Legislature(2007 - 2008)BARNES 124
03/21/2007 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Ncsl/usda | |
| HB128 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 128 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
March 21, 2007
1:07 p.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Vic Kohring
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
Representative Scott Kawasaki
MEMBERS ABSENT
Representative Bob Roses
COMMITTEE CALENDAR
Presentation: NCSL/USDA
- HEARD
HOUSE BILL NO. 128
"An Act relating to allowable lease expenditures for the purpose
of determining the production tax value of oil and gas for the
purposes of the oil and gas production tax; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 128
SHORT TITLE: OIL & GAS PRODUCTION TAX: EXPENDITURES
SPONSOR(s): REPRESENTATIVE(s) OLSON
02/12/07 (H) READ THE FIRST TIME - REFERRALS
02/12/07 (H) O&G, RES, FIN
02/22/07 (H) O&G AT 3:00 PM CAPITOL 124
02/22/07 (H) Heard & Held
02/22/07 (H) MINUTE(O&G)
03/01/07 (H) O&G AT 3:00 PM CAPITOL 124
03/01/07 (H) Moved CSHB 128(O&G) Out of Committee
03/01/07 (H) MINUTE(O&G)
03/05/07 (H) O&G RPT CS(O&G) 3DP 1NR
03/05/07 (H) DP: DOOGAN, RAMRAS, OLSON
03/05/07 (H) NR: SAMUELS
03/19/07 (H) RES AT 1:00 PM BARNES 124
03/19/07 (H) Heard & Held
03/19/07 (H) MINUTE(RES)
03/21/07 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
DOUG FARQUHAR, Agriculture & Rural Development
National Conference of State Legislatures (NCSL)
Denver, Colorado
POSITION STATEMENT: Discussed the role of state legislatures in
revitalizing rural America.
KEVIN BANKS, Acting Director
Division of Oil & Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 128.
JONATHAN IVERSEN, Director
Anchorage Office
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: During hearing of HB 128, answered
questions.
ROBERT E. MINTZ, Attorney at Law
Kirkpatrick & Lockhart Preston Gates Ellis LLP
Anchorage, Alaska
POSITION STATEMENT: During hearing of HB 128, answered
questions in his capacity as an attorney for the Department of
Revenue and the Department of Law regarding production tax
matters.
DON BULLOCK, Attorney
Legislative Legal Counsel
Legislative Legal and Research Services
Legislative Affairs Agency
Juneau, Alaska
POSITION STATEMENT: During hearing of HB 128, spoke as the
drafter of the legislation.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 1:07:08 PM. Representatives
Gatto, Johnson, Edgmon, Seaton, Wilson, and Kohring were present
at the call to order. Representatives Kawasaki and Guttenberg
arrived as the meeting was in progress.
^Presentation: NCSL/USDA
1:07:27 PM
CO-CHAIR GATTO announced that the first order of business would
be a presentation from the National Conference of State
Legislatures (NCSL) and the United States Department of
Agriculture (USDA).
1:08:27 PM
DOUG FARQUHAR, Agriculture & Rural Development, National
Conference of State Legislatures (NCSL), began by informing the
committee that he has been with NCSL since 1991. In about 1998
he said he began working with USDA and the Kellogg Foundation
regarding rural development issues. There is a wide diversity
in rural America in that what is rural in some parts of the
country isn't in others. Furthermore, the rural think tanks
address ethanol and corn, but don't address mining, oil and gas,
timber, and fisheries, he highlighted. Mr. Farquhar then turned
to his PowerPoint presentation titled "Revitalizing Rural
America: The Role of State Legislatures." He turned to slide
2, and emphasized that rural legislators are becoming rare and
reviewed the redistricting proposals of Colorado, Nebraska, and
Texas. He related that generally census data goes against
rural legislators.
1:14:01 PM
MR. FARQUHAR pointed out that many states have created rural
caucuses. These rural caucuses have been established to ensure
that rural issues don't get lost in the legislative process and
maintain services and resources for the rural areas. Mr.
Farquhar moved on to slide 4 and opined that the federal farm
policy isn't supporting widespread rural economic development
and growth. For many states, the farm bill will be dramatically
different, which he attributed to the lack of budget, the
country's trade partners saying that subsidies can't be given,
and corn doesn't need subsidies. He highlighted that if there
isn't a decision by September 30th and a farm bill isn't passed,
it reverts back to the 1948 farm bill. He then opined that the
natural resources economy isn't effectively addressed by the
federal government but rather seems to be "locked up" in the
Department of Interior, the Bureau of Land Management (BLM), and
the U.S. Forest Service. He surmised that Alaska is very
frustrated that the federal government controls most of the land
in the state, which is an issue for all Western states. The
aforementioned isn't effectively addressed in the rural
discussions, and therefore he expressed the desire to work with
the committee on that. He informed the committee that there's
going to be a Rural Summit paid for by the Kellogg Foundation to
discuss rural issues with Congress, but he's having difficulty
getting the issue of federally controlled lands on the agenda.
1:17:37 PM
MR. FARQUHAR moved on to globalization, and suggested that
there's no way to not integrate globalization into the rural
economy because there are major impacts to rural areas. For
example, the country's manufacturing base is moving overseas.
Furthermore, the trade barriers that once existed are no longer.
The basic barriers were tariffs or an individual at the port
saying the item couldn't enter. Now, there must be an exact
reason why an item can't enter and there must be lawyers and
economists to support it.
1:18:45 PM
MR. FARQUHAR emphasized that trade agreements and states aren't
in agreement with one another. Furthermore, [trade agreements]
haven't been good for the states, from a state policy-making
view. Although he acknowledged that [trade agreements] have
been good for the economy overall, states need to be able to
address situations when a state law is repealed because of trade
agreements with other countries. With regard to changing rural
policy, Mr. Farquhar expressed the need to frame issues for the
rural economy, particular to the state. For instance, those in
rural Alaska can't grow corn, and therefore there needs to be a
new way to define rural development. He then shared a map of
Alaska that highlights the extensive amount of lands held by the
federal government in the state. The aforementioned has to be
brought forward because rural development in Alaska can't be
addressed the same as states with little to no federally
controlled lands. Turning to slide 6, he highlighted the
federal laws that apply, which limit what Alaska and many
Western states can do on federal lands.
1:22:15 PM
MR. FARQUHAR, referring to slide 7, emphasized that the economy
in rural America is lagging behind. Furthermore, the natural
resource economy is extremely difficult to maintain. He then
directed the committee's attention to slide 8 titled "Counties
with net out migration, 2000-03," which illustrates where people
are moving out of and to. The map on slide 8 illustrates that
people are leaving the rural areas and moving to the more urban
areas. In fact, the only places growing in Alaska are around
Anchorage, which he surmised that the committee members already
know.
1:23:28 PM
CO-CHAIR GATTO inquired as to why Southeast Alaska doesn't
prosper more. He asked if it's due to transportation issues.
MR. FARQUHAR answered that Southeast Alaska is a natural
resource economy and much of the land is held by the U.S. Forest
Service. There is very little land available in Southeast
Alaska, over which the state has control. If the scenario was
switched, there would be changes. For example, in Colorado
counties where the federal government has allowed economic
development to occur there has been expansion. In fact, the
North Central portion of Colorado is experiencing a boom because
of natural gas development. The aforementioned was a decision
by the federal government, he emphasized.
1:25:30 PM
REPRESENTATIVE SEATON commented that on all of Alaska's
resource-based industries, the market prices have been an issue.
He echoed Mr. Farquhar's earlier comments regarding the impacts
of trade agreements. Representative Seaton clarified that
federal government ownership hasn't been the only problem.
MR. FARQUHAR said that goes back to his point about
globalization. There are much cheaper areas to produce
everything, especially when the areas [outside the U.S.] don't
have to pay the costs required in the U.S. such as environmental
studies, health care, etcetera. He pointed out that if a
business has to purchase a certain product, it may be more
economical to purchase it from another country. The
aforementioned really hits the rural economies. Mr. Farquhar
said that although he doesn't have an answer, he emphasized that
states often don't have people at the table when trade
agreements are discussed.
1:28:19 PM
MR. FARQUHAR moved on to slide 9, which highlights that states
can't give a preference to local purchasers. The question, he
reiterated, is how can it be equal when those in the U.S. have
to pay labor, health, and safety costs that aren't required in
other countries. He then turned attention to the FRTC v. Natios
case, which was the result of a Massachusetts law passed in
1980. The law said that anyone doing business with the country
of Burma and the State of Massachusetts would be assessed a 10
percent penalty, fee, which would be used to educate people
about the atrocities in Burma. Originally, Switzerland brought
suit against the U.S. to overturn the Massachusetts law. The
case ultimately went to the U.S. Supreme Court, which ruled that
trade agreements are federal foreign policy and states don't
have a role. Basically, the law was repealed. From a legal
standpoint, most trade agreements don't give an individual the
right to sue a state but a country can file suit against the
entire U.S. This case dramatically changed the dynamic as it
allowed an individual company to bring suit against a state over
a trade agreement negotiated by the federal government on an
international basis.
1:31:24 PM
MR. FARQUHAR then turned to the issue of local food preferences
within a state. Although there are 20 states that have adopted
laws with regard to local food preferences, those laws are all
in violation of this trade agreement. He surmised that as long
as there is no case or controversy, things are fine. [In
relation to Alaska's position on this matter], he said that he
still thinks about Canada's lumber dispute and salmon and
questioned whether it will come back to haunt Alaska.
1:32:13 PM
MR. FARQUHAR moved on to slide 10 regarding U.S. exports and
imports. He pointed out that 20 percent of all imports are
coming into the U.S. In fact, Wal-Mart is the number one
purchaser of products from China. He said that Wal-Mart is the
one single company that has turned the Chinese economy around.
The U.S. has about 12 percent of the world's exports, which is
agriculture and Boeing. He emphasized that the natural resource
economy, on which Alaska is based, is not coming in from
countries besides the U.S. Slide 11 titled "State Rural
Agencies" relates the agencies being created in other states to
address the aforementioned problems. He highlighted that in the
late 1980s the Governor of North Carolina created the North
Carolina Rural Economic Development Center. The goal of the
center was to identify the problems in rural areas, bring those
issues to the forefront, and obtain more federal resources into
rural North Carolina. The Center for Rural Pennsylvania was
created along the same lines as the North Carolina Rural
Economic Development Center. He noted that rural areas are
inherently not as well represented in Congress and they don't
receive as much attention among the federal agencies.
Therefore, one must determine how to bring the data forward into
a rural context in order to discuss the problems. He then
directed the committee's attention to slides 12-14, which
highlights legislation regarding rural economic development in
various states. The point, he said, is that state legislatures
are beginning to take a role in rural economic development by
providing tax incentives, enterprise zones, and loans. In fact,
this year North Dakota is going to provide $500,000,000 to fund
farmer's markets.
1:35:41 PM
MR. FARQUHAR informed the committee that Canada and Idaho have
taken an aggressive approach with regard to addressing their
rural constituencies. Idaho put together a document profiling
rural Idaho in an effort to provide the data necessary for rural
areas to apply for grants and loans. He mentioned that many
states are identifying a single state employee who is dedicated
to getting federal money to rural areas. That employee's job is
to design the data in a manner that's attractive to gain rural
dollars. Canadians are very aggressive because their economy is
based on trade, which will prove to be a difficulty for many of
the states that have the same economic base as Canada. The
aforementioned is something Alaska may want to consider. In
conclusion, Mr. Farquhar inquired as to the types of topics and
comments he needs to take to the USDA and the Kellogg Foundation
to meet the needs of rural Alaskans.
1:38:18 PM
REPRESENTATIVE EDGMON pointed out that a key point lacking in
the presentation was the cost of energy, which can make or break
a company's decision for going into Bush Alaska. Furthermore, a
good portion of Bush Alaska and Alaska isn't connected via the
road system and thus every component of rural Alaska is
different than rural areas elsewhere.
MR. FARQUHAR noted his agreement that the price of oil has an
enormous impact in rural areas, although it affects everyone.
He mentioned that small businesses have had to relocate from
rural areas to larger areas because of transportation issues.
There is no easy answer, he opined.
1:40:13 PM
CO-CHAIR GATTO highlighted that general aviation is essential in
Bush Alaska and the federal government just added $.50 a gallon
on general aviation fuel. For those in the Bush, that tax is
devastating.
1:40:52 PM
REPRESENTATIVE WILSON related that her husband lives in the
Bristol Bay area, which isn't even considered a village, where
the cost of something is by weight [due to transportation costs]
and thus it drives up the prices. For instance, a head of
cabbage can cost $9 in some areas. Furthermore, gasoline in
some of these areas is $6 a gallon. Although Southeast Alaska
can obtain things by boat, it's not a dependable system. She
then highlighted that the majority of land in Southeast Alaska
is in the Tongass National Forest and there's plenty of forest
that could be cut and it could renew itself. However, the
federal government has cut back what logging can be done.
Therefore, Alaska really needs relief with regard to economic
development on federal land.
1:44:18 PM
MR. FARQUHAR returned to the production of ethanol and the high
price of corn. However, the only reason ethanol is being made
from corn in the U.S. is due to the $.50 a gallon subsidy and a
certain amount of ethanol comes in from Brazil. The ethanol
made in Brazil is made much cheaper and the U.S. has a barrier
on the amount of Brazil's ethanol that can be imported into the
U.S. He related that his friends at the National Renewable
Energy Laboratories who say that what is good [to make fuel] is
wood. Furthermore, the wood doesn't need to be of great
quality, as what's left after a fire can even produce fuel.
Although it takes a while to get these technologies going, Wall
Street is very excited about this. The natural conditions to
grow trees at a fast pace occur in Southeast, which could result
in some exciting things. However, the situation remains that
Southeast Alaska legislators have to represent those in
Southeast Alaska while decisions are made in Washington, D.C.
Mr. Farquhar reminded the committee that he is asked to speak
about what state legislatures think about rural development and
what's been discussed today is often what he brings up. He
noted that in particular he specifies that state legislatures
should be able to make the decisions. Furthermore, technology
can provide some great opportunities, he mentioned.
1:47:37 PM
CO-CHAIR GATTO said that he discussed some options for rural
areas with Mr. Farquhar. To that end, the presence of a
windmill could be enormously beneficial. He then highlighted
Galena, which is using nuclear to make steam to run a turbine.
Furthermore, wood chips can be used as can fish oil for making
biodiesel.
1:48:14 PM
MR. FARQUHAR commented that he didn't discuss healthcare and
education via the Internet. In fact, the biggest thing for
economic development has been the Internet and cell phones.
Furthermore, there are rural school districts in Colorado that
have closed their school buildings and provide instruction via
the Internet in their homes. He related that he teaches courses
on line for the University of Denver. Healthcare is taking that
same path by utilizing the Internet. This is part of rural
development, he emphasized.
1:50:49 PM
CO-CHAIR GATTO turned to the pharmaceutical industry and
informed the committee that a French company contracted with
American farmers to grow genetically modified corn that produced
a drug to treat cystic fibrosis. The aforementioned was much
less expensive than synthetically producing the drug. However,
the genetically modified corn has to be confined and can't get
out. Co-Chair Gatto opined that the aforementioned wouldn't be
a problem in Alaska.
MR. FARQUHAR noted that there is controversy with genetically
modified corn because if it gets out [there are problems]. The
corn stock is designed to produce a lot and thus not much is
necessary. Furthermore, it can be grown in greenhouses.
CO-CHAIR GATTO related his belief that an individual with one
acre of land in Alaska could have a farming operation. He then
related that he is searching for help in the really rural areas
of the state.
1:54:55 PM
MR. FARQUHAR pointed out that there are some parts of the world
that cannot get decent food, such as Bethel. However, that's
not on the [USDA's] radar at all because it views rural areas as
having bountiful food. In fact, New Mexico has initiated an
effort to utilize farmers' markets from which fresh produce is
shipped to rural areas that don't have fresh produce.
1:56:21 PM
REPRESENTATIVE WILSON inquired as to who is paying for it to be
shipped.
MR. FARQUHAR answered the state legislature appropriated the
funds.
REPRESENTATIVE WILSON then inquired as to what occurs when the
majority of the legislators are in a railbelt and don't want to
fund things for other areas.
MR. FARQUHAR said that such a situation exists in New Mexico.
The problem is in relation to the extra dollars being paid in
Medicaid dollars to rural areas without medical insurance. The
effort in New Mexico was based on the public health effects of
unhealthy people and that everyone pays for them.
REPRESENTATIVE WILSON interjected that the crux of the problem
is that no Alaskan pays for state government.
1:59:02 PM
REPRESENTATIVE WILSON inquired as to what Alaska can do [to help
with regard to rural economic development].
MR. FARQUHAR suggested that [the legislators] should keep
feeding him anecdotes and keep having Co-Chair Gatto come to his
meetings. He announced that in the last week of June, the
Kellogg Foundation is holding a meeting in Washington, D.C.,
where it will talk to the rural caucus and discuss how to build
up this rural agenda.
2:00:02 PM
MR. FARQUHAR, in response to Co-Chair Gatto, said that there
probably would be an opportunity to make a presentation about a
rural condition for which no resolution has been found. He
informed the committee that he is being asked to get a speaker
from the group in Alabama. With the exception of Idaho, who is
very aggressive, most states step back thinking they can't do
anything about [rural economic development].
2:01:38 PM
CO-CHAIR GATTO inquired as to whether there is any place back
East that's considered rural. If so, what is considered rural,
he asked.
MR. FARQUHAR related that five miles [from a major urban center]
is considered rural.
2:04:07 PM
CO-CHAIR GATTO asked if the federal government is pulling back
from rural development or are they advancing.
MR. FARQUHAR informed the committee that part of the 2002 Farm
Bill included the Rural Strategic Investment Act, which would've
provided funds to rural development and have meetings. However,
the budget office cut it. There are a lot of disincentives in
Congress for rural America. In fact, most congressmen from
rural America are being defeated. Furthermore, some of the
large [rural] advocates, such as Bob Dole, have stepped down.
Demographics are against rural legislators, he said.
2:05:40 PM
CO-CHAIR GATTO surmised then that it's a shift for rural
legislators to be replaced by those who are more urban in
character.
MR. FARQUHAR noted his agreement, adding that every time
redistricting occurs there are more seats from urban areas and
urban suburban areas. Rural legislators have less clout, he
pointed out. Therefore, the rural folks have to make themselves
more known.
CO-CHAIR GATTO reviewed the situation in Alaska and related that
a third of Alaska's population isn't on the road system and is
scattered throughout the state. There isn't an answer for those
rural areas to establish an economy to provide some self-
sufficiency.
2:07:41 PM
CO-CHAIR GATTO mentioned that there are folks in the building
addressing how valuable broadband is for education. He related
his belief that education is going to have to change from brick-
and-mortar schools. He emphasized that the state's entire
future is the proposed natural gasline.
[A discussion ensued regarding the proposed natural gasline.]
2:13:54 PM
MR. FARQUHAR urged committee members to contact him when there
are problems.
HB 128-OIL & GAS PRODUCTION TAX: EXPENDITURES
2:15:15 PM
CO-CHAIR GATTO announced that the final order of business would
be HOUSE BILL NO. 128, "An Act relating to allowable lease
expenditures for the purpose of determining the production tax
value of oil and gas for the purposes of the oil and gas
production tax; and providing for an effective date." [Before
the committee was CSHB 128(O&G).]
The committee took an at-ease from 2:16 p.m. to 2:17 p.m.
2:18:35 PM
KEVIN BANKS, Acting Director, Division of Oil & Gas, Department
of Natural Resources (DNR), began by relating DNR's support for
HB 128. He then turned to paragraph (19) [on page 3, lines 19-
23] of the legislation, which suggests a new category of costs
that would be eliminated from a potential deduction in
calculating the petroleum production profits tax (PPT) should
there be repair or replacement or improperly maintained
property.
2:20:11 PM
CO-CHAIR GATTO asked if DNR has a definition of the term
"improper."
MR. BANKS related his understanding that John Iversen,
Department of Revenue (DOR), has been working with Legislative
Legal and Research Services, himself, and staff of the Alaska
Oil and Gas Conservation Commission (AOGCC) to develop clear
language. Mr. Banks related his belief that this is a provision
of the petroleum production profits tax (PPT) that would not be
used very frequently. He suspected that there could be a
situation in which an auditor determines there has been some
kind of failure, which would indicate that there's a problem.
At that point the commissioner of DOR, under this provision,
would be able to consult with DNR, the Conservation Commission,
or the Department of Environmental Conservation (DEC) and ask
whether something had occurred or whether the failure had
occurred due to improper maintenance. After those
conversations, the commissioner will be able to assemble an
opinion regarding whether or not a facility had been improperly
maintained. At this point, the commissioner of DOR could take
it or leave it as he is only tasked with taking such into
consideration when making a decision regarding whether the cost
is deductible or not. He highlighted that DNR is now embarking
on an effort, as a consequence of the events last spring and
summer, to create the Petroleum Systems Integrity Office (PSIO).
The PSIO will be responsible for collecting information
regarding how facilities owned and operated by the [state's]
lessees are being maintained. The PSIO will rely on the
internal controls that the operators normally use in scheduling
maintenance, various industry standards, as well as the
operators' own internal controls for maintaining equipment.
2:24:47 PM
REPRESENTATIVE WILSON related her understanding that the
department can already do what HB 128 says.
2:25:14 PM
MR. BANKS explained that [the department], as the landlord, will
be extending the oversight over operations conducted by the
lessees. The purpose of this organization is not to provide, on
a routine basis, information that's relevant to a taxing
authority of the state. He clarified that [the department] is
going to assure that the facilities in operation in the oil
field are being taken care of. When the commissioner of DOR
comes to DNR and wants to know whether or not equipment has been
maintained appropriately. Once [the PSIO] is up and running
there will be evidence to share to answer the aforementioned
question. In fact, he suggested that a lessee knowing that
potentially the cost of maintenance activities might not be
deductible under taxes may have the incentive to provide the
PSIO with information that they have properly maintained their
equipment. The evidence DNR may collect would serve as a
benefit to establish that the lessee or taxpayer had legitimate
costs to be deducted.
2:27:05 PM
CO-CHAIR GATTO asked if this requires a person on-site or will
the poor maintenance or nonmaintenance be based on the evidence
of a leak, corrosion, or a pipe shut down. He noted his
understanding that there can be a pipe shut down for a number of
reasons, none of which are improper maintenance. Therefore, he
questioned whether there is a test that would determine whether
there is proper maintenance, improper maintenance, failure, et
cetera.
MR. BANKS responded that as part of the routine function of the
PSIO, PSIO staff will examine the records and documents provided
by the lessees that illustrate the types of maintenance plans
and equipment replacement planning in place. The PSIO will
verify that the lessee did what it said it would do. There will
also be occasional on-site inspections to ensure that equipment
is in place that the lessees specify and meet the standard
certification expected in the various settings utilized. The
idea, he clarified, is to ensure nothing happens. Mr. Banks
emphasized that the PSIO won't pursue a problem. However,
pursuing a problem may be the result of a tax audit that reveals
a failure due to improper maintenance. Under those
circumstances, the commissioner of DOR may request that DNR help
determine whether [the failure] was caused by an accident or
gross negligence or something in between, which is what
paragraph (19) attempts to address. At that point [the PSIO]
can turn to its records and information to establish that.
2:30:11 PM
REPRESENTATIVE WILSON recalled that the PPT legislation included
language that would cover the existing situation. Therefore,
she questioned whether, because of regulations, BP's request for
a tax credit could be disallowed, if the department so chose.
She expressed interest in understanding what HB 128 is doing
that's different.
MR. BANKS replied that the regulations regarding the
implementation of terms like improper maintenance, gross
negligence, and other aspects of this particular section of the
PPT is the responsibility of DOR.
2:31:55 PM
JONATHAN IVERSEN, Director, Anchorage Office, Tax Division,
Department of Revenue, said that there are a number of
provisions in the PPT already that would be applicable to this
sort of repair costs. Although there are a number of tools
under the PPT to exclude costs, HB 128 would help to clarify
whether costs attributable to improper maintenance can be
excluded, in the absence of gross negligence. The legislation
before the committee today makes it bulletproof, he opined.
2:33:20 PM
ROBERT E. MINTZ, Attorney at Law, Kirkpatrick & Lockhart Preston
Gates Ellis LLP, explained that the current law has an area
which is clear and an area that isn't. The area of existing law
that is clear is the exclusion of costs due to gross negligence.
However, gross negligence is a much narrower category than what
this legislation is trying to address, which is the lack of
maintenance or improper maintenance. The unclear portion is the
general definition of lease expenditures or deductible costs,
which are ordinary, necessary, and direct costs of exploring,
developing, or producing oil and gas deposits. He said that in
interpreting that general definition, current law directs the
department to review typical industry practices and standards in
the state that are reflected in the types of costs that may be
billed under joint operating agreements. If the department
reviewed this and determined that improper maintenance costs are
typically disallowed by industry practice, then it would be
firmer ground to disallow them. If the facts are otherwise, the
department would have to rely on the gross negligence standard.
Mr. Mintz specified his agreement with Mr. Iversen that
legislation is appropriate if the legislature is interested in
making clear that costs due to lack of maintenance or improper
maintenance should be excluded.
2:35:29 PM
REPRESENTATIVE SEATON related his understanding that Mr. Mintz
is excluding the lease expenditure portion of the enrolled
version of House Bill 3001 on page 28 [which was passed in
2006]. Under that provision, there is another fallback so that
if the other producers within that lease don't allow that those
deductions were legitimate deductions or were caused by
negligence, then the state automatically doesn't allow them as
well or can exclude those costs as well. Therefore, there seems
to be gross negligence and negligence as seen by the other
owners on that lease. He questioned, "Can you tell me then, in
reference to that, where is this new standard of improper
maintenance come from our standpoint if the other owners of that
lease don't consider that the improper maintenance was enough to
not allow that to be deducted from the operator's costs that
they're billing them. At what point does our standard of
improper maintenance come in?"
2:37:26 PM
MR. MINTZ stated his agreement that if the costs were in a unit
subject to a unit operating agreement that the department had
approved or acquired under [AS 43.55].165(c) or (d) and the
producers disallow the bill, it would be disallowed for tax
purposes as well. He then related his understanding that
Representative Seaton is proposing a situation in which HB 128
is passed, but there's a situation in which the costs are billed
under an operating agreement and the partners don't dispute it,
they pay it. The question is whether the state would have to
allow it as a deduction, to which the answer is no because
subsections (c) and (d) specifically exclude all of the items
listed in subsection (e). He directed attention to the lead-in
language to subsection (c)(1) on page 28 and subsection (d)(1)
on page 29 of House Bill 3001. The language specifies that
lease expenditures that are deductible are the costs that are
listed other than items listed in (e) of the section, which is
the list of excluded items.
2:39:16 PM
REPRESENTATIVE SEATON said:
That's what I was recognizing. All of these, whether
it's the gross negligence standard or the ... strict
liability clause of 16 if there's a spill. And then
we have this third fallback that we're just talking
about in lease expenditures. If they're disallowed by
the other operators. ... I guess if we're talking
about standards of the industry and we're talking
about standards that are used, ... is your position
that the other owners are going to automatically roll
over for these big high costs or you would expect them
to roll-in and pay a good percentage of these high
costs if they attribute them to negligent operation of
the unit. If that's not the case, then what we're
talking about a whole series that is beyond what they
would disallow for negligence. Is that correct?
MR. MINTZ said he wasn't sure he could predict how the other
owners are going to behave. However, he recalled that in one of
the early hearings of [House Bill 3001] a representative from
ConocoPhillips Alaska, Inc. (ConocoPhillips) discussed that its
corporate policy in reference to bills is to challenge bills
that they believe are due to gross negligence or the acts of an
imprudent operator. He further recalled that the ConocoPhillips
representative said that a determination had not yet been made
as to the company's position related to the particular costs
related to pipeline corrosion.
2:41:49 PM
DON BULLOCK, Attorney, Legislative Legal Counsel, Legislative
Legal and Research Services, Legislative Affairs Agency,
explained that under the PPT the producers are allowed to deduct
the allowable lease expenditures in determining their tax.
Under the 22.5 percent tax rate if there's a $1 deduction, the
state shares 22.5 cents of the cost. In addition to the
deduction allowed in determining the amount of the tax to be
paid, there is also a credit for certain qualified capital
expenditures. The aforementioned provides [the producers]
another 20 percent of their qualified capital expenditure. He
highlighted that to be a qualified capital expenditure, it has
to also be an allowable lease expenditure. This bill, he
stated, presents the question of how much risk the state wants
to be for certain costs. Mr. Bullock then turned to negligence,
and pointed out that an entity would be negligent because it
didn't do what was expected. Therefore, HB 128 requires the
commissioner of DOR to determine what is good oil field
practice. The legislation specifies that certain deductions for
cost will be given, but a certain level of performance is
expected. How much of a deviation from what's expected to be
good oil field practice will be determined by the commissioner
of DOR.
MR. BULLOCK then turned to the matter of depreciation. The PPT
has some aspects of an income tax as it starts with a gross
value at the point of production and the costs are allowed.
However, the [costs] are all expensed and there's no
capitalization. This means that regular maintenance costs would
be deducted over the year as they go, but if equipment isn't
maintained, then there would be a disproportionate deduction to
make up. Therefore, if the cost is one that could've been
prevented, then the question with HB 128 is whether the state is
going to share in the cost of something less than what the state
finds to be an acceptable standard.
2:45:23 PM
CO-CHAIR GATTO posed a scenario during which the first three
years there are normal maintenance costs of one, one, and one
for a total of three. He then posed a scenario in which a
company doesn't do maintenance until the fourth year when it's
four, which would've been normal. In such a situation should
the company be penalized for doing all of its maintenance in
year four, or should the company be penalized for not doing
maintenance during the first three years.
MR. BULLOCK explained that it's the history of the maintenance
as well as whether the company should've done something in prior
years that later resulted in extraordinary cost. The [question]
is whether the company deviated from the standard of good oil
field practice. This legislation has the following two aspects:
it tells a producer what level of performance is expected, that
they be consistent with good oil field practice; and if the
producer doesn't [follow good oil field practices], the state
doesn't want to share in costs that could've been avoided.
2:46:33 PM
CO-CHAIR GATTO posed a situation in which in year four a company
only has an expense of three, and asked whether the companies
should be rewarded for delaying maintenance to year four or
should they be penalized for not doing one, one, and one.
MR. BULLOCK said, "You do that in the forms already in the bill
[by] giving credit for development of new equipment. That is
something you can consider." The narrow scope of HB 128
addresses the level of operation that's expected for the state
to share the cost.
2:47:14 PM
REPRESENTATIVE SEATON commented that he is unclear with regard
to the standard for life expectancy of something. He posed a
situation in which something has a life expectancy of 20 years,
but in the 22nd year it breaks and causes the pipeline to be
shut down. In such a situation, when does the amount of
maintenance and something's useful life come into play with
regard to improper maintenance and subparagraphs (B) and (C) in
relation to a partial or complete shutdown.
MR. BULLOCK opined that the aforementioned is why the bill
sponsor asked the commissioner of DOR to determine the expected
standard. Still, it's logical to assume that toward the end of
the useful life of property, it would require more maintenance.
He mentioned the notion of normal wear and tear versus unusual
wear and tear. He reminded the committee that it's a matter of
what good oil field practice requires after [the useful life of
an item]. One option is to insert presumption specifying clear
examples of what should be done. He recalled that during the
hearings in the House Special Committee on Oil and Gas, how
often the inspection pigs were utilized was mentioned. As a
policy, certain inspections could be required in addition to
good oil field practice.
2:49:33 PM
CO-CHAIR GATTO read lines 19-23 on page 3, and opined it's an
almost impossible standard to meet. He asked if there's any way
to get to an easy standard.
MR. BULLOCK said that the committee is facing whether this is a
high standard or merely the expected standard. The state is
sharing in the costs through these deductions and credits.
Therefore, it's a policy determination as to how much latitude
the committee wants to allow. He pointed out that AS
43.55.165(a) discusses ordinary and necessary costs. The
aforementioned is the rule of thumb. Subsection (e) being
amended by HB 128 is where the legislature decides how much risk
the state will take and what costs will be shared as well as for
which expenditures, through leases expenditures and qualified
capital expenditures, a credit will be allowed.
2:52:12 PM
CO-CHAIR GATTO recalled that the $.30 was inserted for a
specific maintenance reason. He asked if it would've helped to
have never had that $.30 cents or should it be higher.
MR. BULLOCK replied that there may be different reasons to have
the $.30. One of the ironies of the [$.30 provision] is that if
there are malfunctions and declining production and the volume
decreased, the $.30 times the lower volume broadens the
deduction that can be taken as it lowers the threshold.
2:53:19 PM
REPRESENTATIVE SEATON expressed concern that most all of the
standards are fairly firm, save this one. "The industry," he
opined, "is going to have a very hard time pinning down what
proactively is going to be determined in retrospect if something
happens ... to have been improper maintenance." He further
opined that this standard will depend more on whether the state
is running a surplus or deficit in the budget. The earlier
suggestion of including some presumptions might help, he
commented. He then turned attention to the language on page 3,
line 19, where it says, "costs or that portion of the costs" and
recalled that one of the commissioners that would be deciding
that didn't seem to know what that standard is.
2:55:12 PM
CO-CHAIR GATTO announced that this Friday at 1:00, the committee
will accept testimony on what constitutes proper oil field
practices.
[HB 128 was held over.]
2:55:50 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:55 p.m.
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