Legislature(1999 - 2000)

04/13/2000 06:20 PM House O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                                                             
                         April 13, 2000                                                                                         
                           6:20 p.m.                                                                                            
                                                                                                                                
COMMITTEE CALENDAR                                                                                                              
                                                                                                                                
HEARING ON IRS TREATMENT OF TAPS DR&R, AND TARIFFING                                                                            
BY RICHARD FINEBERG                                                                                                             
                                                                                                                                
TAPE 00-22, SIDE A                                                                                                              
                                                                                                                                
CALL TO ORDER                                                                                                                   
                                                                                                                                
Representative Jim Whitaker convened the meeting at 6:20 p.m.                                                                   
                                                                                                                                
PRESENT                                                                                                                         
                                                                                                                                
Members  present  at  the  call  to  order  were  Representatives                                                               
Smalley, Dyson, Kemplen, Whitaker.                                                                                              
                                                                                                                                
SUMMARY OF INFORMATION                                                                                                          
                                                                                                                                
CHAIRMAN  WHITAKER  introduced  Richard A.  Fineberg  to  testify                                                               
regarding the basis of his recent  Anchorage Daily News "Compass"                                                               
piece on the  Internal Revenue Service treatment  of Trans-Alaska                                                               
Pipeline    Service   (TAPS),    "Dismantlement,   Removal    and                                                               
Restoration" (DR&R) collections,  and the effect that may have on                                                               
tariffs.                                                                                                                        
                                                                                                                                
RICHARD  A. FINEBERG  explained that  DR&R is  the collection  of                                                               
payments  for  the dismantling  of  the  TAPS, stating  that  the                                                               
owners  of  the   pipeline  have,  by  their   own  calculations,                                                               
collected more than $760 million  for income taxes, most of which                                                               
they never actually paid.  He stated  that this has probably cost                                                               
the State of Alaska more than $160  million in revenue.   He went                                                               
on to  say that the administration  only recently  discovered the                                                               
problem,  and  that they  should  have  discovered it  long  ago.                                                               
According to Mr. Fineberg, Alaska  North Slope (ANS) crude oil is                                                               
handicapped  by its  relatively  high transportation  costs,  the                                                               
largest of which  is the pipeline.  From a  policy standpoint the                                                               
state should be concerned about the tariff for three reasons:                                                                   
                                                                                                                                
     First, the more it costs to deliver (ANS crude) to the                                                                     
     refinery, the less competitive that oil will be on the                                                                     
    world market.                                                                                                               
                                                                                                                                
       Second, the three companies that presently own the                                                                       
     rights to more than 90 percent of the production, also                                                                     
    own  more than  90  percent  of the  pipeline,  therefore                                                                   
    standing  to  benefit  from   excessive  tariffs  to  the                                                                   
    detriment of  non-owner shippers.   (He then  referred to                                                                   
    exhibit "B" of his testimony packet)                                                                                        
                                                                                                                                
    Finally, if the tariffs are excessive, that deprives the                                                                    
    state of much needed revenue.                                                                                               
                                                                                                                                
MR.  FINEBERG questioned  whether  the Regulatory  Commission  of                                                               
Alaska  (RCA)  safeguards  state revenue  interests  and  (North)                                                               
Slope  competition,  and suggested  that  the tariff  has  served                                                               
industry  purposes rather  well,  but (the  RCA)  functions as  a                                                               
"rubber stamp".   Up until  August 23,  1999, the state  had been                                                               
very clear  that the tariffs were  "just and reasonable,"  but on                                                               
that   date,   reversed   its  position   with   the   governor's                                                               
announcement  (during a speech  on the  BP/Arco merger)  that the                                                               
tariffs were excessive and a barrier to competition.                                                                            
                                                                                                                                
MR. FINEBERG testified  that while the tariff  is formula driven,                                                               
DR&R  is "cast  in concrete,"  a  set number  that is  "front-end                                                               
loaded"  or accelerated.   Further,  the  money is  not put  into                                                               
escrow  or a reserve  account, thus  creating  a windfall  to the                                                               
pipeline owners.                                                                                                                
                                                                                                                                
MR. FINEBERG stated  that the disclosure of what  he refers to as                                                               
the "scam" came  about in January, 2000, during  an investigation                                                               
brought about a challenge to the  tariffs brought by Tesoro.  The                                                               
RCA had requested that all other  parties to the case file briefs                                                               
on various aspects  of the DR&R.  In preparing  its response, the                                                               
Department of  Law discovered that  although the  1985 settlement                                                               
increased  DR&R collections  tariffs  to pay  the federal  income                                                               
tax, the TAPS  owners then "took federal tax  deductions for TAPS                                                               
DR&R  in  advance of  incurring  the  actual  expense."       The                                                               
Department  of Law  brief says  the TAPS  agreement assumes  that                                                               
DR&R funds  are treated  as taxable  income,  so the TAPS  owners                                                               
cannot  take  a deduction  for  DR&R  expenses until  the  actual                                                               
expense is incurred".                                                                                                           
                                                                                                                                
MR.  FINEBERG, in  answer  to a  question  by Chairman  Whitaker,                                                               
described how he  arrived at his initial statement  regarding the                                                               
amount of money this means to the state and to the producers.                                                                   
                                                                                                                                
MR. FINEBERG  quoted from the Department  of Law's filing  to the                                                               
RCA, wherein it states that Exxon  had filed a petition in United                                                               
States tax court  in 1990 to increase its deduction.   In the IRS                                                               
ruling,  the  need for  an  income  tax  surcharge for  DR&R  was                                                               
eliminated.                                                                                                                     
                                                                                                                                
MR. FINEBERG  stated that an attorney  for the Department  of Law                                                               
told him that the department is  still trying to obtain documents                                                               
to  determine  what  actually  happened  to both  the  state  and                                                               
federal income  tax payments, and  that it would be  premature to                                                               
quantify the consequences at this time.                                                                                         
                                                                                                                                
MR. FINEBERG  found, from  public records,  that the TAPS  owners                                                               
and  the state  have said  that  the owners  have collected  $765                                                               
million ($663 million for federal  taxes and $152 million for the                                                               
state) through  the years of the  tariff.  He then looked  at how                                                               
the state  income taxes  are collected,  and commented  that even                                                               
though the state and the IRS cannot  comment as to whether or not                                                               
the  taxes  have  been  paid,  nothing   would  prevent  BP  from                                                               
answering  the question  of  its own  volition.   He  went on  to                                                               
suggest if the  recent $460 million payment of  tax settlement to                                                               
the State of Alaska included compensation  for the failure to pay                                                               
tax on  the income  they received  for TAPS  DR&R, the  following                                                               
question  should  be  asked:  To   avoid  recurrence  of  similar                                                               
problems, was a penalty sought or collected?                                                                                    
                                                                                                                                
MR.  FINEBERG  then   commented  that  it  is   unusual  for  the                                                               
Department  of  Law  to  be both  making  and  executing  policy.                                                               
Typically, the department  represents a state agency  such as the                                                               
Department  of Natural Resources  or Department  of Revenue.   He                                                               
said he  has discovered  in various  conversations over  the last                                                               
year that  many of the people  who have formulated state  oil and                                                               
gas   revenue  administration   and   collection  policies,   are                                                               
responsible  for implementing  those  policies today.   He  noted                                                               
that the external  counsel who assisted the Department  of Law in                                                               
negotiating  the 1985  TAPS tariff  settlement  has continued  to                                                               
represent the state  in pipeline tariff matters  at FERC (Federal                                                               
Energy  Resource Commission).   He  mentioned several  indicators                                                               
that might  have prompted  a look at  this problem prior  to this                                                               
year:  several  of  his  reports,  testimony  at  the  settlement                                                               
hearings pointing  out the potential  for problems,  and articles                                                               
in publications.                                                                                                                
                                                                                                                                
CHAIRMAN  WHITAKER   asked  Mike  Barnhill  to   respond  to  Mr.                                                               
Fineberg's  comments   and  reassure   the  committee   that  the                                                               
department is looking into the matter.                                                                                          
                                                                                                                                
MIKE BARNHILL,  Assistant Attorney  General, Oil, Gas  and Mining                                                               
Section,  Department of  Law, responded  that he  does not  agree                                                               
with what  Mr. Fineberg  said in  his article,  and thinks  those                                                               
allegations were premature.   He testified that he  has asked the                                                               
RCA  to  investigate this  and  develop  a  factual record.    He                                                               
explained how  the whole  DR&R issue arose  from the  TAPS tariff                                                               
litigation  by the  state,  including the  inclusion  of the  tax                                                               
payments.   After deciding  how  much money would  be needed  for                                                               
DR&R  came the  discussion of  how  to collect  enough money  for                                                               
pipeline dismantlement  and how to approach the  tax treatment of                                                               
that amount.                                                                                                                    
                                                                                                                                
MR.  BARNHILL,   in  responding  to  RCA's  question   about  the                                                               
appropriate   treatment  of  the   DR&R  payments,   came  across                                                               
information  that raised  questions about  the collection  and or                                                               
payment  of  federal  income tax  monies  collected  through  the                                                               
tariff.    He went  on  to  say that  it  is  very early  in  the                                                               
investigation of  this issue.  He  expects the RCA in  the not so                                                               
distant  future  to  issue  a  ruling   on  his  request,  set  a                                                               
procedural schedule,  and afford  the department the  opportunity                                                               
of discovery.   That  discovery will allow  the  department  will                                                               
develop a factual  record.  But until the department  obtains all                                                               
the  facts,   they  just  don't   know  (whether  there   is  any                                                               
malfeasance).                                                                                                                   
                                                                                                                                
MR. BARNHILL, in response to a question  by Representative Dyson,                                                               
stated that the IRS agreement with  the TAPS carriers was made in                                                               
1988.                                                                                                                           
                                                                                                                                
REPRESENTATIVE GREEN asked Mr. Barnhill  to comment on the effect                                                               
that an extension of the life of  the TAPS line would have on the                                                               
collection of DR&R funds.                                                                                                       
                                                                                                                                
MR. BARNHILL  stated that the  collection schedule  was front-end                                                               
loaded, and  that almost all of  the money the carriers  had been                                                               
committed to  collect for DR&R had  already been collected.   The                                                               
issue, in  his opinion, is how  the money collected  will accrue.                                                               
The operators, at the time of the  TAPS settlement agreement, had                                                               
not  anticipated that  the pipeline  could last  until 2030;  but                                                               
now,  almost  everyone  agrees  that  it  could,  and  production                                                               
predictions extend until 2020.                                                                                                  
                                                                                                                                
REPRESENTATIVE  GREEN stated  concern  over how  the DR&R  monies                                                               
would be  handled in  relation to oil  industry with  mergers and                                                               
sales; and, that  despite the amount of money  already collected,                                                               
the cost of DR&R, after inflation, might exceed that amount.                                                                    
                                                                                                                                
MR.  BARNHILL answered  that with  the accrual  of interest,  the                                                               
amount of money  will grow, and should cover it,  unless the rate                                                               
of inflation exceeds it.                                                                                                        
                                                                                                                                
REPRESENTATIVE PORTER  asked if there was a separate  account for                                                               
the DR&R money.                                                                                                                 
                                                                                                                                
MR. BARNHILL  replied, "No,  all the  DR&R collections  are taken                                                               
into  income by  the TAPS  carriers, and  there's no  requirement                                                               
that the  money be kept in  a separate account  either internally                                                               
or externally, and  that is why they are legitimately  subject to                                                               
state and federal corporate income tax."                                                                                        
                                                                                                                                
MR.  BARNHILL,  in response  to  a question  from  Representative                                                               
Kemplen, said  that at the  time of the  1985 TSM  agreement, the                                                               
parties  didn't  know  that  the   IRS  would  rule  in  favor  a                                                               
deduction.  He could not speculate  how that knowledge might have                                                               
affected the settlement.  He did  say that the DR&R charges would                                                               
be less, but how much less, he didn't know.                                                                                     
                                                                                                                                
REPRESENTATIVE  KEMPLEN expressed  concern  that considering  the                                                               
fact  that  this  situation  was  discovered  as  the  result  of                                                               
"ancillary"  research, he was  wondering what  else might  be out                                                               
there and  asked if there were  some type of auditing  being done                                                               
on TAPS tariffs.                                                                                                                
                                                                                                                                
MR. BARNHILL answered  that the state has the right  to audit all                                                               
of the  TAPS carriers tariffs  on an  annual basis, and  that has                                                               
been done regularly since at least  1990.  But the audits look at                                                               
whether  the costs  the  carriers include  in  their tariffs  are                                                               
"prudent"   costs,  not   whether  certain   provisions  of   the                                                               
settlement agreement are appropriate, he explained.                                                                             
                                                                                                                                
REPRESENTATIVE KEMPLEN asked what  had been done during the years                                                               
1985 to 1990.                                                                                                                   
                                                                                                                                
MR. BARNHILL said it is possible  that audits had occurred during                                                               
that time, but that  he just didn't know.  He  explained that the                                                               
Department of  Law it is not  charged with examining  the formula                                                               
relating to  the tariff,  but with auditing  the input  into that                                                               
formula.   He  went on  to say  that  the Department  of Law  has                                                               
sufficient concern about the tax  deduction issue that they would                                                               
like to get some more information about it.                                                                                     
                                                                                                                                
REPRESENTATIVE   PORTER   asked  whether   any   of  the   recent                                                               
settlements preclude  the [state's] ability  to go back  and look                                                               
into this.                                                                                                                      
                                                                                                                                
MR. BARNHILL answered that it is  a possibility that they do, but                                                               
that is not something that he has  looked at yet.  In response to                                                               
a further  question by  Representative Dyson  as to what  lessons                                                               
we've learned and how we could do  better with regard to watching                                                               
for this type  of situation, Mr. Barnhill stated  that during the                                                               
1985  settlement  the   state  tried  to  look  at   all  of  the                                                               
possibilities.   However, this issue  involved federal  taxes and                                                               
thus  it   would  be   particularly  difficult   to  obtain   the                                                               
information.   He was not  sure that  the state would  have asked                                                               
specifically if  the carriers were  going to seek a  deduction of                                                               
the taxes on the  DR&R funds, but he supposed he  could find that                                                               
out.                                                                                                                            
                                                                                                                                
CHAIRMAN WHITAKER, in conclusion,  asked Mr. Barnhill to reaffirm                                                               
that the Department of Law is looking into this matter.                                                                         
                                                                                                                                
MR. BARNHILL responded in the affirmative.                                                                                      
                                                                                                                                
ADJOURNMENT                                                                                                                     
                                                                                                                                
The meeting was adjourned at an unspecified time.                                                                               
                                                                                                                                
NOTE:                                                                                                                           
                                                                                                                                
The meeting was recorded and handwritten  log notes were taken. A                                                               
copy of the tape and log notes may  be obtained by contacting the                                                               
House  Records  Office  at Room  229,  Terry  Miller  Legislative                                                               
Office  Building, 129  Sixth Street,  Juneau, Alaska  99801-1182,                                                               
(907) 465-2214,  and after adjournment  of the second  session of                                                               
the  Twenty-first Alaska  State Legislature,  in the  Legislative                                                               
Reference Library.                                                                                                              
                                                                                                                                

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