole answer to the fuel shortage.                                                                                           
                                                                                                                                
9:50:26 AM                                                                                                                    
                                                                                                                                
Representative  Gara asked  if  the  denied contracts  would                                                                    
have met  En-star's five and  ten year demand.  Ms. Lockhart                                                                    
believed that  the five year  contract would  have fulfilled                                                                    
unmet needs through 2016, but  could not reply regarding the                                                                    
10 year contract.                                                                                                               
                                                                                                                                
Representative Gara wondered how one  commits to a five year                                                                    
gas supply contract, when the gas is not already available.                                                                     
Ms. Lockhart  stated that it  is a risked  business. Various                                                                    
factors go into  determining portfolios. Production profiles                                                                    
constantly  change,  and  are  considered  when  determining                                                                    
contract commitments.                                                                                                           
                                                                                                                                
Representative Gara  wondered what  happens if the  gas that                                                                    
is promised is not recovered.  Ms. Lockhart replied that the                                                                    
producer  can  purchase gas  from  other  companies or  keep                                                                    
drilling.                                                                                                                       
                                                                                                                                
9:53:18 AM                                                                                                                    
                                                                                                                                
Representative  Fairclough  shared  that in  her  experience                                                                    
with  the  Regulatory  Commission of  Alaska  the  utilities                                                                    
typically do  not request contracts from  only one producer.                                                                    
Utilities  normally submit  multiple contracts  with various                                                                    
producers,  to  ensure  availability of  the  resource.  She                                                                    
mentioned that the Regulatory  Commission of Alaska recently                                                                    
faced an  issue pertaining to the  high cost of gas  for the                                                                    
consumer, and  that the Regulatory Commission  of Alaska did                                                                    
not approve the contracts because of the cost.                                                                                  
                                                                                                                                
9:54:48 AM                                                                                                                    
                                                                                                                                
Representative  Gara  thought  it   would  be  in  the  best                                                                    
interest  of  his constituents  and  Alaska  to receive  the                                                                    
geophysical data  if Marathon was  to receive a  tax credit.                                                                    
That  way,   sustainability  knowledge  is   maintained.  He                                                                    
asserted that  the legislature's  purpose is not  to protect                                                                    
the interest of the industry,  but for the protection of the                                                                    
gas  supply for  consumers.  Ms. Lockhart  replied that  the                                                                    
state is benefited from the  additional resource and reserve                                                                    
production.   She  restated   that   the   release  of   the                                                                    
geophysical  and  well-log  data   is  problematic  for  the                                                                    
producer.                                                                                                                       
                                                                                                                                
9:58:43 AM                                                                                                                    
                                                                                                                                
Representative Doogan wondered how  the corporate income tax                                                                    
credit would be  used by the producer.  MARCIA DAVIS, DEPUTY                                                                    
COMMISSIONER,  DEPARTMENT OF  REVENUE,  stated  that the  25                                                                    
percent  credit is  based on  the  capital expenditures  and                                                                    
services. Once that volume is  determined, the 25 percent is                                                                    
used to offset  up to 100 percent the  corporate income tax,                                                                    
until the credit expires.                                                                                                       
                                                                                                                                
Representative Doogan  asked how  the tax credit  is applied                                                                    
pertaining strictly to drilling  attempts. Ms. Davis replied                                                                    
that if  the producer  avails themselves  of the  25 percent                                                                    
corporate income tax  credit, they would not be  able to use                                                                    
the same expenditures under a  production or exploration tax                                                                    
credit.                                                                                                                         
                                                                                                                                
10:02:48 AM                                                                                                                   
                                                                                                                                
Representative Doogan wondered if  one might be eligible for                                                                    
future  credits, once  the 25  percent corporate  income tax                                                                    
credit is used.  Ms. Davis replied that  one particular well                                                                    
may have many  different tax credits applied  to it, because                                                                    
different  kinds of  expenditures will  be used  through the                                                                    
life of the well.                                                                                                               
                                                                                                                                
10:05:04 AM                                                                                                                   
                                                                                                                                
Representative Austerman referred to  the current 10 percent                                                                    
tax credit  currently written in  law. He queried  the money                                                                    
that had  been used against  the 10 percent tax  credit, and                                                                    
requested an extrapolation against  the proposed increase to                                                                    
the 25 percent  tax credit. Ms. Davis replied  that the only                                                                    
way to do  a history of who has utilized  the 10 percent tax                                                                    
credit,  tedious physical  examinations of  corporate income                                                                    
tax returns and calculations would be required.                                                                                 
                                                                                                                                
Representative  Austerman  would  like to  know  the  dollar                                                                    
value  to previous  tax  credit bills,  not  limited to  gas                                                                    
related tax  credit bills. He  emphasized the  importance of                                                                    
obtaining  that  information,  in  order  to  determine  the                                                                    
fiscal impact on the state. Co-Chair Stoltze agreed.                                                                            
                                                                                                                                
Representative Austerman  assumed the Department  of Revenue                                                                    
(DOR) was  tracking all of  the tax credit  information. Ms.                                                                    
Davis reiterated that DOR was  not tracking the tax credits,                                                                    
because  they  did not  have  the  capabilities to  manually                                                                    
examine  and calculate  every corporate  income tax  return.                                                                    
She remarked that  DOR is at a  disadvantage when supporting                                                                    
the legislature, because they  are without that information.                                                                    
She  asserted that  Representative  Austerman's request  for                                                                    
calculations and  data were reasonable, but  DOR was without                                                                    
that resource.                                                                                                                  
                                                                                                                                
10:08:13 AM                                                                                                                   
                                                                                                                                
Co-Chair  Hawker  remarked  that  approximately  $3  million                                                                    
dollars was appropriated three years  prior, for the purpose                                                                    
of  accumulating the  requested data.  He wondered  why that                                                                    
money had  not been  used. Ms. Davis  responded that  the $3                                                                    
million  was used  to upgrade  motor fuel,  excise tax,  and                                                                    
corporate  income   tax.  The   $3  million  would   not  be                                                                    
inadequate to  provide a system requested  by Representative                                                                    
Austerman.                                                                                                                      
                                                                                                                                
Co-Chair Hawker  pointed out that  when HB 61 passed  in the                                                                    
2003  Legislature, DOR  affirmed that  they would  provide a                                                                    
complete  report in  2009 on  the effect  of the  tax credit                                                                    
under  HB 61.  He asked  if that  report was  completed. Ms.                                                                    
Davis affirmed that the report  was completed, and agreed to                                                                    
provide the report at a later time.                                                                                             
                                                                                                                                
Representative  Austerman wondered  if  DOR  looks at  every                                                                    
piece  of legislation  pertaining to  corporate income  tax.                                                                    
Ms. Davis  replied that there  were many current  bills that                                                                    
affect either  production or corporate  income tax,  and DOR                                                                    
carefully examines the data, as is feasible with man power.                                                                     
                                                                                                                                
Representative  Austerman stressed  providing DOR  with more                                                                    
money and  capabilities to extrapolate  data related  to the                                                                    
production and corporate income tax.                                                                                            
                                                                                                                                
10:10:42 AM                                                                                                                   
                                                                                                                                
Co-Chair Hawker argued that  the legislature faces decisions                                                                    
based  on  revenue generation  and  decisions  based on  the                                                                    
public good.  He emphasized that  half the population  is in                                                                    
need of natural gas, and that  a balance should be made when                                                                    
determining what money can be used towards a greater good.                                                                      
                                                                                                                                
Representative  Austerman agreed  that  he  was not  arguing                                                                    
health  and  safety  issues,  and  understood  that  gas  is                                                                    
needed. He just wanted to  be given accurate information, so                                                                    
he understood the fiscal impact of his decisions.                                                                               
                                                                                                                                
Representative  Gara asked  if DOR  had an  estimate of  how                                                                    
much money had  been received for corporate  income tax from                                                                    
Cook Inlet  over the  two years prior.  Ms. Davis  agreed to                                                                    
provide  that  information.  She  furthered  that  that  the                                                                    
information would only be  rough estimate, because corporate                                                                    
income  tax  is done  on  a  proportionate basis  of  global                                                                    
income based on a factor analysis.                                                                                              
                                                                                                                                
Co-Chair Hawker queried how  the state apportions world-wide                                                                    
income.  Ms. Davis  replied that  corporate income  tax from                                                                    
oil and gas  is a ratio of the corporate  global income. The                                                                    
return is a a fraction of  the Alaska payroll, a fraction of                                                                    
Alaska   properties  against   total  property,   and  other                                                                    
incorporating factors. Once that  ratio is determined, it is                                                                    
multiplied by  the total income to  determine Alaska's share                                                                    
of the income.                                                                                                                  
                                                                                                                                
10:13:58 AM                                                                                                                   
                                                                                                                                
Representative Gara wondered if  the credits can be combined                                                                    
with other  deductions or  royalty modifications.  Ms. Davis                                                                    
replied  the production  tax is  determined by  applying the                                                                    
tax  rate  against  the  net income.  The  costs  are  lease                                                                    
expenditures in  subtracting costs  out of the  proceeds, to                                                                    
determine the  production tax  value. The  tax rate  is then                                                                    
applied  against   the  tax  value.  Therefore,   the  lease                                                                    
expenditures  are  used in  deriving  the  tax value,  which                                                                    
determines  the oil  and gas  production tax  under Alaska's                                                                    
Clear and Equitable Share (ACES).                                                                                               
                                                                                                                                
In response to a question  by Representative Gara, Ms. Davis                                                                    
stated that tax payers in  Cook Inlet pay the Economic Limit                                                                    
Factor  (ELF) rate,  rather than  the calculated  rate under                                                                    
the production tax.                                                                                                             
                                                                                                                                
Representative  Gara  wondered  if   there  were  any  other                                                                    
expenditures  derived from  the royalty.  Ms. Davis  replied                                                                    
royalty  relief negotiations  would occur  before new  costs                                                                    
are incurred. Production costs would  not impact the royalty                                                                    
costs.                                                                                                                          
                                                                                                                                
In response to a question  by Representative Gara, Ms. Davis                                                                    
believed  that  royalty relief  can  occur  anywhere in  the                                                                    
state.                                                                                                                          
                                                                                                                                
10:17:49 AM                                                                                                                   
                                                                                                                                
Representative Joule  asked how the tax  credit would impact                                                                    
the work force.  Ms. Davis responded that any  time there is                                                                    
a  credit, money  is spent.  The credit  was formulated,  in                                                                    
order to  encourage production and  spending. The  target of                                                                    
the bill  is Cook  Inlet gas development,  and the  state is                                                                    
essentially  giving   the  producers   a  discount   on  the                                                                    
production  costs.  The  state  would  lose  a  bit  of  its                                                                    
corporate income tax  due to the 25 percent  tax credit, but                                                                    
the 75 percent of the cost  incurred by the company, is used                                                                    
to  presumably hire  employees and  continue to  operate and                                                                    
produce oil.                                                                                                                    
                                                                                                                                
10:21:28 AM                                                                                                                   
                                                                                                                                
Co-Chair Hawker  wondered if a  tax payer  avails themselves                                                                    
of  the investment  tax credit  under HB229,  they would  be                                                                    
prohibited  from  receiving royalty  modifications  provided                                                                    
under any other title. Ms. Davis affirmed that is correct.                                                                      
                                                                                                                                
Co-Chair Hawker  surmised that anyone who  avails themselves                                                                    
of investment  tax credit against  the corporate  income tax                                                                    
under HB229 would be prohibited  from claiming any other tax                                                                    
credit or royalty modification under  any other statute. Ms.                                                                    
Davis replied that is correct.                                                                                                  
                                                                                                                                
CSHB 229 (RES)  was HEARD and HELD in  Committee for further                                                                    
consideration.                                                                                                                  
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:24 AM                                                                                           

Document Name Date/Time Subjects
Petition.pdf HFIN 3/31/2010 9:00:00 AM
HB 7
Robert Bush Obituary 2.docx HFIN 3/31/2010 9:00:00 AM
HB 7
Sponsor Statement-TRA.pdf HFIN 3/31/2010 9:00:00 AM
HB 7
AS 43.20.043.docx HFIN 3/31/2010 9:00:00 AM
HB 229
Chapter 61, SLA 2003.pdf HFIN 3/31/2010 9:00:00 AM
HB229 Testimony 3.15.10[1].pdf HFIN 3/31/2010 9:00:00 AM
HB 229
HB 229 Report from DOR 3.15.10[1].pdf HFIN 3/31/2010 9:00:00 AM
HB 229
PRA Study Final (3).pdf HFIN 3/31/2010 9:00:00 AM
HB 229
Sectional Analysis (RES).pdf HFIN 3/31/2010 9:00:00 AM
HB 229
Sponsor Statement (RES).pdf HFIN 3/31/2010 9:00:00 AM
HB 229
HB 229 GARA Handout DNR Incentive Grid.pdf HFIN 3/31/2010 9:00:00 AM
HB 229
HB 229 DOR Report Gas Exploration Tax Credit.pdf HFIN 3/31/2010 9:00:00 AM
HB 229
Cook Inlet Well Example 5Apr10.pdf HFIN 3/31/2010 9:00:00 AM
HB 229