Legislature(2007 - 2008)HOUSE FINANCE 519

11/02/2007 09:00 AM House RESOURCES


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09:10:43 AM Start
09:11:38 AM HB2001
07:24:57 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB2001 OIL & GAS TAX AMENDMENTS TELECONFERENCED
Heard & Held
Presentations by:
Steve Porter & Dan Dickinson, Consultants
to LB&A
Pat Galvin, Commissioner of Revenue
Recess @ 3:00pm, to reconvene @ 5:30pm
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                        November 2, 2007                                                                                        
                           9:10 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Carl Gatto, Co-Chair                                                                                             
Representative Craig Johnson, Co-Chair                                                                                          
Representative Anna Fairclough                                                                                                  
Representative Bob Roses                                                                                                        
Representative Paul Seaton                                                                                                      
Representative Peggy Wilson                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative David Guttenberg                                                                                                 
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Scott Kawasaki                                                                                                   
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative Mike Chenault                                                                                                    
Representative Les Gara                                                                                                         
Representative Kyle Johansen                                                                                                    
Representative Mike Kelly                                                                                                       
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 2001                                                                                                             
"An Act  relating to  the production  tax on oil  and gas  and to                                                               
conservation  surcharges  on oil;  relating  to  the issuance  of                                                               
advisory  bulletins and  the  disclosure  of certain  information                                                               
relating to the  production tax and the  sharing between agencies                                                               
of certain information relating to  the production tax and to oil                                                               
and gas or  gas only leases; amending the State  Personnel Act to                                                               
place in  the exempt service  certain state oil and  gas auditors                                                               
and their immediate supervisors; establishing  an oil and gas tax                                                               
credit  fund and  authorizing payment  from that  fund; providing                                                               
for retroactive  application of certain statutory  and regulatory                                                               
provisions  relating to  the production  tax on  oil and  gas and                                                               
conservation  surcharges on  oil;  making conforming  amendments;                                                               
and providing for an effective date."                                                                                           
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB2001                                                                                                                  
SHORT TITLE: OIL & GAS TAX AMENDMENTS                                                                                           
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
10/18/07       (H)       READ THE FIRST TIME - REFERRALS                                                                        
10/18/07       (H)       O&G, RES, FIN                                                                                          
10/19/07       (H)       O&G AT 1:30 PM HOUSE FINANCE 519                                                                       
10/19/07       (H)       Heard & Held                                                                                           
10/19/07       (H)       MINUTE(O&G)                                                                                            
10/20/07       (H)       O&G AT 12:00 AM HOUSE FINANCE 519                                                                      
10/20/07       (H)       Heard & Held                                                                                           
10/20/07       (H)       MINUTE(O&G)                                                                                            
10/21/07       (H)       O&G AT 1:00 PM HOUSE FINANCE 519                                                                       
10/21/07       (H)       Heard & Held                                                                                           
10/21/07       (H)       MINUTE(O&G)                                                                                            
10/22/07       (H)       O&G AT 9:00 AM HOUSE FINANCE 519                                                                       
10/22/07       (H)       Heard & Held                                                                                           
10/22/07       (H)       MINUTE(O&G)                                                                                            
10/23/07       (H)       O&G AT 9:00 AM HOUSE FINANCE 519                                                                       
10/23/07       (H)       Heard & Held                                                                                           
10/23/07       (H)       MINUTE(O&G)                                                                                            
10/24/07       (H)       O&G AT 9:00 AM HOUSE FINANCE 519                                                                       
10/24/07       (H)       Heard & Held                                                                                           
10/24/07       (H)       MINUTE(O&G)                                                                                            
10/25/07       (H)       O&G AT 10:00 AM HOUSE FINANCE 519                                                                      
10/25/07       (H)       Heard & Held                                                                                           
10/25/07       (H)       MINUTE(O&G)                                                                                            
10/26/07       (H)       O&G AT 10:00 AM HOUSE FINANCE 519                                                                      
10/26/07       (H)       Heard & Held                                                                                           
10/26/07       (H)       MINUTE(O&G)                                                                                            
10/27/07       (H)       O&G AT 2:00 PM HOUSE FINANCE 519                                                                       
10/27/07       (H)       Heard & Held                                                                                           
10/27/07       (H)       MINUTE(O&G)                                                                                            
10/28/07       (H)       O&G AT 2:00 PM HOUSE FINANCE 519                                                                       
10/28/07       (H)       Moved CSHB2001(O&G) Out of Committee                                                                   
10/28/07       (H)       MINUTE(O&G)                                                                                            
10/29/07       (H)       O&G RPT CS(O&G) NT 4DP 1NR 2AM                                                                         
10/29/07       (H)       DP: SAMUELS, NEUMAN, RAMRAS, OLSON                                                                     
10/29/07       (H)       NR: DOOGAN                                                                                             
10/29/07       (H)       AM: KAWASAKI, DAHLSTROM                                                                                
10/29/07       (H)       RES AT 1:00 PM HOUSE FINANCE 519                                                                       
10/29/07       (H)       Heard & Held                                                                                           
10/29/07       (H)       MINUTE(RES)                                                                                            
10/30/07       (H)       RES AT 9:00 AM HOUSE FINANCE 519                                                                       
10/30/07       (H)       Heard & Held                                                                                           
10/30/07       (H)       MINUTE(RES)                                                                                            
10/30/07       (H)       RES AT 6:30 PM HOUSE FINANCE 519                                                                       
10/30/07       (H)       Heard & Held                                                                                           
10/30/07       (H)       MINUTE(RES)                                                                                            
10/31/07       (H)       RES AT 9:00 AM HOUSE FINANCE 519                                                                       
10/31/07       (H)       Heard & Held                                                                                           
10/31/07       (H)       MINUTE(RES)                                                                                            
11/01/07       (H)       RES AT 9:00 AM HOUSE FINANCE 519                                                                       
11/01/07       (H)       Heard & Held                                                                                           
11/01/07       (H)       MINUTE(RES)                                                                                            
11/02/07       (H)       RES AT 9:00 AM HOUSE FINANCE 519                                                                       
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
DAN DICKINSON, Consultant                                                                                                       
Legislative Budget and Audit Committee                                                                                          
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Provided a presentation on HB 2001.                                                                      
                                                                                                                                
STEVE PORTER, Consultant                                                                                                        
Legislative Budget and Audit Committee                                                                                          
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Provided a presentation on HB 2001.                                                                      
                                                                                                                                
PAT GALVIN, Commissioner                                                                                                        
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Provided a presentation on HB 2001.                                                                      
                                                                                                                                
JONATHON IVERSEN, Director                                                                                                      
Anchorage Office                                                                                                                
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  During hearing on HB 2001, answered                                                                      
questions.                                                                                                                      
                                                                                                                                
MARCIA DAVIS, Deputy Commissioner                                                                                               
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Provided a presentation on HB 2001.                                                                      
                                                                                                                                
JERRY BURNETT, Director                                                                                                         
Division of Administrative Services                                                                                             
Department of Revenue                                                                                                           
POSITION STATEMENT:  During hearing of HB 2001, answered                                                                      
questions.                                                                                                                      
                                                                                                                              
NANETTE THOMPSON,  Unit/Tech Support                                                                                            
Division of Oil & Gas                                                                                                           
Department of Natural Resources                                                                                                 
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:    During   hearing  of  HB  2001,  answered                                                             
questions.                                                                                                                      
                                                                                                                                
BOB GEORGE                                                                                                                      
Gaffney Kline and Associates                                                                                                    
Houston, Texas                                                                                                                  
POSITION STATEMENT:  Provided a presentation on HB 2001.                                                                      
                                                                                                                                
RICH RUGGIERO                                                                                                                   
Gaffney Kline and Associates                                                                                                    
Houston, Texas                                                                                                                  
POSITION STATEMENT:  Provided a presentation on HB 2001.                                                                      
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CO-CHAIR  CARL   GATTO  called   the  House   Resources  Standing                                                             
Committee  meeting  to  order at  9:10:43  AM.    Representatives                                                             
Roses, Wilson, Fairclough,  Seaton and Gatto were  present at the                                                               
call to  order.  Representatives Johnson,  Edgmon, and Guttenberg                                                               
arrived  as  the meeting  was  in  progress.   Other  legislators                                                               
present  were  Representatives  Johansen,  Chenault,  Kelly,  and                                                               
Gara.                                                                                                                           
                                                                                                                                
HB2001-OIL & GAS TAX AMENDMENTS                                                                                               
                                                                                                                                
9:11:38 AM                                                                                                                    
                                                                                                                                
Co-CHAIR GATTO  announced that the  only order of  business would                                                               
be HOUSE  BILL NO. 2001, "An  Act relating to the  production tax                                                               
on oil  and gas and  to conservation surcharges on  oil; relating                                                               
to  the issuance  of  advisory bulletins  and  the disclosure  of                                                               
certain  information  relating  to  the production  tax  and  the                                                               
sharing between  agencies of certain information  relating to the                                                               
production tax  and to oil and  gas or gas only  leases; amending                                                               
the State  Personnel Act to  place in the exempt  service certain                                                               
state  oil  and gas  auditors  and  their immediate  supervisors;                                                               
establishing  an oil  and  gas tax  credit  fund and  authorizing                                                               
payment from that fund; providing  for retroactive application of                                                               
certain  statutory  and  regulatory provisions  relating  to  the                                                               
production  tax on  oil and  gas and  conservation surcharges  on                                                               
oil;  making   conforming  amendments;   and  providing   for  an                                                               
effective date."  [Before the committee was CSHB 2001(O&G).]                                                                    
                                                                                                                                
9:11:53 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO  informed  members  that Mr.  Dickinson  and  Mr.                                                               
Porter would present to the  committee, after which the committee                                                               
would break until  1:00 p.m.  The committee would  then hear from                                                               
Commissioner  Galvin  and take  a  break  at  3:00 p.m.  so  that                                                               
Representative Wilson can attend another  hearing.  He said after                                                               
the  presentations,  he  would   like  to  schedule  a  committee                                                               
discussion on  ACES or  have a  discussion then.   A  round table                                                               
discussion  with the  administration  and  stakeholders would  be                                                               
held the following day.                                                                                                         
                                                                                                                                
9:12:15 AM                                                                                                                    
                                                                                                                                
MR. DAN  E. DICKINSON, Consultant,  Legislative Budget  and Audit                                                               
Committee (LBA), Alaska  State Legislature, said he  would give a                                                               
10-minute  explanation to  flesh out  a request  to present  some                                                               
material  he already  presented but  with actual  numbers, rather                                                               
than round numbers.  He told members:                                                                                           
                                                                                                                                
     ...  When I  sent my  slides in  [to committee  staff],                                                                    
     they said the numbers are  wrong and two of your slides                                                                    
     are mislabeled  because instead of saying  November 11,                                                                    
     they say  October 30th.   That was  intentional because                                                                    
     that was  the original  slide but  the version  you got                                                                    
     they  were efficient  and updated.   So,  all of  yours                                                                    
     will say November 2nd on  them if you're looking at the                                                                    
     pieces  of  paper  but,  on the  slide,  this  was  the                                                                    
     original  slide  that was  presented  and,  as you  may                                                                    
     recall, I  used some  very round  numbers, $7  and $20.                                                                    
     This slide was actually put  together from home to call                                                                    
     in  with  a  presentation to  make  some  illustrations                                                                    
     here.                                                                                                                      
                                                                                                                                
9:16:16 AM                                                                                                                    
                                                                                                                                
     The  request  that I  received  was  to put  in  actual                                                                    
     numbers.   And  so, let  me go  to the  next slide  and                                                                    
     that's exactly  what I've  done here  is put  in actual                                                                    
     numbers....                                                                                                                
                                                                                                                                
CO-CHAIR GATTO interrupted to welcome Co-Chair Johnson.                                                                         
                                                                                                                                
MR. DICKINSON continued.                                                                                                        
                                                                                                                                
     Maybe repeating  the points that  I made  earlier, what                                                                    
     this is comparing is  the [petroleum production profits                                                                    
     tax]  PPT, [Alaska's  Clear and  Equitable Share]  ACES                                                                    
     and  the  House  Oil   and  Gas  Committee  substitute.                                                                    
     Flipping back and  forth, the barrels that  I was using                                                                    
     before were 244 million barrels  for the year. In fact,                                                                    
     the actual that  was used in the  current Department of                                                                    
     Revenue's  forecasting   and  that  was  used   in  the                                                                    
     material  that  was presented  to  you  by Econ  One  -                                                                    
     that's 230.5  million barrels.  Co-Chair  Johnson asked                                                                    
     that I pull out the oil price  that day.  I went to the                                                                    
     Department of  Revenue website and  that was  $89.09 so                                                                    
     that's a breathtaking number for  those of us that have                                                                    
     been looking at prices for awhile.                                                                                         
                                                                                                                                
CO-CHAIR GATTO asked about this morning's price.                                                                                
                                                                                                                                
MR. DICKINSON thought the price was in the $90s.                                                                                
                                                                                                                                
CO-CHAIR GATTO asked if the highest it reached was $97.                                                                         
                                                                                                                                
MR. DICKINSON said two numbers are available: inter-day trading                                                                 
as opposed to the close out.                                                                                                    
                                                                                                                                
REPRESENTATIVE EDGMON asked if the lifting upstream costs of                                                                    
$18.57 were higher than what DOR actually quoted.                                                                               
                                                                                                                                
MR. DICKINSON said the next slide would address that point and                                                                  
that some controversy surrounded that number.                                                                                   
                                                                                                                                
9:18:55 AM                                                                                                                    
                                                                                                                                
MR. DICKINSON continued:                                                                                                        
                                                                                                                                
     I framed  this just kind  of as  - some folks  may have                                                                    
     been following  - Representative Doogan made  the exact                                                                    
     same point  you did.   He said,  gosh, I  thought costs                                                                    
     would be closer  to 20 - he said the  costs were closer                                                                    
     -  were 15,  how come  you used  20?   What's going  on                                                                    
     there? What  I've got  here are  3 comparisons  and the                                                                    
     ones on  the left are  numbers we  can all look  at. On                                                                    
     the right is what was used  by Econ One and you can see                                                                    
     the numbers are very, very  close.  I don't want anyone                                                                    
     to be  misled. By  doing it very  simplistically, there                                                                    
     are some  pennies that  are going to  be different.   I                                                                    
     want to illustrate the point.                                                                                              
                                                                                                                                
     The Department of Revenue,  currently estimating for FY                                                                    
     2008,  $4.2 billion  in upstream  [indisc.].   When  it                                                                    
     comes  time  to turn  that  into  a dollar  per  barrel                                                                    
     number, and I remember  Secretary McNamara had a phrase                                                                    
     he used - never express things  on a per unit basis and                                                                    
     when somebody  expresses things  to you  on a  per unit                                                                    
     basis, be  suspicious of  why they are  doing it.   So,                                                                    
     this may be an illustration of that.                                                                                       
                                                                                                                                
     But you  need to  divide through by  the barrels.   So,                                                                    
     how  many barrels  were their  daily  volume -  722,000                                                                    
     barrels a  day, 365 days  in a year?   So, you  come up                                                                    
     with 2.6, 3.5 million in barrels a year.                                                                                   
                                                                                                                                
     Now  this is  where it  gets, perhaps,  tricky. If  you                                                                    
     look  at the  taxable barrels,  you're going  to divide                                                                    
     through by - take that  number and multiply by .875. In                                                                    
     other  words, roundly  speaking,  it's  not quite  that                                                                    
     number  but,  just  for illustration,  there's  a  12.5                                                                    
     percent  royalty. Those  barrels  aren't  taxed so  you                                                                    
     simply divide  through by taxable barrels  and what you                                                                    
     find is  that you've got  $18.57 as the  consequence of                                                                    
     that division.                                                                                                             
                                                                                                                                
     According to  the statute, that's  the number  that you                                                                    
     use.   You take the  total cost, you divide  through by                                                                    
     the taxable barrels.   Now I think  what's confusing is                                                                    
     if  you ask  someone what  are your  costs per  barrel.                                                                    
     What does  it cost to  operate the field.   They'll say                                                                    
     here are  our costs.   Here are  the barrels.    divide                                                                    
     that  one through  the other  and you  come out  with a                                                                    
     number that's 12.5 percent lower  or $16.25.  And so, I                                                                    
     think the problem is -  and it was probably exacerbated                                                                    
     by my trying to illustrate  one barrel, is when you ask                                                                    
     the  question what  are your  costs per  barrel, you'll                                                                    
     get  something  that's closer  to  $16.25.   If  you're                                                                    
     trying to  mechanically reproduce  what's going  in the                                                                    
     statute, you will  come up with a  number that's 18.57,                                                                    
     or  roughly $2  higher.   If you  take the  two numbers                                                                    
     that  are used  in the  Econ One  data, you'll  come up                                                                    
     with $18.50  and I'm not  sure what the -  there's lots                                                                    
     of small things  in the model that  I'm not replicating                                                                    
     - it's very simplistic.                                                                                                    
                                                                                                                                
9:19:37 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE EDGMON  said he  recalled a  number of  $14.56 and                                                               
asked if  that was from  DOR.  He  also asked if  Mr. Dickinson's                                                               
calculations are different from  DOR's or contain more up-to-date                                                               
data.                                                                                                                           
                                                                                                                                
9:20:18 AM                                                                                                                    
                                                                                                                                
MR. DICKINSON explained that every  number he has used comes from                                                               
the Department  of Revenue.   He noted  the numbers he  was using                                                               
were  for FY  2008 and  said he  would have  to see  what numbers                                                               
[DOR] was  using.  He said  a lot of the  data is based on  a 10-                                                               
year  average  - he  would  have  to look  at  that  number.   He                                                               
confirmed that his numbers come from the Department of Revenue.                                                                 
                                                                                                                                
9:20:33 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON recalled DOR was using 2006 figures.                                                                      
                                                                                                                                
MR. DICKINSON said  his understanding, looking at  the graphs, is                                                               
if 2006 numbers were used, his numbers are higher.                                                                              
                                                                                                                                
9:20:55 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  EDGMON asked  where the  numbers would  differ in                                                               
that chart.                                                                                                                     
                                                                                                                                
MR. DICKINSON asked if he wanted to know the implications.                                                                      
                                                                                                                                
CO-CHAIR GATTO  clarified that  Representative Edgmon  was asking                                                               
if 2006 was $14 and 2007 is  $16, what changed to change the lift                                                               
cost.                                                                                                                           
                                                                                                                                
9:21:02 AM                                                                                                                    
                                                                                                                                
MR. DICKINSON said  all three things. The number  of barrels have                                                               
declined so, to the degree the  costs are fixed, a smaller number                                                               
of  barrels divided  through  will raise  costs  per barrel.  The                                                               
second  factor is  that actual  costs have  increased. Oil  field                                                               
costs  are inflated  at $90  per barrel  as compared  to $60  per                                                               
barrel in 2006.  The mathematical implication of those  go in the                                                               
same direction.                                                                                                                 
                                                                                                                                
9:21:53 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG asked if  the transportation costs were                                                               
included.                                                                                                                       
                                                                                                                                
                                                                                                                                
MR. DICKINSON  responded transportation  costs are  not included.                                                               
He said  the transportation costs  of $6.73 used on  the previous                                                               
slide  were from  DOR, although  it  was not  in DOR's  published                                                               
forecast, which had costs at $7.22.                                                                                             
                                                                                                                                
9:22:34 AM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  asked whether  ocean transportation  cost changes                                                               
vary  according  to  supply  and demand  of  tanker  space,  fuel                                                               
prices, or distance to a refinery.                                                                                              
                                                                                                                                
MR. DICKINSON said all three  of those factors affect costs. Fuel                                                               
cost has  a huge impact because  that affects every tanker.   The                                                               
issue of  tight demand  affects only the  tankers at  the margin.                                                               
Most of the fleet is on hold.   Each one is owned by a subsidiary                                                               
of an oil company.  If two  tankers are laid up, that [oil] might                                                               
come in at a  high price but it will only drive  the average up a                                                               
small amount. He  believes the Puget Sound, Los  Angeles, and San                                                               
Francisco markets have been fairly  steady recently. If one round                                                               
trip takes longer than another, the cost will be higher.                                                                        
                                                                                                                                
9:24:11 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  said he  believes the  state takes  all of                                                               
its  value  in  royalty.    He asked  if  there  is  any  royalty                                                               
implication in this figure.                                                                                                     
                                                                                                                                
MR. DICKINSON replied:                                                                                                          
                                                                                                                                
     This  is going  to be  the total  royalty costs  of the                                                                    
     non-royalty barrels divided  through by the non-royalty                                                                    
     barrels, or the  total cost divided through  by all the                                                                    
     barrels.   In either way,  you'd come up with  the same                                                                    
     number.   Because the royalty costs  are deductible for                                                                    
     calculating  the royalty,  and  the  entire royalty  is                                                                    
     subtracted from  what the  PPT is  applied to,  I don't                                                                    
     think  there's any  controversy  about  that. In  other                                                                    
     words, if you ask somebody what  does it cost to ship a                                                                    
     barrel?  You'd say $6.73.   What does it cost to ship a                                                                    
     taxable barrel - $6.73.                                                                                                    
                                                                                                                                
9:25:23 AM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked what it costs to ship a royalty barrel.                                                                    
                                                                                                                                
MR. DICKINSON replied $6.73.                                                                                                    
                                                                                                                                
9:25:36 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG asked  whether the  charge for  diesel                                                               
fuel differs  for the  tankers owned  by an  oil company  and the                                                               
independent tankers, assuming the tankers  run on diesel fuel. He                                                               
questioned  whether that  is part  of the  problem with  vertical                                                               
integration.                                                                                                                    
                                                                                                                                
MR.  DICKINSON  said he  believes  clauses  in both  the  royalty                                                               
contracts and  the tax  would look  at that  if they  were paying                                                               
anything other  than fair market  value.  Typically, the  rule is                                                               
they  charge the  same price  other companies  would charge.   He                                                               
noted that is a specific audit  issue, and the effect, if any, is                                                               
fairly small because of publicly reported numbers.                                                                              
                                                                                                                                
9:26:40 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG stated:                                                                                               
                                                                                                                                
     If I may - just an  observation and I meant to bring it                                                                    
     up  the  other  day  - when  we're  talking  about  the                                                                    
     topping  plant, the  difference between  what they  pay                                                                    
     their contractors or  for their BP pick-up  or a Conoco                                                                    
     pick-  up on  the Slope  versus the  difference between                                                                    
     what they charge for others -  but I think this is part                                                                    
     of the problem that we're  seeing in some of the tariff                                                                    
     situations.   What's the real  cost? And the  public is                                                                    
     very  cynical  about  this.    It's  the  oil  industry                                                                    
     complaining  about the  price of  oil and  their prices                                                                    
     are  rising.   They're  scratching  their head  saying,                                                                    
     huh?   It doesn't make  any sense to  them at all.   We                                                                    
     know lifting  prices haven't changed.   Operating costs                                                                    
     haven't  gone up  considerably and  they're complaining                                                                    
     about what  they're selling  it at  the pump  [for] and                                                                    
     they're getting the money back.   We should be a little                                                                    
     cynical about that also.                                                                                                   
                                                                                                                                
9:27:30 AM                                                                                                                    
                                                                                                                                
MR. DICKINSON continued with his presentation.                                                                                  
                                                                                                                                
     Using the $6.73 and the $18.57 upstream lifting cost                                                                       
     figure, we derive a production tax value of $63.79.                                                                        
     Multiply that times the taxable barrels and the base                                                                       
     for the tax base is $14.70 billion in both the PPT                                                                         
     case and the ACES case.  The progressivity - I think                                                                       
     we walked through that before - you knock off $40 from                                                                     
     the $63.79 to get to your starting place so that's                                                                         
     $23.79.  You multiply each dollar in that.  It's an                                                                        
     additional quarter of a percent so there's 5.95                                                                            
     percent additional progressivity.  That gets applied                                                                       
     against the base for a total of additional dollars -                                                                       
     in this example of $874 million.                                                                                           
                                                                                                                                
     The   original  progressivity   tax  in   the  original                                                                    
     presentation was 732  so it's been an  increase and the                                                                    
     increase  has occurred.   You  had smaller  barrels but                                                                    
     you had higher starting  prices and smaller deductions.                                                                    
     So  you kind  of had  three things  moving and  the net                                                                    
     effect of  them is, the  ones that were  increasing it,                                                                    
     increased it  more than  the ones  that the  decline in                                                                    
     barrels, which  was a  decrease in  this example.   The                                                                    
     House Oil and  Gas is going to be  a slightly different                                                                    
     calculation  because their  progressivity  is based  on                                                                    
     the gross  and, so, when  you do this  calculation your                                                                    
     base  is the  same volumes  but it's  times a  wellhead                                                                    
     number,  which doesn't  have  the  lifting costs  taken                                                                    
     out.    So,  it's  the  gross value  at  the  point  of                                                                    
     production as  opposed to the production  tax value, to                                                                    
     use  the technical  terms  in the  statute.   You  then                                                                    
     subtract a  larger figure  from that,  $50, and  so the                                                                    
     price index  is $32.36.   The  per dollar  variation is                                                                    
     between 2.5  and .2 percent, .225  so the progressivity                                                                    
     factor, 7.28, that's   multiplied times the  base for a                                                                    
     new progressivity  number.  Again, you'll  see this one                                                                    
     went up less than the  others and that's because you're                                                                    
     not taking - in my  simplistic example when I was using                                                                    
     $20 to  generate this,  you've made  a change  but that                                                                    
     change did not  affect the House Oil  and Gas Committee                                                                    
     substitute.                                                                                                                
                                                                                                                                
9:30:24 AM                                                                                                                    
                                                                                                                                
MR. DICKINSON continued:                                                                                                        
                                                                                                                                
     [Slide 5] So, the next question on this - so what,                                                                         
     what does that mean?  I presented this diagram. This                                                                       
     is the original and basically there's two things you                                                                       
     could see from this.  One was the fact that they are                                                                       
     very close.  As prices go up, the total tax before ...                                                                     
     taking the credits, very close but when you're                                                                             
     comparing the House Oil and Gas Committee CS what                                                                          
     you'll see is - it is below ACES and then there comes                                                                      
     a point at about $77 where it surpasses ACES and then                                                                      
     at higher prices it is higher.  Someone pointed out to                                                                     
     me that this diagram was sort of hard to read or                                                                           
     wasn't information filled.  When I plotted out the new                                                                     
     version using the daily price and the DOR cost of                                                                          
     volume assumptions, you get a very similar drawing.                                                                        
     House Oil and Gas is below the Governor's proposal.                                                                        
     The crossover point moves up a little bit.  It's in                                                                        
     the - a later slide will tell you exactly what it is                                                                       
     but it's right here in this range.  And from that                                                                          
     point on up, the House Oil and Gas version would                                                                           
     produce more revenues before credits than the ACES                                                                         
     plan.                                                                                                                      
                                                                                                                                
9:31:56 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG  asked why, if everything  changes with                                                               
credits,  the diagram  doesn't  contain a  line  that shows  what                                                               
happens with credits.                                                                                                           
                                                                                                                                
MR. DICKINSON  explained he was  trying to isolate one  piece and                                                               
illustrate it. If both bills had  the same amount of credits, the                                                               
lines  would  [go]  lower  but  they  wouldn't  change  in  their                                                               
relationship to one  another. The House Special  Committee on Oil                                                               
and Gas restored  TIE credits, to his  understanding.  Therefore,                                                               
if  the House  Special  Committee  on Oil  and  Gas credits  were                                                               
plotted, they  would be  different than  the credits  under ACES.                                                               
So, all of  the effects were put together and  reflected in DOR's                                                               
fiscal  note.   He  reiterated  he was  trying  to isolate  those                                                               
pieces.                                                                                                                         
                                                                                                                                
REPRESENTATIVE GUTTENBERG said the  committee is trying to figure                                                               
out what the government take is so  it would be good to know what                                                               
that real slope looked like.                                                                                                    
                                                                                                                                
MR. DICKINSON replied:                                                                                                          
                                                                                                                                
     ... we're so far from government take because we don't                                                                     
     have federal taxes, we don't have state income taxes,                                                                      
     we don't have royalties, we don't have property taxes.                                                                     
     This is not - I apologize if anyone thought this was a                                                                     
     government take figure.                                                                                                    
                                                                                                                                
9:33:13 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG asked  the graph  would slide  down or                                                               
slide out if the credits were put in.                                                                                           
                                                                                                                                
MR.  DICKINSON said  it would  slide down  with the  credits; the                                                               
slope  would change  with  the royalties;  the  income tax  would                                                               
change the  slope in  the other direction;  and the  property tax                                                               
would change the slope and slide down.                                                                                          
                                                                                                                                
9:33:53 AM                                                                                                                    
                                                                                                                                
MR.  DICKINSON, in  response to  Representative Guttenberg,  said                                                               
many  of those  were produced  for another  committee at  various                                                               
points. He  said when they  were provided, people  questioned how                                                               
PPT fit in and  there is only a minor difference.   He noted some                                                               
analyses  break it  down, some  synthesize the  information.   He                                                               
repeated his presentation breaks it down.                                                                                       
                                                                                                                                
9:34:38 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG said understanding  what one is looking                                                               
at and how it  was built is very important.    The economists are                                                               
working on  pure theory,  which is great  to hear,  but sometimes                                                               
members need real numbers or information that is policy driven.                                                                 
                                                                                                                                
MR. DICKINSON  said he appreciates  that but the problem  is, "If                                                               
you look at  $62 and say I want  to get that up to  $63, you then                                                               
have  to open  the hood  and  figure out  which parameter  you're                                                               
going to change."                                                                                                               
                                                                                                                                
9:35:24 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON referred  to  the bottom  of the  previous                                                               
slide that speaks  to the progressivity rate and  base, and asked                                                               
if the line  that refers to tax only applies  to progressivity or                                                               
whether that shows the difference between 22.5 and 25.                                                                          
                                                                                                                                
MR. DICKINSON said those pieces only apply to progressivity.                                                                    
                                                                                                                                
9:35:52 AM                                                                                                                    
                                                                                                                                
MR. DICKINSON then moved to Slide 6 and told members:                                                                           
                                                                                                                                
     ... What I originally did is ... I had a slide that                                                                        
     had these lines on it - it had 6 different lines and                                                                       
     each one looked just about the same and it was ACES                                                                        
     versus the House Oil and Gas Committee substitute,                                                                         
     once with the $27 cost, once with the $15, and once                                                                        
     with the $22 in between.  You had 6 lines and ... it                                                                       
     didn't communicate very much.  What I tried to do was                                                                      
     extract three points from that [Slide 7], which is on                                                                      
     the same graph where House Oil and Gas and the ACES                                                                        
     bill, where would they overlap?                                                                                            
                                                                                                                                
     In other  words, if you come  down here to the  left of                                                                    
     where any of these points  are, you would find that the                                                                    
     ACES raises more revenue [indisc.]  credits - I want to                                                                    
     make  sure that's  clear  here.   Just  using a  simple                                                                    
     example  - just  using this  portion of  it, ACES  will                                                                    
     raise  more revenue  than  House Oil  and  Gas and  the                                                                    
     reason  is ACES  is a  25 tax  percent rate  before any                                                                    
     progressivity and the  House Oil and Gas is  at 22.5 so                                                                    
     they will be below.   Then the progressivity occurs and                                                                    
     at  some   point  the  House  Oil   and  Gas  Committee                                                                    
     substitute goes  above ACES and  the question  is where                                                                    
     is  that point.   If  the costs  in the  illustration I                                                                    
     gave to you - you use  $27, that point is right here at                                                                    
     about -  it's ... $79  and the  total tax coming  in is                                                                    
     about 3.8 [indisc.] credits.                                                                                               
                                                                                                                                
     As you  take out  costs, the  crossover point  moves to                                                                    
     the right  and, so, if  I use  the actual costs  of the                                                                    
     Department of  Revenue, that  would move  the crossover                                                                    
     point  up to  something about  $10 higher,  $87 dollars                                                                    
     when both  systems would produce about  $4.4 billion in                                                                    
     revenue.   If you go all  the way out to  $22, in other                                                                    
     words  a  $15 cost,  the  round  figure, the  crossover                                                                    
     point is extremely  high.  It's above $110  ANS.  Maybe                                                                    
     someday we'll  be able  to say that  and it  will sound                                                                    
     natural  - a  couple of  weeks from  now but  right now                                                                    
     that sounds  [like] a  very, very  high number.  So, as                                                                    
     the costs change, when you  are comparing the ACES plan                                                                    
     and the  House Oil and Gas  Committee substitute, where                                                                    
     ... one raises ... more  revenue than the other is very                                                                    
     dependent on the costs that go into that.                                                                                  
                                                                                                                                
     Again, I'll repeat something that you've probably                                                                          
     heard ad nauseum. You can make a gross that looks like                                                                     
     a net if you define exactly what the costs are but                                                                         
     then when the costs change, you no longer have an                                                                          
     exact match here. Your gross is no longer reflecting                                                                       
     your net.  So anytime you take a gross piece and you                                                                       
     fix a point where a different system allows that to be                                                                     
     variable as it effects the outcome, you will change                                                                        
     the relative of those two costs - the relative                                                                             
     revenues or the relative costs over point.                                                                                 
                                                                                                                                
     So, I hope this slide has clarified, as opposed to                                                                         
     obscured.                                                                                                                  
                                                                                                                                
9:39:43 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG asked  what happens  when the  credits                                                               
are added.                                                                                                                      
                                                                                                                                
MR. DICKINSON  said he  believes the  crossover points  would not                                                               
change on the X axis but they would all drop on the Y axis.                                                                     
                                                                                                                                
9:40:16 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG asked to what level.                                                                                  
                                                                                                                                
MR. DICKINSON explained if one  is talking about the TIE credits,                                                               
the difference  between that  being fully  allowed and  not being                                                               
allowed should be  about 10 percent of the  capital number, which                                                               
is   a  $200   million   difference.  In   further  response   to                                                               
Representative  Guttenberg,  Mr.  Dickinson specified  the  angle                                                               
will stay the same; it will just move down.                                                                                     
                                                                                                                                
9:41:10 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH opined that  what members are trying to                                                               
get on the record is that  the government take would be less when                                                               
credits are  applied than  what is on  the graph  before members.                                                               
She added  a taxing  policy is  not just  based on  revenue; it's                                                               
also based on investment and  actually monetizing resources.  She                                                               
stated:                                                                                                                         
                                                                                                                                
     The Representative  has appropriately pointed  out with                                                                    
     credits  not  before  us,  it  is  over-inflating  what                                                                    
     Alaskans would see  as the benefit of any  of the three                                                                    
     tax analyses  that we're  looking at.   All  three have                                                                    
     variables   that   include  advantages   to   encourage                                                                    
     different kinds  of exploration.   One  bill encourages                                                                    
     more  small  companies to  come  in  and invest.    The                                                                    
     original  [economic limit  factor]  ELF encouraged  the                                                                    
     big  three,  per  say,  to have  a  better  benefit  to                                                                    
     disallow the  smaller investors  to come  in.   So it's                                                                    
     all  -   I  think  I'm   going  back  to  BP   and  Ms.                                                                    
     Fitzpatrick's  ... pace  and  time  of the  investments                                                                    
     that companies come forward with  - pace and scale with                                                                    
     what we do.                                                                                                                
                                                                                                                                
     So,  I think  the  Representative appropriately  points                                                                    
     out that  we're looking at  a picture that  is modified                                                                    
     in  the   sense  that  there  are   other  things  that                                                                    
     negatively  affect  the  cash  flow in  being  able  to                                                                    
     monetize our resource.                                                                                                     
                                                                                                                                
9:42:31 AM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  said the committee  came looking for  the science                                                               
of numbers but is being asked  to apply art to mentally calculate                                                               
the credit variations  across the board.  The  committee has been                                                               
presented with a  chart but must overlay parts of  the chart.  He                                                               
felt  it  is asking  a  lot  of members  to  include  all of  the                                                               
testimony  it  has   heard  and  then  be  shown   a  chart  that                                                               
demonstrates before credits.                                                                                                    
                                                                                                                                
MR. DICKINSON  acknowledged that is  a fair point  and everything                                                               
can be presented every time,  however that might obscure what the                                                               
committee is looking at in detail.                                                                                              
                                                                                                                                
9:43:41 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked if  members are  essentially looking                                                               
at the  base tax differential  in the House Special  Committee on                                                               
Oil and Gas version and ACES and the progressivity.                                                                             
                                                                                                                                
MR. DICKINSON said that is correct.                                                                                             
                                                                                                                                
REPRESENTATIVE SEATON asked,  "And so if we were  just looking at                                                               
the progressivity without the change  in base, then we're looking                                                               
at this graph?"                                                                                                                 
                                                                                                                                
MR. DICKINSON said that is correct. He added,                                                                                   
                                                                                                                                
     The bottom  lines here  are straight.   If  you plotted                                                                    
     the straight lines  that flow from there  out here, the                                                                    
     difference  between them,  that straight  line and  the                                                                    
     reason   it   no   longer  stays   straight,   is   the                                                                    
     progressivity piece.   But what people  were interested                                                                    
     in this conversation for producing  this graph was this                                                                    
     notion  that when  you're  not  in progressivity,  when                                                                    
     you're  in  the  range  to  where  investments  may  be                                                                    
     affected, ACES takes  more than the House  Oil and Gas.                                                                    
     They were concerned  about that.  But  what they wanted                                                                    
     to  show  was when  prices  go  up,  they felt  it  was                                                                    
     appropriate   to   have   a   more   assertive   or   a                                                                    
     progressivity which took a higher  share.  So, it's try                                                                    
     to combine  those two  pieces and  those two  pieces in                                                                    
     isolation.                                                                                                                 
                                                                                                                                
9:45:16 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH referred to  a previous comment made by                                                               
Representative  Roses  about  time  and some  of  the  particular                                                               
things the  committee is looking at  today.  She opined  that the                                                               
cross sections the  committee is looking at  to monetize Alaska's                                                               
money are obscure because of  the historically high price of oil.                                                               
Alaskans could  be shown  a model  right now  that shows  a state                                                               
take of billions in progressivity if  oil prices were at $200 per                                                               
barrel.  That would show  Alaskans the state was really "sticking                                                               
it  to" producers  and would  serve  to provide  a scenario  that                                                               
looks very  good for government  take.  However, the  reality is,                                                               
in  the time  continuum  of 50  years of  investment  of oil  and                                                               
organizations involved in  this industry, the state  must look at                                                               
an average price closer to the  $30 range.  She expressed concern                                                               
that  the  legislature  is   considering  building  something  in                                                               
progressivity  while looking  at the  $100 per  barrel price  and                                                               
losing  sight  of  the  average.   She  said  the  House  Special                                                               
Committee on Oil and Gas has  made an attempt to tell Alaskans it                                                               
is trying to balance  at a low price per barrel  but take more at                                                               
the high  end.   She expressed  concern that  legislators believe                                                               
that whatever  tax policy  it puts  out is  based on  a realistic                                                               
price of oil.   She pointed out the price  of the American dollar                                                               
is on the  decline, which is contributing to  the inflated barrel                                                               
price,  as  is  instability  in  world regions  with  oil.    She                                                               
cautioned that many  variables exist so it is  dangerous to focus                                                               
on progressivity as the one answer.                                                                                             
                                                                                                                                
9:48:41 AM                                                                                                                    
                                                                                                                                
MR.   DICKINSON   noted   his   agreement   with   Representative                                                               
Fairclough's  observation   and  said  he  anticipates   a  price                                                               
correction.   He  added he  recognizes the  reason the  proxy for                                                               
costs built  into the ELF  system broke  down was because  no one                                                               
graphed  outside of  their imagination.   He  suggested that  the                                                               
state should  not count on  extremes, but should be  prepared for                                                               
them.                                                                                                                           
                                                                                                                                
9:49:39 AM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked  if he would be able to  avoid an asymptotic                                                               
line if the amount was brought out to $1,000.                                                                                   
                                                                                                                                
MR. DICKINSON said they will  continue to separate, but they will                                                               
cap out  at some point.   He believes  the cap  in both is  at 50                                                               
percent so  the production  tax would be  taking 50  percent, but                                                               
the split is not 50/50 because  of royalty and everything on top.                                                               
At that point, the total government take would be in the 80s.                                                                   
                                                                                                                                
9:50:14 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  clarified that  he believes the  bills cap                                                               
progressivity  at 25  percent so  it is  the equal  share concept                                                               
through  PPT  that the  legislature  approved  earlier. That  was                                                               
based  on 25  percent in  the base  price and  25 percent  in the                                                               
progressivity.   That was the  basis for the equal  share through                                                               
half in  progressivity and half in  the base price.   The PPT was                                                               
adopted  at 22.5  and  progressivity is  capped  at X  +  Y =  50                                                               
percent  but it  is capped  at  25 percent  in all  bills. It  is                                                               
dependent on the base price: if that  is 22.5, the cap will be at                                                               
47.5. The idea behind the 25  percent was that at high oil prices                                                               
the state wanted to  have an equal share so it  was a question of                                                               
where that would be reached.                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON asked to hear from Mr. Porter.                                                                            
                                                                                                                                
9:51:35 AM                                                                                                                    
                                                                                                                                
STEVE  PORTER, Consultant  to the  Legislative  Budget and  Audit                                                               
Committee,  Alaska   State  Legislature,  recalled  one   of  the                                                               
questions was how  credits affect the line.  He  said credits are                                                               
the simplest model.  He explained:                                                                                              
                                                                                                                                
     It really  is $1 out of  one pocket into another  so it                                                                    
     truly  does just  drop the  line. For  every dollar  of                                                                    
     credit, it drops a dollar  down so that line is exactly                                                                    
     parallel.   For every  dollar of  credit it  would drop                                                                    
     down a dollar.   So the credits are simple.   They just                                                                    
     move the line  up and down, do not change  the slope of                                                                    
     any of the lines.  They  are all in rough ratio to each                                                                    
     other  because   you  calculate  the  slope   then  you                                                                    
     subtract the credits.  It's  just straightforward.  The                                                                    
     things  that  change the  slope  of  the line  ...  the                                                                    
     starting  point doesn't  change the  slope of  the line                                                                    
     but it tells you how you are going to start.                                                                               
                                                                                                                                
     Definitely the  progressivity factor  that the  .225 or                                                                    
     the  .25 -  that's going  to  change the  slope of  the                                                                    
     line. How  you affect the [operating  expenditure] opex                                                                    
     and [capital  expenditure] capex  - how much  you bring                                                                    
     into that and  the level that you -  whether it's gross                                                                    
     or net, that's going to  change the methodology and the                                                                    
     slope  of the  line.   It's similar  to the  difference                                                                    
     between  multiplication and  addition and  subtraction.                                                                    
     Multiplication is  going to change the  slope, addition                                                                    
     and subtraction is just going  to drop the thing up and                                                                    
     down.   So it's actually  roughly, as you look  at each                                                                    
     one of  the variables,  we can talk  conceptually about                                                                    
     how  they  affect  the relationship.  That's  something                                                                    
     we're available to do.                                                                                                     
                                                                                                                                
9:53:16 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROSES remarked  that  yesterday's testimony  from                                                               
Pioneer was eye-opening.  He told members:                                                                                      
                                                                                                                                
     They talked about the fact that they had to go in and                                                                      
     renegotiate the lease with the state and not only were                                                                     
     they paying all of this but they were also paying 30                                                                       
     percent on the net. The progressivity we have is never                                                                     
     going to get to 30 percent on the net. So there isn't                                                                      
     a single company out there that had existing leases                                                                        
     prior to this that's ever going to get as high as what                                                                     
     the negotiated rate was for Pioneer.  On top of that,                                                                      
     we're giving them this additional boost so I'm trying                                                                      
     to get my hands around how the fact that we hold some                                                                      
     of those particular situations harmless and I don't                                                                        
     know whether the cap takes care of that or not but it                                                                      
     doesn't appear that it does.  So I guess we're - I was                                                                     
     struggling with this and thought these little dynamic                                                                      
     changes of 2 percent here and .0002 here and .003 here                                                                     
     and then I look at 30 percent and say we're not even                                                                       
     in the ballpark.  We're grappling over peanuts when                                                                        
     the peanut farm is over here.  So it sort of pales in                                                                      
     comparison so when people say it's going to change the                                                                     
     dynamic by raising this 2/10ths of a percent, and we                                                                       
     saw somebody else get theirs raised by .3, not ...                                                                         
     2/100ths of a [percent], it just blows my mind.  It                                                                        
     just seems to me like we're arguing over some of the                                                                       
     wrong points.                                                                                                              
                                                                                                                                
9:55:33 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  said  the   30  percent  net  cost  share                                                               
contract  kicks  in  after [Pioneer]  has  recovered  all  costs,                                                               
operating  and capital.   They  also got  royalty relief  so that                                                               
upfront their royalty  is 12.5 instead of 5.   That's a trade-off                                                               
on net present value versus future.   He was surprised to hear of                                                               
30  percent net  profit  sharing  in addition  to  PPT, until  he                                                               
understood royalty  reduction was  given and  the 30  percent net                                                               
profit sharing  was a  trade-off for  the upfront  royalty relief                                                               
that doesn't kick in until costs are recovered.                                                                                 
                                                                                                                                
REPRESENTATIVE SEATON  pointed out  that another  difference does                                                               
not show  up on  the graph  because the  [numbers] are  static in                                                               
time. Oil  and gas will  remain at that  curve as will  the curve                                                               
for ACES,  if one  assumes increases in  costs or  inflation will                                                               
move further  to the right.   One  of the points  discussed about                                                               
time is that the trigger point  being on the net accounts for all                                                               
of the differences.    That is  not the slope of  the line change                                                               
or whether  the tax is  on wellhead versus  net after costs.   He                                                               
continued:                                                                                                                      
                                                                                                                                
     That is not the determining factor of having this tax                                                                      
     last for a long time and acquire the positions of                                                                          
     having built into it the idea that it won't have to                                                                        
     come back and be fixed because if you trigger it on                                                                        
     the net, which ACES does, then those are taken in as                                                                       
     whether you have inflation or whether you have                                                                             
     increased costs in some fields.  And so I just want to                                                                     
     make sure that I'm understanding that right so if we                                                                       
     look at those graphs and make some presumptions of 5                                                                       
     years from now with some inflation and everything                                                                          
     else, those lines are going to move apart.  But that                                                                       
     wouldn't be the case if we keyed the gross                                                                                 
     progressivity on the net profit margin, the same as in                                                                     
     ACES.  Is that correct?                                                                                                    
                                                                                                                                
9:58:47 AM                                                                                                                    
                                                                                                                                
MR. DICKINSON  said yes, if one  trigger is gross and  one is net                                                               
as costs change,  the two will move further apart.   He noted, in                                                               
this graph,  as costs increase,  even with declining  volumes and                                                               
no inflation, the cost per barrel  will be higher.  The line will                                                               
move to the left, not to the right.                                                                                             
                                                                                                                                
REPRESENTATIVE  SEATON  clarified that  ACES  would  move to  the                                                               
right and the gross trigger would keep it where it is.                                                                          
                                                                                                                                
MR. DICKINSON said that is correct.   He added there are a number                                                               
of  net profit  share  leases on  the North  Slope.   Pioneer  is                                                               
unique in that most  of its oil is in the one  lease.  He pointed                                                               
out:                                                                                                                            
                                                                                                                                
     The only other observation I'll make is also it then                                                                       
     becomes deductible for PPT so the net effect, once                                                                         
     payouts reach and those payments are there, then the                                                                       
     PPT will drop some.  But, you're right, it's a much                                                                        
     larger figure.                                                                                                             
                                                                                                                                
10:00:13 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  FAIRCLOUGH  stated,  in regard  to  the  comments                                                               
specific to  Pioneer, she met  with Commissioner Galvin  and some                                                               
geologists to discuss  those numbers.  She  learned that Oooguruk                                                               
has been waiting to be developed  for at least 40 years.  Pioneer                                                               
took a risk in stepping forward to  produce it and was able to do                                                               
that  now because  of the  transition in  basin holders  that has                                                               
allowed smaller  explorers to come  in.  That  facility agreement                                                               
has  allowed Pioneer  to access  a line  at a  much reduced  cost                                                               
rather than  building new structures.   She said the  dynamics of                                                               
who is investing in Alaska is  changing as the statute matures so                                                               
hopefully its tax policy will reflect that.                                                                                     
                                                                                                                                
CO-CHAIR GATTO said  hopefully the next Oooguruk will  be able to                                                               
take advantage of the infrastructure.                                                                                           
                                                                                                                                
10:01:53 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  WILSON said  because  of  the dynamics  occurring                                                               
right now, legislators must be  careful.  North Slope activity is                                                               
increasing so  the legislature must  be careful to do  nothing to                                                               
stop that.                                                                                                                      
                                                                                                                                
10:03:03 AM                                                                                                                   
                                                                                                                                
MR. DICKINSON  replied the PPT does  more than that.   Instead of                                                               
impeding investment, it  makes it more attractive.   He continued                                                               
with his presentation., as follows:                                                                                             
                                                                                                                                
     ... My last  slide [Slide 7], everyone  was hoping for,                                                                    
     which  is  a little  bit  of  algebra. Basically,  some                                                                    
     people think  visually, some people in  tables and some                                                                    
     people  think  in  equations.  So  I'm  basically  just                                                                    
     trying    to    differentiate   between    the    gross                                                                    
     progressivity  and  the  net progressivity.  ...Let  me                                                                    
     start at  the bottom with the  net progressivity, which                                                                    
     is the current law and how that works.                                                                                     
                                                                                                                                
     You basically have  a rate. You start with  R, which is                                                                    
     the rates and it's a  per barrel amount.  It typically,                                                                    
     in current law, it's .25.   You multiply that times two                                                                    
     other things.   The first thing  is to my mind  how you                                                                    
     get the  total progressivity  rate and so  you multiply                                                                    
     that times the gross value  at the point of production,                                                                    
     minus  all  those  upstream costs.    You  divide  that                                                                    
     through  by taxable  barrels  so  that this  expression                                                                    
     gives you a per barrel amount.                                                                                             
                                                                                                                                
     And then you say, okay, we're  going to - not only will                                                                    
     you get to recover  your costs but before progressivity                                                                    
     kicks in, you  get to recover another $40.   This tells                                                                    
     you  how much  the per  barrel cash  flow is  from each                                                                    
     barrel less  $40.  Let's say  that came out to  be $10.                                                                    
     You then would take your rate,  which is a quarter of a                                                                    
     percent per barrel, and you'd  come out you'd say okay,                                                                    
     that's  2.5 percent.    And then  you'd  take that  2.5                                                                    
     percent  progressivity and  you'd  multiply that  times                                                                    
     the  same thing  that  you calculate  your total  taxes                                                                    
     against, which  is your gross value  less your upstream                                                                    
     costs.                                                                                                                     
                                                                                                                                
     So that's how that currently  works and that's how that                                                                    
     works under  ACES, and the  only difference  being that                                                                    
     this  40 becomes  30,  and the  R -  I  guess I  wasn't                                                                    
     consistent in  how I treated  that - the R,  instead of                                                                    
     being  .25 is  .20. But  the  mechanics of  it are  the                                                                    
     same. The equation looks the same.                                                                                         
                                                                                                                                
     The  progressivity  tax  on gross  is  simpler.    That                                                                    
     doesn't mean  it's right but  it is simpler.   I think,                                                                    
     as everyone  realizes, is  all it means  is you  go and                                                                    
     strike  out  -   wherever  you  see  an  N   here  -  a                                                                    
     subtraction  of   costs,  you  strike  that   out  and,                                                                    
     probably partially  to compensate for that,  then this,                                                                    
     the number that you subtract was up to 50.                                                                                 
                                                                                                                                
     So what it  is, you take your per barrel  rate, you say                                                                    
     what's  my  gross value  at  the  point of  production,                                                                    
     divide through  by my  barrels, find  out what  that is                                                                    
     and knock out $50.  That  gives me my index of the same                                                                    
     thing. If  it was  a quarter of  a percent,  and that's                                                                    
     $10,  you  have 2.5  percent,  and  then you  take  2.5                                                                    
     percent times the gross.   So you're typically going to                                                                    
     have a higher figure here  and because costs are always                                                                    
     going to bring that down.   Whether this is high or not                                                                    
     depends on whether the difference  between 50 and 40 is                                                                    
     larger  than the  difference between  the costs  and no                                                                    
     costs.                                                                                                                     
                                                                                                                                
     I hope  that's -  now there's a  third way  of thinking                                                                    
     about  that.    As  Representative  Roses  has  -  full                                                                    
     equation and then  for Representative Guttenberg's, you                                                                    
     would  then  take  this  whole thing  and  add  on  the                                                                    
     regular  tax  and then  subtract  the  credits and  the                                                                    
     equation is a lot longer.                                                                                                  
                                                                                                                                
10:07:34 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON pointed to  two different functions in both                                                               
of the equations.  One is what you're  taxing on at the end, G or                                                               
G-N.  The  other  is  the  trigger point,  which  is  the  middle                                                               
sections  and nothing  prevents changing  the trigger  point from                                                               
the  lower equation  into the  upper equation  and taxing  on the                                                               
wellhead instead of the net.                                                                                                    
                                                                                                                                
MR. DICKINSON  said that is  absolutely right. He pointed  to the                                                               
graph and  said, "To put  it in classic  tax terms, this  is your                                                               
base and this  is your rate, and there's no  reason that you have                                                               
to have the same figure in both."                                                                                               
                                                                                                                                
10:08:16 AM                                                                                                                   
                                                                                                                                
CO-CHAIR GATTO said the cross point is the intriguing number.                                                                   
                                                                                                                                
MR.  DICKINSON   told  members  the  cross   point  will  change,                                                               
dependent on N.                                                                                                                 
                                                                                                                                
10:08:42 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROSES  said  the  committee  heard  that  due  to                                                               
progressivity  on the  gross, at  a certain  price and  a certain                                                               
cost, there  would be no  taxes on  the base, therefore  the cost                                                               
would wash  out and the  progressivity would  kick in.   He asked                                                               
for clarification.                                                                                                              
                                                                                                                                
MR.  DICKINSON explained  the progressivity  does not  affect the                                                               
base calculation, nor can the  progressivity go negative.  If the                                                               
per barrel amount  is $40, and $50 is subtracted  from that, that                                                               
doesn't equate to a negative $10 refund.                                                                                        
                                                                                                                                
10:09:39 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROSES said  he thought  that speaker's  point was                                                               
that if $40 is the trigger point,  but costs wash out to zero, no                                                               
taxes would  be paid  on the  base.  However,  with the  gross, a                                                               
progressivity tax would  be paid but that  isn't possible because                                                               
the [progressivity tax] would only trigger in above that amount.                                                                
                                                                                                                                
MR. DICKINSON opined that the opposite  is true.  He said the $40                                                               
figure has  nothing to  do with  the base.   The state  gets 22.5                                                               
percent of the net  - that will never change.   He said he shares                                                               
Representative Roses' confusion about how that might work.                                                                      
                                                                                                                                
10:10:43 AM                                                                                                                   
                                                                                                                                
CO-CHAIR GATTO said if the gross kicks  in at $50 and the cost is                                                               
$60,  the  company  is  not   making  any  money.    However  the                                                               
progressivity costs  have still  kicked in  because it's  a gross                                                               
amount.                                                                                                                         
                                                                                                                                
MR.  PORTER   explained  that  would   occur  in  a   high  price                                                               
environment for  oil, where  progressivity would  kick in,  and a                                                               
company is  spending so much capital  that the net was  spread to                                                               
zero.   He said he  believes that  is the only  environment where                                                               
that scenario could be possible.                                                                                                
                                                                                                                                
MR. DICKINSON  presented a  hypothetical case  of a  company with                                                               
existing production that makes a  huge investment in a new field.                                                               
Their net  could be zero over  all of their barrels  because that                                                               
new  investment wipes  out the  tax  on the  original.   However,                                                               
those  original   barrels  could  still  be   taxed  under  gross                                                               
progressivity.   He  said  that might  be likely  if  one of  the                                                               
current small players decided to make a huge investment.                                                                        
                                                                                                                                
10:13:00 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON  asked if gross progressivity  was based on                                                               
the trigger  point of  the net, that  could never  happen because                                                               
the progressivity  would not kick  in without a profit  margin of                                                               
30 or 40.                                                                                                                       
                                                                                                                                
MR. DICKINSON responded  that is correct.  If any  number goes to                                                               
zero in the multiplication, the entire equation goes to zero.                                                                   
                                                                                                                                
MR. PORTER  told members  he and Mr.  Dickinson are  available to                                                               
answer questions.                                                                                                               
                                                                                                                                
10:13:56 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE ROSES asked:                                                                                                     
                                                                                                                                
     After the bill came out of [the House] Oil and Gas                                                                         
    [Committee], there was an article in the paper and there                                                                    
     was some concern about the fact that because of the cost -                                                                 
    and that's why you were here to show the actual costs as                                                                    
     opposed to the $20...                                                                                                      
                                                                                                                                
MR. DICKINSON interrupted to clarify Representative Roses was                                                                   
referring to the actual estimated costs.                                                                                        
                                                                                                                                
REPRESENTATIVE ROSES continued.                                                                                                 
                                                                                                                                
     ...exactly, well, the number based on what we think is the                                                                 
     current cost.  And there was an article that talked about                                                                  
    the fact that under the House Oil and Gas provision that                                                                    
     the state would get no additional revenue for 5 years based                                                                
     on the progressivity and the rate that they were in there.                                                                 
     Did you follow that and understand what that meant?                                                                        
                                                                                                                                
10:14:39 AM                                                                                                                   
                                                                                                                                
MR. DICKINSON  explained that  the fiscal  note uses  a forecast.                                                               
Typically those prices  start at $70 and go down.   In that case,                                                               
the higher progressivity  doesn't kick in, so  the CSHB 2001(O&G)                                                               
raises less revenue than ACES.                                                                                                  
                                                                                                                                
REPRESENTATIVE  ROSES  responded,  "Under that  prediction  of  a                                                               
decline of prices."                                                                                                             
                                                                                                                                
MR. DICKINSON verified  that is correct.  He  then explained that                                                               
the second fiscal note forecast  uses a nominal and real [number]                                                               
and  assumes  a  start  point  of $80  and  prices  rise  due  to                                                               
inflation.  In that case, five  years out the [barrel price] hits                                                               
the $90  range where the cross  over occurs and that  is the only                                                               
time CSHB 2001(O&G) would raise more  revenue than ACES.  He said                                                               
if  today's price  is used  and one  assumes that  increases, the                                                               
CSHB 2001(O&G) would raise more revenue today.                                                                                  
                                                                                                                                
REPRESENTATIVE ROSES  said the only  way that would happen  is if                                                               
the stars were aligned properly.                                                                                                
                                                                                                                                
MR. DICKINSON jested only one star  would be needed to align with                                                               
exactly what DOR said would happen.                                                                                             
                                                                                                                                
MR. PORTER said  if one asks about the impact  of CSHB 2001(O&G),                                                               
that  version raises  more money  at  higher prices  and less  at                                                               
lower prices.   The crossover point is roughly in  the $80 range,                                                               
depending on a number of variables.                                                                                             
                                                                                                                                
10:17:32 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  WILSON  said almost  any  scenario  can be  shown                                                               
dependent  upon what  numbers are  used.   Legislators must  base                                                               
decisions on  whether the prices are  high or low and  ensure the                                                               
state is covered  in either case.  She expressed  concern that if                                                               
prices  are  low,  developers will  leave,  which  happened  once                                                               
before in  Alaska.  She opined  that she does not  want to repeat                                                               
history.                                                                                                                        
                                                                                                                                
MR. PORTER  agreed that  is very  important and  said it  is also                                                               
important  to understand  the relative  significance of  changing                                                               
the numbers.   He said  he would compare  a gross tax,  which the                                                               
state does  not currently have,  to a net  tax, which is  in both                                                               
ACES  and   PPT  and  the   relationship  between  the   tax  and                                                               
progressivity.  Each one of  those elements substantially effects                                                               
the economics of  a project regarding taxes.  If  a company spent                                                               
$1 billion to get to the  point of first production and 10 years,                                                               
that is  a huge  front-end expense before  it receives  its first                                                               
dollar.  A  gross tax would take a portion,  maybe 20 percent, of                                                               
that first dollar,  which delays the amount of  time that company                                                               
can recover its  costs.  On a net basis,  the company's cash flow                                                               
is  taxed, which  helps the  company  recapture its  money.   The                                                               
advantage  of progressivity  is  that it  gives  the company  $30                                                               
(ACES) or $40  (PPT) in cash flow before the  state starts taking                                                               
its  portion of  the windfall.   If  the state  is trying  not to                                                               
impact the overall impact of  a project, the progressivity on the                                                               
top end will  not affect the overall economics of  the project as                                                               
much  as raising  and lowering  the  base tax.   He  is a  strong                                                               
proponent  of keeping  the  base  tax stable  and  as  low as  is                                                               
reasonable and in sharing in the income at the top end.                                                                         
                                                                                                                                
10:21:53 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON  noted that  ACES has a  fairly significant                                                               
gross  floor,   10  percent.       That   would  be   taken  into                                                               
consideration  by a  board when  deciding whether  to sanction  a                                                               
project.  The committee has seen  $32 used as the stress point in                                                               
models but now  that has been kicked up  to as high as $75.    He                                                               
asked  if setting  the progressivity  amount above  that analysis                                                               
point  would   prevent  it  from   impacting  a   decision  about                                                               
sanctioning a project.                                                                                                          
                                                                                                                                
MR. PORTER replied:                                                                                                             
                                                                                                                                
     ... Especially  if you're on  - your trigger  points on                                                                    
     the net  because you are  giving them cash  flow before                                                                    
     you  even start  the progressivity.   The  problem with                                                                    
     the gross  floor on a  percent basis is you  really are                                                                    
     taxing  that  first  dollar   that  they're  trying  to                                                                    
     capture.  I look at two  things.  If, in fact, West Sak                                                                    
     is at  40, which  I think the  administration testified                                                                    
     to,  in that  low environment  that becomes  very, very                                                                    
     difficult.    So a  floor  impacts  your most  marginal                                                                    
     projects more than it does  the very prolific projects,                                                                    
     you might say.  So that's  the ones that you don't want                                                                    
     to hit.  To be very direct, that's a bad idea.                                                                             
                                                                                                                                
10:24:13 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  SEATON  said in  looking  at  the give  and  take                                                               
balance, the floor  has been eliminated in  CSHB 2001)O&G), which                                                               
is a  large percentage at  low oil prices, yet  the progressivity                                                               
has been modeled to equal ACES so  that it is not aggressive.  He                                                               
pointed out  it is hard  to tell  the difference between  the PPT                                                               
and ACES  line.  He  asked if  Mr. Porter's understanding  is the                                                               
same.                                                                                                                           
                                                                                                                                
MR. PORTER said Representative Seaton's  analysis is correct, but                                                               
needs to  be qualified.  He  pointed out that although  the lines                                                               
are  pretty close,  the difference  is significant  in those  out                                                               
years  as  the difference  amounts  to  hundreds of  millions  of                                                               
dollars.    He  said  the   key  is,  when  legislators  look  at                                                               
progressivity, they  need to  figure out how  much cash  flow per                                                               
barrel  it wants  to  let  the company  recoup  before it  starts                                                               
taking  its  windfall.   Legislators  will  either determine  the                                                               
slope of  the line depending on  how quickly it wants  to capture                                                               
incremental  value or  decide to  share the  cash flow  for every                                                               
dollar in  revenue. If legislators  decided to set the  number at                                                               
$120, at that point it would  max out the state's share at 50/50.                                                               
Legislators can do two things:  choose the start point and choose                                                               
the upper  point where it wants  to start sharing 50/50,  and the                                                               
slope will create itself. He emphasized  he is speaking to net so                                                               
that $120 would represent the price per barrel less any costs.                                                                  
                                                                                                                                
10:27:31 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH  suggested the committee begin  a round                                                               
table discussion on  the hot point issues so that  the public can                                                               
understand  the   different  pieces   going  into   the  decision                                                               
legislators  are trying  to make.   She  suggested beginning  the                                                               
discussion  with  net  versus  gross   and  continuing  with  the                                                               
recognition of costs, the Governor's proposal, et cetera.                                                                       
                                                                                                                                
10:29:54 AM                                                                                                                   
                                                                                                                                
CO-CHAIR  GATTO  said  all  of those  issues  could  be  resolved                                                               
quickly if  members knew what the  price of oil was  going to be.                                                               
He said if  one takes the historical average of  a postage stamp,                                                               
that  would  amount  to  about  20 cents,  since  the  price  has                                                               
increased  from 1  to 41  cents.    However,  no one  can mail  a                                                               
letter  for  20  cents.   He  thought,  in  trying  to   pick  an                                                               
historical  average  for  oil  prices   short  of  a  world  wide                                                               
recession, the average  is unlikely to recur.   He wished someone                                                               
could  establish  a  fixed  price  for oil  from  which  to  make                                                               
decisions, but  that can't happen.   He noted the  legislature is                                                               
dealing with  knobs and pulleys so  that every time one  issue is                                                               
changed,  everything else  changes.   Experts cannot  predict the                                                               
price of oil.                                                                                                                   
                                                                                                                                
CO-CHAIR GATTO remarked that  Representative Fairclough's idea of                                                               
a round  table discussion is  superb because most  public support                                                               
appears to  counter simplistic advertising.   He opined  that the                                                               
committee should discuss the fact  that the issue is barrels, not                                                               
taxes, because changing the tax could result in fewer barrels.                                                                  
                                                                                                                                
CO-CHAIR JOHNSON said  he agrees with the  round table suggestion                                                               
but asked that all committee members be present.                                                                                
                                                                                                                                
CO-CHAIR  GATTO  noted  that  three of  the  absent  members  are                                                               
Democrats.   Those members are  in a meeting.   He said he  is so                                                               
pleased that  partisanship has not  entered into this issue.   He                                                               
suggested taking a recess to wait for those members to return.                                                                  
                                                                                                                                
REPRESENTATIVE  WILSON suggested  taking  a  10-minute break  and                                                               
informing the absent members of the plan.                                                                                       
                                                                                                                                
REPRESENTATIVE ROSES suggested having  the round table discussion                                                               
after  members submitted  amendments, since  there is  a deadline                                                               
for doing so.                                                                                                                   
                                                                                                                                
CO-CHAIR GATTO reminded members that  amendments were due at noon                                                               
the following  day.  He  said the  committee could take  a recess                                                               
after the amendments  are submitted so that  members could review                                                               
them.                                                                                                                           
                                                                                                                                
10:36:59 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  FAIRCLOUGH  related  her   desire  to  have  full                                                               
participation and  is willing to  wait for the absent  members to                                                               
return.  She  clarified her desire is that  people articulate the                                                               
different  positions   on  each  issue,  not   advocate  for  any                                                               
position.   She said  all legislators  come to  the table  with a                                                               
different  filter  due  to  their  different  backgrounds.    Her                                                               
intention, she relayed, is to  ensure all members have understood                                                               
the testimony  in the same way  and to inform the  public, not to                                                               
participate in  partisan politics.   She  further said  she wants                                                               
her constituents to know that  all committee members believe this                                                               
point  in time  to  be very  important for  Alaska  and they  are                                                               
trying to balance all of the issues put before them.                                                                            
                                                                                                                                
CO-CHAIR GATTO said  he would also like the  public to understand                                                               
that the  differences between the types  of oil are as  varied as                                                               
the difference  between soft and  alcoholic drinks.   The formula                                                               
must adjust  to the different  types of oil because  the expenses                                                               
are very different.                                                                                                             
                                                                                                                                
10:41:01 AM                                                                                                                   
                                                                                                                                
The committee took an at-ease from 10:41 a.m. to 10:57 a.m.                                                                     
                                                                                                                                
10:57:17 AM                                                                                                                   
                                                                                                                                
CO-CHAIR GATTO  called the meeting  back to order.   He announced                                                               
the  agenda for  the  remainder of  the day  would  consist of  a                                                               
recess from noon  to 1:00, at which time members  would hear from                                                               
the commissioner  of the  Department of Revenue  and others.   At                                                               
3:00 p.m. the committee will  either recess or adjourn, depending                                                               
on the amount of material covered.                                                                                              
                                                                                                                                
CO-CHAIR GATTO  invited members to  begin an  internal discussion                                                               
for  the benefit  of  the public,  as well  as  members. He  said                                                               
members will meet at a second  round table with the producers and                                                               
the administration  on Saturday.   He asked  Representative Roses                                                               
to discuss ground rules.                                                                                                        
                                                                                                                                
10:58:37 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROSES   said  his  understanding  is   that  this                                                               
opportunity  is not  to  be  used as  a  press  conference or  to                                                               
discuss members'  opinions, but  to get areas  of concern  on the                                                               
table so  that further clarification  can be requested.  That way                                                               
future round table participants will  be prepared for the line of                                                               
questioning.                                                                                                                    
                                                                                                                                
10:59:58 AM                                                                                                                   
                                                                                                                                
CO-CHAIR GATTO  explained that  when Prudhoe  Bay was  young, the                                                               
first barrels  of oil  had the  consistency of  a bottle  of Coca                                                               
Cola.   As time went on,  the lightest and thinnest  oil had been                                                               
pumped and  the consistency of the  oil turned to that  of syrup.                                                               
The  new  oil,  not  yet available,  will  have  a  substantially                                                               
thicker consistency.   That oil  will probably be developed  in a                                                               
decade  because  the  technology  does  not  yet  exist  to  make                                                               
development economically feasible.   However, because that target                                                               
is known, organization resources are focused in that direction.                                                                 
                                                                                                                                
11:01:34 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON  said he would  lay out the issues  in CSHB
2001(O&G) that he would like  the experts to further clarify. The                                                               
first is  the exploration incentive  credit (EIC) because  he has                                                               
not heard enough information on all standpoints.                                                                                
                                                                                                                                
11:02:33 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH  said she would like  the producers and                                                               
the administration  to discuss progressivity,  specifically about                                                               
appropriating  funds  into   the  Constitutional  Budget  Reserve                                                               
(CBR), the  permanent fund, or  a separate account, at  the round                                                               
table scheduled on Saturday at 9:00 a.m.                                                                                        
                                                                                                                                
11:03:58 AM                                                                                                                   
                                                                                                                                
CO-CHAIR GATTO opined that it  is time the legislature repaid the                                                               
funds it  borrowed from the  CBR, and thus he  expressed interest                                                               
in that being part of the discussion.                                                                                           
                                                                                                                                
11:04:21 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GUTTENBERG said  he thinks  members already  know                                                               
what  industry representatives  are  going to  say  at the  round                                                               
table, for example  they want a partnership but it  does not need                                                               
to be  balanced.  He  said he would like  to get a  definition of                                                               
windfall   profits,  and   discuss  terms   of  behavior.     The                                                               
consultants  have  told  legislators  they  do  not  have  enough                                                               
information from the course of the  last 30 years to predict [oil                                                               
companies']  behavior.   He  believes part  of  that behavior  is                                                               
influenced  to  a  great  degree by  happenings  elsewhere.    He                                                               
specified  that he  would like  to hear  from the  administration                                                               
about the evolution of the  ACES bill, especially its change from                                                               
the gross, and how it expects  behavior to change.  He also wants                                                               
to know how the bill evolved from going to the gross to ACES.                                                                   
                                                                                                                                
11:06:56 AM                                                                                                                   
                                                                                                                                
CO-CHAIR  GATTO  said  he  would  also like  to  hear  about  the                                                               
evolution  of ACES  and its  change from  the governor's  initial                                                               
campaign promise.                                                                                                               
                                                                                                                                
11:07:19 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE    SEATON   requested    discussion   about    [AS                                                               
43.55].165(e)(6) and  the BP situation.   He would also  like all                                                               
of the participants to discuss  expanding [AS 43.55].165(e)(6) to                                                               
include criminal negligence,  the fact that those  costs would be                                                               
non-deductible,  and on  the impacts  of eliminating  the section                                                               
about unscheduled shutdowns and how audits would be handled.                                                                    
                                                                                                                                
11:08:56 AM                                                                                                                   
                                                                                                                                
CO-CHAIR  GATTO  asked  if Representative  Seaton  thinks  it  is                                                               
necessary  to  discuss  fines and  penalties  that  have  already                                                               
occurred.                                                                                                                       
                                                                                                                                
REPRESENTATIVE SEATON  related his  understanding that  all bills                                                               
have a  retroactivity portion  that deals with  that issue  so he                                                               
doesn't think that would be built  into new legislation.  He then                                                               
expressed interest  in discussing how  that issue can  be handled                                                               
in the most expeditious way for all parties.                                                                                    
                                                                                                                                
11:09:51 AM                                                                                                                   
                                                                                                                                
CO-CHAIR GATTO  said legislators  spent a lot  of time  trying to                                                               
figure  out best  oil field  practices.   He asked  about the  30                                                               
cents a barrel issue.                                                                                                           
                                                                                                                                
11:10:33 AM                                                                                                                   
                                                                                                                                
MR. DICKINSON  recalled that Representative  Seaton characterized                                                               
[AS 43.55].165(e)(6) as  the BP issue.  He pointed  out if a cost                                                               
is disallowed  in Prudhoe Bay,  half of that interest  belongs to                                                               
BP,  almost one-quarter  belongs to  ConocoPhillips, almost  one-                                                               
quarter belongs to ExxonMobil and  the remaining interests belong                                                               
to small operators.  One  of the issues legislators wrestled with                                                               
was  working  interest  owners, specifically  how  an  operator's                                                               
criminal negligence  would affect the  tax return of  the working                                                               
owner.  He said negligence issues need to be thought through.                                                                   
                                                                                                                                
11:11:35 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH said she  would like the administration                                                               
to  speak to  the issue  of confidentiality.   The  committee has                                                               
talked about a wide variety of  people who would have access to a                                                               
wide variety of information in both  DOR and DNR.  She questioned                                                               
whether  the administration  would be  willing to  trim down  the                                                               
exposure   because    the   producers   have   spoken    to   how                                                               
confidentiality  impacts  their  competitive edge  on  return  on                                                               
investment.      She   supports  the   Governor's   attempts   at                                                               
transparency while  providing confidentiality  but wants  to know                                                               
how she plans to do that.                                                                                                       
                                                                                                                                
REPRESENTATIVE WILSON said  that is her concern also.   She added                                                               
the data  in ACES is  wide open. She  would like to  know whether                                                               
that can be narrowed down.                                                                                                      
                                                                                                                                
11:13:35 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON  said he wants  to make sure  the producers                                                               
and  the administration  are aware  that  members have  requested                                                               
specific information,  such as  amendment language  from possibly                                                               
ConocoPhillips to tighten up the confidentiality issue.                                                                         
                                                                                                                                
MR.  DICKINSON provided  three  observations on  confidentiality.                                                               
The first is  that DOR would share forecast  information with DNR                                                               
but  the  time  period  for   the  forecast  information  is  not                                                               
specified.    Currently,  most  oil  revenue  is  taken  in  cash                                                               
payments but,  20 years ago,  most of it  was taken in-kind.   He                                                               
pointed out  that DNR  was acting  as an  agent, selling  oil and                                                               
held several competitive  sales.  Although DNR has  not done that                                                               
recently,  it  retains that  right.    He  noted if  a  company's                                                               
potential  competitors  for  sales  in  Alaska  must  submit  all                                                               
forward-looking information,  legislators might  consider whether                                                               
DNR's  marketing folks  will be  looking  at that  as they  think                                                               
about RAV.                                                                                                                      
                                                                                                                                
MR.  DICKINSON  turned  to  his  second concern:    that  on  the                                                               
forward-looking information,  in a worse case  scenario, auditors                                                               
may find a  document necessary to forecast or  with the potential                                                               
to forecast  and say  that should have  been produced.   However,                                                               
DOR could  wait to notify the  company until the end  of the time                                                               
period, six  years, and send the  company a bill for  $2 million,                                                               
which equals a fine  of $1,000 per day times six  years.  He said                                                               
if the  intent is to  fine a company when  it does not  produce a                                                               
document requested  by the  department, the  $1,000 per  day fine                                                               
should suffice [and the company  should be notified immediately].                                                               
He opined that concern should be addressed.                                                                                     
                                                                                                                                
MR.  DICKINSON  said  his third  concern  addresses  a  technical                                                               
issue.  The  current tax statute says the  department can publish                                                               
information  as  long  as  it's combined  so  that  a  particular                                                               
taxpayer's business  cannot be  identified.   The ACES  bill will                                                               
eliminate  that  protection  and   instead  requires  that  three                                                               
taxpayers' information  be combined so that  BP's tax information                                                               
could be  combined with the  two smallest  taxpayers' information                                                               
and be  published.   He said  the same approach  is used  for the                                                               
salmon  pricing report  so that  if  there are  fewer than  three                                                               
taxpayers in  a category, the  information is not  published. If,                                                               
at some  point, three can  be combined statewide or  one taxpayer                                                               
represents more than  80 percent or two  taxpayers represent more                                                               
than 90  percent, the data  will not  be published.   Second, the                                                               
salmon pricing  report remains  under the  general tax  rule that                                                               
requires the particulars of a taxpayer's  data be disguised.   He                                                               
related  his  belief  that  rule should  remain,  but  noted  his                                                               
agreement  with  the  overall  goal of  clarifying  what  can  be                                                               
published.                                                                                                                      
                                                                                                                                
11:21:16 AM                                                                                                                   
                                                                                                                                
CO-CHAIR  GATTO asked  if that  falls  under the  confidentiality                                                               
provision.                                                                                                                      
                                                                                                                                
MR.  DICKINSON  answered  it  falls  under  the  publication  and                                                               
sharing of taxpayer data between  departments provision.  He said                                                               
Representative   Wilson's  concern   about  the   forward-looking                                                               
information pertains to being more  specific.  It currently says,                                                               
"anything necessary for  a forecast."  A  taxpayer could consider                                                               
information useful but  not necessary to forecast.   He suggested                                                               
telling taxpayers to  tell DOR for the next eight  years what the                                                               
following  categories  will be:    capital  and operating  costs;                                                               
exploration costs; and  projected volumes.  Where  a unit exists,                                                               
the  state should  be privy  to any  information passing  between                                                               
members of the unit, such as when projects get approved.                                                                        
                                                                                                                                
CO-CHAIR GATTO  asked if Mr.  Dickinson will be  participating in                                                               
the round table discussion.                                                                                                     
                                                                                                                                
MR. DICKINSON said he will not.                                                                                                 
                                                                                                                                
11:23:04 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH  asked if  the House  Special Committee                                                               
on Oil  and Gas extended  the auditing  period to six  years. She                                                               
noted  that  producers  and  the  public  have  said  allowing  a                                                               
bureaucracy additional  time will only increase  the longevity to                                                               
produce  a document.  She pointed  out that  Representative Roses                                                               
has requested  that the administration provide  facts at previous                                                               
meetings on how often audits have  been pushed out past the three                                                               
year timeframe. She  added federal tax returns can  be audited up                                                               
to seven  years after being  filed. She  has not seen  a response                                                               
and she would like an answer before looking at CSHB 2001(O&G).                                                                  
                                                                                                                                
11:24:36 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROSES recalled  he also  asked how  many times  a                                                               
situation has been pushed into jeopardy status.                                                                                 
                                                                                                                                
MR.  DICKINSON   said  no  statute  of   limitations  applies  to                                                               
situations like fraud.                                                                                                          
                                                                                                                                
11:25:23 AM                                                                                                                   
                                                                                                                                
CO-CHAIR GATTO said the base rate could be a topic.                                                                             
                                                                                                                                
11:25:32 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE ROSES said he is  sure the administration will try                                                               
to justify why  the legislature should adopt 25 percent  and a 10                                                               
percent floor but he does not have any questions about it.                                                                      
                                                                                                                                
11:25:56 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE EDGMON said  he does not expect the  parties to be                                                               
surprised by any questions at  this point since the deliberations                                                               
have been going on for 16  days.  He thought Representative Roses                                                               
characterized  the  situation  most  candidly when  he  said  the                                                               
legislature is in session because the  price of oil is at $96 per                                                               
barrel, so the discussion is about  money on both sides.  He said                                                               
the  committee heard  testimony yesterday  about finding  a sweet                                                               
spot but he  believes, as policy makers,  legislators are looking                                                               
at a fairly balanced viewpoint,  that being the yield curve where                                                               
it starts at the bottom end and  goes to the top end so that both                                                               
sides  share in  the risk  and the  reward.   He pointed  out the                                                               
producers have talked almost exclusively about the risk side.                                                                   
                                                                                                                                
11:27:54 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON pointed out that  members heard a lot about                                                               
underestimation of  costs and possible underpayment  of tax based                                                               
on costs  claimed that may not  be appropriate.  He  was not sure                                                               
whether the reporting requirements in  the bill will cover all of                                                               
that.   He requested more  information on what the  penalties for                                                               
underpayment  need to  be  to get  as close  as  possible to  the                                                               
estimated tax payments for the net present value.                                                                               
                                                                                                                                
11:29:27 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE WILSON  expressed interest  in hearing  more about                                                               
the topping  plant.    She recalled  asking how many  barrels are                                                               
involved  right  now  and  whether   expanding  its  use  to  all                                                               
operators on the Slope will  significantly increase the number of                                                               
barrels and impact the royalties the state receives.                                                                            
                                                                                                                                
CO-CHAIR GATTO  said he  would like to  know whether  the topping                                                               
plant saves the producers or the state money.                                                                                   
                                                                                                                                
11:30:46 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH said she does  not want to advocate for                                                               
a large credit  for a particular company.    However, she related                                                               
her belief  that the  EPA and  environmental standards  to reduce                                                               
sulfur  in diesel  specific to  the  topping plant  issue can  be                                                               
compared to land use issues.   If one wants something to be done,                                                               
one  changes a  behavior; in  this case,  at the  state level  on                                                               
taxation,  at  a local  level  on  land  use policy.    Sometimes                                                               
unintended consequences occur.  She continued:                                                                                  
                                                                                                                                
     So, I think that the federal government in the EPA ruling                                                                  
     that mandates a reduction in sulfur and diesel, their                                                                      
     intent is to take carbon monoxides and toxic chemicals out                                                                 
     of the air.  And so, I'd like to have a conversation of the                                                                
    dollars and cents, as Representative Wilson and you have                                                                    
     both spoken to, but then I have to take a step back and say                                                                
    what was EPA's intent.  If we're going to put 50 trucks,                                                                    
    and I'm not certain if that is round trip or not because                                                                    
     that means it could be up to 100 trips per day, on a road                                                                  
    that the State of Alaska will have to maintain, so there                                                                    
    will be costs allocated to that maintenance that aren't                                                                     
     picked up by those trucks because the diesel that's hauling                                                                
     the trucks will contribute to the federal tax on fuel but                                                                  
     what they are hauling will not.  My point is there are air                                                                 
     quality issues and other issues that will impact a decision                                                                
     of building something on the North Slope that goes beyond                                                                  
     the finances and that is that EPA is trying to extract                                                                     
     toxic poisons out of our air, which is a global issue.                                                                     
     Again, it's weighing that balance.                                                                                         
                                                                                                                                
     I'm certainly not advocating for the credit but I am                                                                       
    advocating for the consideration of there is more to the                                                                    
    issue than dollars and cents when it reaches the general                                                                    
     public and the benefit of the general public.  The bottom                                                                  
     line is that the intent from EPA is to get the toxins out                                                                  
     of the air and then we're going to, because of economics,                                                                  
     choose to put hundreds of trucks on a daily basis.  I                                                                      
     wonder what the dialog will be and how much carbon we stick                                                                
     back in the air in putting the lower diesel fuel into                                                                      
     service. I'm sure that you understand what I mean.  I just                                                                 
     know that there's a trade-off there.                                                                                       
                                                                                                                                
11:33:24 AM                                                                                                                   
                                                                                                                                
CO-CHAIR GATTO acknowledged both a social and economic cost.                                                                    
                                                                                                                                
REPRESENTATIVE  FAIRCLOUGH  said  [oil  development]  creates  an                                                               
environmental cost, a health cost, and a global warming cost.                                                                   
                                                                                                                                
11:33:44 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  SEATON asked  if  members  received a  three-page                                                               
memo on the  number of trucks and maintenance costs.   He said he                                                               
would distribute it if they did not.                                                                                            
                                                                                                                                
11:34:04 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  WILSON  said  she  would  like  to  know  whether                                                               
companies can  deduct payments  to the  state from  federal taxes                                                               
and  whether  they  could  still take  those  deductions  at  the                                                               
federal level if the state does not give them.  She asked:                                                                      
                                                                                                                                
     If we said  we weren't going to use that  as a deduction, do                                                               
     they still get  to deduct it at the federal  level?  I would                                                               
     like to  know that because  that would make a  difference in                                                               
     what I did too.  If they're  going to get it deducted at the                                                               
     federal level, then  why would we give them  a deduction for                                                               
     it?                                                                                                                        
                                                                                                                                
MR.  DICKINSON explained  many expenses  on the  North Slope  are                                                               
deductible  for  the  purposes  of PPT,  state  income  tax,  and                                                               
federal  income tax.      He pointed  out  a  deduction does  not                                                               
provide 100  percent recovery of costs.   He felt it  is entirely                                                               
appropriate, given  three different taxes, to  allow companies to                                                               
deduct something from each.   Generally, the deductibility on the                                                               
federal tax will  be very separate from the way  the state treats                                                               
it.   The state  income tax  uses the same  standard so  it would                                                               
probably be  deductible state  income tax whether  or not  it was                                                               
deductible from the state production  tax, unless the legislature                                                               
specifically prohibited it.                                                                                                     
                                                                                                                                
11:36:23 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROSES  said  he thought  Representative  Wilson's                                                               
concern was not  so much about the deductibility  of expenses but                                                               
whether or  not the company was  receiving a federal credit  or a                                                               
special write-off  on federal taxes.   Her concern was  not about                                                               
the state issuing credits on top of those credits, he suggested.                                                                
                                                                                                                                
MR. DICKINSON agreed  and said credits would add  up more quickly                                                               
but even a federal credit is not typically 100 percent.                                                                         
                                                                                                                                
11:36:55 AM                                                                                                                   
                                                                                                                                
CO-CHAIR GATTO  announced that the  committee would  recess until                                                               
1:00 p.m.                                                                                                                       
                                                                                                                                
1:22:28 PM                                                                                                                    
                                                                                                                                
CO-CHAIR   GATTO   reconvened   the   meeting   and   asked   Mr.                                                               
Gavin to give his presentation.                                                                                                 
                                                                                                                                
1:22:38 PM                                                                                                                    
                                                                                                                                
PAT  GALVIN,  Commissioner,  Department   of  Revenue,  gave  the                                                               
following testimony:                                                                                                            
                                                                                                                                
     Thank you, Mr.  Chair.  Today I wanted to  just pick up                                                                    
     some loose ends  and cover some things  that we haven't                                                                    
     had a chance to cover  in the previous testimony.  Some                                                                    
     of this is  in response to issues of  concern that have                                                                    
     been raised to  us or questions that  people have asked                                                                    
     us to pursue.                                                                                                              
                                                                                                                                
     And I've  broken this  down organizationally  into four                                                                    
     different  topics.    I've  got  the  first  one  -  an                                                                    
     explanation of credits.  There  was a lot of discussion                                                                    
     about the way that the  credit system works between new                                                                    
     companies   coming  in,   current  companies   who  are                                                                    
     currently  producing, and  then when  we start  talking                                                                    
     about  the exploration  incentive  credit program,  all                                                                    
     the numbers start to blur and  so what I've tried to do                                                                    
     is capture  as neatly as I  can, in just a  few slides,                                                                    
     some  of  the  distinguishing  characteristics  of  the                                                                    
     credits  as  it  relates   to  new  entrants,  existing                                                                    
     explorers or existing  producers and the EICs.   And so                                                                    
     that's one section.                                                                                                        
                                                                                                                                
     The next  section I  wanted to do  is just  run through                                                                    
     from the administration's vantage  point, the House Oil                                                                    
     and  Gas CS  and  give  you our  comments  in terms  of                                                                    
     things  that we  would like  to see  changed in  the CS                                                                    
     when  you   consider  moving  something  out   of  this                                                                    
     committee.   I'm going  to walk  through those  and, in                                                                    
     the  process   of  that,  identify  maybe   some  other                                                                    
     directions on  the issues that were  being addressed in                                                                    
     that CS.                                                                                                                   
                                                                                                                                
     The   next  area   is   talking  about   transportation                                                                    
     deductions. This  is something  that hasn't come  up in                                                                    
     this committee yet  and it was an issue  that's come up                                                                    
     through a  number of legislators  who have  asked about                                                                    
     how  the  tax  system  deals  with  the  transportation                                                                    
     deductions associated with  pipelines that have tariffs                                                                    
     with  maybe distinctions  between what  are the  actual                                                                    
     costs versus what are the  applied tariff costs and how                                                                    
     that  relates  to the  tax  system.    So, I've  got  a                                                                    
     description  of  that  and  hopefully  I'll  have  some                                                                    
     expertise on the phone to help me with that.                                                                               
                                                                                                                                
     And  then finally,  there's been  a  lot of  discussion                                                                    
     about  progressivity,  about  ways of  calculating  it,                                                                    
     about net versus doing it on  a gross basis.  The House                                                                    
     Oil  and  Gas CS  is  on  strictly  a gross  basis  and                                                                    
     there's been talk  about doing some sort  of a mixture.                                                                    
     And so  I wanted to  bring the Gaffney Kline  guys back                                                                    
     and  give you  an opportunity  to just  ask them  about                                                                    
     these different  options and I've  had them  respond to                                                                    
     some  of  the  ideas  that I've  heard  from  different                                                                    
     members and  to give you  an idea of  their perspective                                                                    
     on the different options that have been discussed.                                                                         
                                                                                                                                
1:25:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH said a copy of the slide in front of                                                                  
members is not on their table.                                                                                                  
                                                                                                                                
COMMISSIONER GALVIN said the slide he is showing is just a                                                                      
navigational slide; copies of the remainder of his slides are in                                                                
members' packets.                                                                                                               
                                                                                                                                
1:26:15 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if someone would be showing up with a                                                                      
packet of information for members.                                                                                              
                                                                                                                                
COMMISSIONER GALVIN said it was distributed to members and is                                                                   
entitled, "The Credit Story."                                                                                                   
                                                                                                                                
CO-CHAIR GATTO informed members that Ms. Thompson, Division of                                                                  
Oil and Gas, will be on-line and available to answer questions.                                                                 
                                                                                                                                
1:26:30 PM                                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN said Ms. Thompson is the expert on the                                                                      
transportation deductions.  He then continued his presentation:                                                                 
                                                                                                                                
     [Slide 2]  So turning  to the credits,  I hope  this is                                                                    
     helpful.  I  put  this   together  this  morning  after                                                                    
     thinking about  the way  that this  is rolled  out over                                                                    
     the  course of  the days  that you've  been working  on                                                                    
     this  and realizing  that it  kind of  comes disjointed                                                                    
     and  sometimes it's  difficult to  understand how  they                                                                    
     all fit  together.  And to  this is an attempt  to kind                                                                    
     of  bring  that  together  in one  place  to  hopefully                                                                    
     better understand how these parts work.                                                                                    
                                                                                                                                
CO-CHAIR GATTO informed members they should have a copy of a                                                                    
letter that was to accompany a chart on the structure that was                                                                  
previously received.                                                                                                            
                                                                                                                                
1:27:25 PM                                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN continued:                                                                                                  
                                                                                                                                
     So  what I'm  going  to go  through  are two  different                                                                    
     scenarios where you have a  development project that is                                                                    
     being undertaken by a new  entrant, somebody who has no                                                                    
     current production,  no current tax liability  and then                                                                    
     look  at a  similar project  if it  were undertaken  by                                                                    
     what I  am referring to  as an incumbent,  somebody who                                                                    
     currently  has  production   and  is  currently  paying                                                                    
     production  tax and  has  the  opportunity to  transfer                                                                    
     credits  directly.   And then,  separately, we'll  talk                                                                    
     about the exploration incentive  credit program and how                                                                    
     that treats different activities.                                                                                          
                                                                                                                                
1:28:10 PM                                                                                                                    
                                                                                                                                
     So, in the  first example, a new company  comes in, and                                                                    
     a prime  example of this  would be Pioneer.   They come                                                                    
     in with a  new project and let's just, for  the sake of                                                                    
     explanation,  think about  their  project costing  $200                                                                    
     million  in  development costs.    Under  both PPT  and                                                                    
     ACES, they get  a 20 percent credit that's  going to be                                                                    
     taken off at the bottom of  any tax liability.  Both of                                                                    
     them get  the same  ... under PPT  and ACES  it's still                                                                    
     the same and  so it's worth $40 million to  them in the                                                                    
     end with  a $200 million  project. In addition  to that                                                                    
     credit,  as they're  experiencing those  costs, they're                                                                    
     deducting  it   from  zero   revenue  and   so  they're                                                                    
     experiencing a loss in the  amount of $200 million. And                                                                    
     then  they apply  their tax  rate  to -  that they  are                                                                    
     allowed to apply  against that loss -  and that results                                                                    
     in  a net  operating loss.   Under  both PPT  and ACES,                                                                    
     they are allowed to carry  that forward one year and it                                                                    
     turns into a credit the  following year.  It turns into                                                                    
     a transferable credit  that is the same as  if they had                                                                    
     earned it the following year.                                                                                              
                                                                                                                                
1:29:36 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if a company  starts out with a cost of $200                                                               
million  and  gets  a  20 percent  investment  credit  worth  $40                                                               
million, the company's loss would equal $160 million.                                                                           
                                                                                                                                
COMMISSIONER GALVIN  said that  is correct;  although he  has the                                                               
numbers in reverse order.  A  company would first deduct the $200                                                               
million  from revenue,  which  results in  a  $200 million  loss.                                                               
Taxes are calculated  on that.  A 20 percent  rate can be applied                                                               
under   PPT,   and  then   the   credit   would  be   calculated.                                                               
Commissioner Galvin said the main point  of Slide 2 is that under                                                               
the PPT,  the tax rate  a new entrant is  allowed to apply  to an                                                               
operating loss is set at 20 percent.                                                                                            
                                                                                                                                
1:31:00 PM                                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN continued with his presentation.                                                                            
                                                                                                                                
     And you'll  see on  the next slide  [Slide 3],  if they                                                                    
     were an  existing producer the  tax rate would  be 22.5                                                                    
     percent. What we're  doing with ACES is  we're going to                                                                    
     have the same  rate apply for either one of  them - and                                                                    
     you'll see that as we go  through. So now we've got the                                                                    
     incumbent  situation  -  same  project,  $200  million,                                                                    
     company gets  a 20  percent net credit  at the  end for                                                                    
     $40 million.   But, in  this instance, the  company has                                                                    
     production.   They  have a  tax liability  and so  that                                                                    
     $200 million is  just added to their  capital costs for                                                                    
     the year and it just  reduces their tax base that their                                                                    
     tax rate  is then  applied against.   It  reduces their                                                                    
     taxes to the tune of  $45 million, 22.5 percent.  Under                                                                    
     ACES the  tax rate  is higher  so it  amounts to  a $50                                                                    
     million value.   The other additional thing  to note is                                                                    
     when you are with an  incumbent, they are going to also                                                                    
     likely have the  eligibility for the TIE  credit ... 10                                                                    
     percent in  addition so they  get another  $20 million.                                                                    
     ACES doesn't allow that.                                                                                                   
                                                                                                                                
1:32:09 PM                                                                                                                    
                                                                                                                                
     So, comparing  them side-by-side, ACES -  new entrants,                                                                    
     incumbents  -  for  a $200  million  project,  the  new                                                                    
     entrant is looking  at a total credit under  PPT of $80                                                                    
     million and  under ACES  it would  be $90  million, the                                                                    
     primary difference  being that they get  to write their                                                                    
     net operating  loss off against  their actual  tax rate                                                                    
     as opposed to the 20  percent, sort of the artificially                                                                    
     lowered number under PPT.   With the incumbent, they're                                                                    
     looking at ... what I missed  in this is the TIE credit                                                                    
     so you can  add 20 on to  these.  Under the  PPT one it                                                                    
     would be $105  million, including the TIE  credit.  The                                                                    
     primary distinction I  wanted to make was  to show that                                                                    
     under PPT,  the new entrant  for the same  project gets                                                                    
     an  $80 million  credit, while  the incumbent  gets the                                                                    
     $85 million  credit plus  the TIE  credit.   Under ACES                                                                    
     we're going to  bring them both and let  them both have                                                                    
     a $90  million credit so  we're trying to  create equal                                                                    
     value between the incumbents and the new entrants.                                                                         
                                                                                                                                
1:33:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked if  those calculations are  based on                                                               
the assumption that progressivity has not been reached.                                                                         
                                                                                                                                
COMMISSIONER GALVIN said that is correct.                                                                                       
                                                                                                                                
REPRESENTATIVE   SEATON  related   his   understanding  that   if                                                               
progressivity was  reached, the amount of  deductions allowed for                                                               
new entrants and incumbents would definitely differ.                                                                            
                                                                                                                                
COMMISSIONER  GALVIN  said yes,  but  one  has to  remember  that                                                               
progressivity  is going  to be  based on  the taxpayer's  blended                                                               
margin, so  it would  not necessarily  be what  the progressivity                                                               
would  calculate  for  this  project.   Each  taxpayer  and  each                                                               
incumbent will have a different progressivity number.                                                                           
                                                                                                                                
1:34:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked if, for instance,  the progressivity                                                               
in either  ACES or PPT was  calculated on net and  amounted to 10                                                               
percent,  the incumbent  would  be able  to  subtract another  10                                                               
percent while the new entrant  would not be affected because that                                                               
entrant would be in the net operating loss category.                                                                            
                                                                                                                                
COMMISSIONER GALVIN said that is correct.                                                                                       
                                                                                                                                
1:35:33 PM                                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN continued with his presentation, as follows:                                                                
                                                                                                                                
     And then the  last slide I wanted to go  over [Slide 5]                                                                    
     because  it  is  very  confusing,  is  the  exploration                                                                    
     incentive  credits  program.   I  focused  here on  the                                                                    
     credit for  exploration wells.   Just  as a  side note,                                                                    
     the credits that are allowed  under the EIC program are                                                                    
     in exchange for  the 20 percent credit  that they would                                                                    
     normally get under  the ACES or PPT.  So,  when we talk                                                                    
     about 30  percent or 40  percent credit under  the EIC,                                                                    
     it's substituting  for the 20  percent credit  that you                                                                    
     get otherwise under ACES or PPT.                                                                                           
                                                                                                                                
1:36:43 PM                                                                                                                    
                                                                                                                                
     So   in  this   particular  instance,   we've  got   an                                                                    
     exploration well program that  costs $100 million.  And                                                                    
     there's two tests that are  going to decide how much of                                                                    
     a credit they  are going to get.  The  first one, under                                                                    
     A, is if they are three  miles from an existing well. I                                                                    
     have  existing well  in  quotation  marks because  it's                                                                    
     important that  there's a change  in the  definition of                                                                    
     existing  well  between  PPT  and  ACES  that  says  an                                                                    
     existing well is  one that has been  drilled within the                                                                    
     last 25 years  but does not include a  well that's been                                                                    
     drilled within the  last year and a half.   And so what                                                                    
     that  allows  is  for  companies  to  come  in  with  a                                                                    
     drilling  program  under ACES  and  drill  a series  of                                                                    
     wells in  one area and get  full credit for all  of the                                                                    
     wells  of  that  program.  Under  PPT,  they  are  only                                                                    
     allowed the wells  they drill in a single  year.  After                                                                    
     that, those  wells are  considered existing  wells when                                                                    
     they come  back the  following year  and so  they don't                                                                    
     get any credit  for that delineation well  and the rest                                                                    
     of the  wells they need  in order to  establish whether                                                                    
     or not to pursue the project.                                                                                              
                                                                                                                                
     So within  these two  tests, you look  at the  well and                                                                    
     the first  question is:  Does it  meet the  first test,                                                                    
     three miles from  an existing well?  The  answer is yes                                                                    
     and they  qualify for  at least the  first part  of the                                                                    
     credit.  Under PPT that  credit is 20 percent, which is                                                                    
     the same  amount that  they would  get if  they weren't                                                                    
     applying the  EIC program, just under  the existing tax                                                                    
     law.   And  so  there is  no reason  to  believe or  to                                                                    
     expect  they  are going  to  avail  themselves of  this                                                                    
     program when  they already have the  underlying program                                                                    
     that  gives them  the exact  same value.   And  so, the                                                                    
     recommendation under  ACES is  to move that  percent up                                                                    
     to 30 percent  to provide some attractive  value to it.                                                                    
     The folks from DNR explained  the value to the state of                                                                    
     having  them  use  the EIC  program  because  it  makes                                                                    
     information   that  is   generated   by  that   program                                                                    
     available  to the  state and  ultimately to  the public                                                                    
     that  otherwise wouldn't  be and  that there's  a value                                                                    
     there and  that's why we're  providing the  increase in                                                                    
     value of the credit if  they decide to use that program                                                                    
     -  it's  an exchange.    We're  buying the  information                                                                    
     exchange for a higher credit.                                                                                              
                                                                                                                                
1:39:24 PM                                                                                                                    
                                                                                                                                
     If they  meet both tests,  three miles from a  well and                                                                    
     25 miles  from a unit,  then they are going  to qualify                                                                    
     for  a 40  percent credit  -  so again,  40 percent  in                                                                    
     exchange for  the 20 percent that  they otherwise would                                                                    
     get under the tax code.                                                                                                    
                                                                                                                                
1:39:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES asked if the commissioner is saying that                                                                   
information is so valuable we are willing to spend $10 million                                                                  
of every $100 million to get it.                                                                                                
                                                                                                                                
COMMISSIONER GALVIN said DNR is saying yes, that is the value                                                                   
they place on getting that information.                                                                                         
                                                                                                                                
1:40:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked if there is also a difference in the                                                                
value of credits taken under EIC as opposed to PPT.  His                                                                        
understanding  is  the  PPT  credits cover  more  costs  and  are                                                               
broader so that a company would  receive less value under the EIC                                                               
for the three mile distance because of the base.                                                                                
                                                                                                                                
COMMISSIONER  GALVIN  said  that  is correct.  He  explained  the                                                               
definition of  what is  an allowable  or qualified  expense under                                                               
the EIC  program is more  narrowly drawn  toward the well  or the                                                               
seismic program.   The tax provision has a  broader definition of                                                               
capital expenditure.                                                                                                            
                                                                                                                                
1:41:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SEATON   questioned    whether   that   narrower                                                               
definition  reduces the  value of  the credit,  whether that  has                                                               
particular value to the state and  whether there is any reason to                                                               
retain  that  distinction in  the  base  amount against  which  a                                                               
credit is applied.                                                                                                              
                                                                                                                                
COMMISSIONER GALVIN  said he believes  the distinction  should be                                                               
retained because of the value  exchange that has been identified.                                                               
That will give 30 percent of  the costs of a particular type that                                                               
go directly toward  the acquisition of that information.    Also,                                                               
that will  establish what DNR is  willing to pay in  order to get                                                               
that information.  He continued:                                                                                                
                                                                                                                                
     When we talk about the  20 percent rate they would fall                                                                    
     back to otherwise, we take  a broader view of basically                                                                    
     any capital  expenditure they make in  association with                                                                    
     production or exploration.   Since we are  not tying it                                                                    
     to  the  acquisition  of the  information,  the  actual                                                                    
     either  drilling  or seismic  project,  we  can have  a                                                                    
     broader view  and a lower rate.  I think if you  end up                                                                    
     taking the - what is  referred to as the 023 definition                                                                    
     of  what   qualifies  for  your   credit  -   and  just                                                                    
     referenced that and used that  as your 025 amount, we'd                                                                    
     end up  paying a lot  more because we'd have  a broader                                                                    
     pool of  costs that now  we're paying  at the 30  or 40                                                                    
     percent  rate.   That's not  the exchange  that we  had                                                                    
     originally  set  up.   I  think  the distinction  still                                                                    
     makes sense.                                                                                                               
                                                                                                                                
1:43:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON asked  that  DNR  staff attend  tomorrow's                                                               
meeting  to  help  determine whether  that  percentage  has  been                                                               
adjusted.  He  noted that keeping dual sets of  books, one on EIC                                                               
and  one  on  PPT,  becomes   problematic  for  everyone.  He  is                                                               
wondering if  a trade-off could  be made  so that the  program is                                                               
more efficient.                                                                                                                 
                                                                                                                                
1:44:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES asked Commissioner Galvin:                                                                                 
                                                                                                                                
     A  few moments  ago I  asked  you the  question was  it                                                                    
     worth $10 million  out of every 100 for you  to get the                                                                    
     information and the  answer was yes.  Now  I'm going to                                                                    
     ask the question the other way.   If there was a choice                                                                    
     between the  EIC and  the other  credits, you  said the                                                                    
     reason  we bumped  it  up to  30 was  to  make this  an                                                                    
     enticement so  we could  get the  information.   Is the                                                                    
     exclusion of  those additional  deductions going  to be                                                                    
     worth the  $10 million that  you are putting up  to the                                                                    
     oil  companies or  are they  going  to want  to try  to                                                                    
     stick to the original, given an option?                                                                                    
                                                                                                                                
COMMISSIONER GALVIN  said that is  not an evaluation that  can be                                                               
made in the  abstract right now.  Different companies  will be in                                                               
different  situations,  particularly  with   an  incumbent.    An                                                               
incumbent may  be looking for  a potentially  qualifying drilling                                                               
program.  They may have  other values for drilling infrastructure                                                               
in the  area as  a starting  point for  another project  down the                                                               
road.   Their capital expenditures associated  with that drilling                                                               
program may not be directly  related to the information from that                                                               
location.     The  company  may   be  looking  into   moving  the                                                               
infrastructure out to that spot  as an interest in something else                                                               
further down  the road.   Under the  023 program with  20 percent                                                               
across  the board,  those equivalents  are made.   Under  the 025                                                               
credit  program, the  state wants  to know  the costs  associated                                                               
with the acquisition of information that  it will get.  That will                                                               
limit it to the cost associated with that drilling program.                                                                     
                                                                                                                                
1:46:06 PM                                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN continued his presentation, as follows:                                                                     
                                                                                                                                
     So  the  next area  is  a  reflection of  the  previous                                                                    
     discussion,  in terms  of those  net losses  that under                                                                    
     the PPT,  the incumbent  is going to  get the  2.5, the                                                                    
     new entrant will  get 20 percent.  Under  ACES it makes                                                                    
     them the same.  And so, at the very bottom  you see the                                                                    
     difference  in values  between an  incumbent and  a new                                                                    
     entrant.   Under  PPT, the  incumbent  is getting  more                                                                    
     value   than  the   new  entrant   on  either   of  the                                                                    
     categories.   Under ACES it  makes them equal  and also                                                                    
     between  PPT and  ACES we're  providing more  value for                                                                    
     this whole  exploration program  across the  board than                                                                    
     under PPT.   So we're trying to get all  the numbers in                                                                    
     one place to  try to show where the move  is going from                                                                    
     PPT to ACES.                                                                                                               
                                                                                                                                
1:47:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON asked  if the  difference between  PPT and                                                               
ACES is  that deductible costs  are allowed  to be deducted  at a                                                               
higher tax rate.                                                                                                                
                                                                                                                                
COMMISSIONER  GALVIN   specified  that  the   primary  difference                                                               
between  the incumbents  and the  new  entrants is  the tax  rate                                                               
issue.                                                                                                                          
                                                                                                                                
CO-CHAIR GATTO asked  if the state should raise  the taxes higher                                                               
in order to give the new entrant an opportunity.                                                                                
                                                                                                                                
COMMISSIONER  GALVIN  replied,  "If they're  only  worried  about                                                               
credits, yes.  But I  think they're also  worried about  how much                                                               
they are going to pay us on the backside."                                                                                      
                                                                                                                                
1:48:13 PM                                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN referred to the  topics page and told members                                                               
he  wanted to  walk through  the [provisions]  in CSHB  2001(O&G)                                                               
that DOR would like changed.   He told members he would reference                                                               
sections from the  original ACES bill, HB 2001,  and compare that                                                               
to CSHB 2001(O&G)  when discussing sections he would  like to see                                                               
reinstated.                                                                                                                     
                                                                                                                                
1:48:51 PM                                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN explained:                                                                                                  
                                                                                                                                
     The first  one goes to  Section 1 of the  original bill                                                                    
     and  that's  a  section  that  deals  with  legislative                                                                    
     intent language.   This legislative intent  language is                                                                    
     intended to reference that  the legislature intends the                                                                    
     change  in  the  statute  of  limitations  language  to                                                                    
     incorporate   the   regulatory  interpretation   of   a                                                                    
     particular potential  event.   That potential  event is                                                                    
     where a taxpayer files a  tax return and somewhere down                                                                    
     the  road  there  is  a  decision by  some  sort  of  a                                                                    
     regulatory  body  that  affects   the  credits  or  the                                                                    
     valuation  that  they  put into  that  tax  return  and                                                                    
     retroactively brings  it back and says  it is different                                                                    
     for the  tax year that  you had filed at  some previous                                                                    
     point.                                                                                                                     
                                                                                                                                
1:50:18 PM                                                                                                                    
                                                                                                                                
     Under  the existing  regulations they  are required  to                                                                    
     then  alert  the department  and  file  an amended  tax                                                                    
     return  to say  hey, our  rates changed,  our valuation                                                                    
     changed by this ruling.   The statute of limitations on                                                                    
     that  amended tax  return starts  then because  they've                                                                    
     just filed a  new tax return.   This legislative intent                                                                    
     is  merely  to  say  when  we  change  the  statute  of                                                                    
     limitations from  three to six years,  it also captures                                                                    
     that instance  where they have filed  an amended return                                                                    
     due   to   a   regulatory   decision.      That's   the                                                                    
     interpretation that  exists within our  regulations and                                                                    
     it's just  merely to capture  that when you  change the                                                                    
     statute of limitations,  you're incorporating basically                                                                    
     that interpretation.                                                                                                       
                                                                                                                                
1:51:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  asked if,  when an amended  return is  filed, the                                                               
six-year  clock  is zeroed  out  for  the  entire return  or  the                                                               
amended portion only.                                                                                                           
                                                                                                                                
COMMISSIONER GALVIN replied only for the amended return.                                                                        
                                                                                                                                
1:51:31 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO said  that might  be  the right  approach but  he                                                               
wanted  to clarify  that the  zeroing out  of the  six-year clock                                                               
would apply to those amended portions only.                                                                                     
                                                                                                                                
COMMISSIONER GALVIN said he would have someone check on that.                                                                   
                                                                                                                                
1:51:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if, under IRS  rules, when a company files a                                                               
1040X, an amended return, the  statute of limitations also zeroes                                                               
out for the amended part.                                                                                                       
                                                                                                                                
COMMISSIONER  GALVIN  said  that is  correct  otherwise  everyone                                                               
would wait to file until the  statute of limitations was about to                                                               
expire.                                                                                                                         
                                                                                                                                
1:52:39 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO said  he understood the section  that required the                                                               
change  but  wanted  to  make  sure the  filers  were  not  being                                                               
penalized.                                                                                                                      
                                                                                                                                
COMMISSIONER  GALVIN told  members  that section  was removed  in                                                               
response to  a concern raised by  AOGA as it read  this provision                                                               
as  encapsulating  an interpretation  of  how  interest would  be                                                               
calculated   retroactively   but   was  referencing   the   wrong                                                               
regulation.   When  PPT regulations  were adopted  several months                                                               
ago,  an existing  regulation  that dealt  with  this aspect  was                                                               
repealed and  replaced with new  PPT related language.   The AOGA                                                               
position was based on the previous regulation.                                                                                  
                                                                                                                                
1:53:30 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  asked if this  section was  in the ACES  bill but                                                               
deleted in CSHB 2001(O&G).                                                                                                      
                                                                                                                                
COMMISSIONER GALVIN replied affirmatively.                                                                                      
                                                                                                                                
1:53:34 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  inquired as to  where that section is  located in                                                               
CSHB 2001(O&G).                                                                                                                 
                                                                                                                                
COMMISSIONER GALVIN  said the original bill  had this legislative                                                               
intent  in Section  1,  but Section  1 was  not  included in  the                                                               
committee substitute  so it disappeared.   He expressed  the need                                                               
for that intent to be put back in the bill.                                                                                     
                                                                                                                                
1:54:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES referred to  responses to committee members'                                                               
questions in  a letter from DOR  dated 10/30/07.  An  answer to a                                                               
question he  asked is on  page 2,  which was about  extending the                                                               
statute  of limitations  to six  years and  about frequency.   He                                                               
noted the  response says  desk audits  are done  for the  four to                                                               
five small taxpayers so they are  not affected.  However, for the                                                               
six  or   seven  taxpayers  that   undergo  full   blown  audits,                                                               
extensions  occurred about  85 percent  of  the time.   He  asked                                                               
Commissioner Gavin,                                                                                                             
                                                                                                                                
     ...Out of the 85 percent of the times that you've done                                                                     
     it, has it taken it out to the full six years or does                                                                      
     an extension mean one day,  five days, a week, a month?                                                                    
     I guess the  question that I'm asking  is you're asking                                                                    
     for six years but is four  enough, is five enough?  The                                                                    
     point is,  we want to  give you  what you need  but you                                                                    
     also do not want to create  a situation by where if you                                                                    
     got the  time they might  take it.  We  want efficiency                                                                    
     as much as we can get it.                                                                                                  
                                                                                                                                
COMMISSIONER  GALVIN clarified  that it  is the  administration's                                                               
intent, and remains a big part  of what it is requesting in terms                                                               
of audits, et cetera, to  complete the audits as expeditiously as                                                               
possible.                                                                                                                       
                                                                                                                                
1:56:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH  asked how the history  was compiled to                                                               
come up with  85 percent.  She  noted that, so far,  DOR has only                                                               
been able  to audit ELF on  a gross tax basis  and questioned how                                                               
DOR determined six years for a net tax.                                                                                         
                                                                                                                                
COMMISSIONER GALVIN admitted DOR does  not have experience with a                                                               
net  tax so  it is  extrapolating  from its  experience with  the                                                               
current tax system.  Under  that system, audits are conducted for                                                               
transportation costs  and other  aspects of the  tax calculation.                                                               
From the experience of the  group and the audit supervisors, they                                                               
recommended an increase  from three to six years  to avoid having                                                               
an  extension be  the normal  course of  business.   In terms  of                                                               
whether empirical  evidence was used to  make that determination,                                                               
DOR has not had enough experience to collect empirical evidence.                                                                
                                                                                                                                
1:57:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH asked:                                                                                                
                                                                                                                                
     ... In  the experience  that we have  - that  is having                                                                    
     the department estimate a need  for an additional three                                                                    
     years, is  there any  way you  could articulate  for us                                                                    
     what  the  specific  triggers   were  that  caused  the                                                                    
     extension because  three years on  a gross - I  mean do                                                                    
     you  not  have  the  appropriate personnel?    I  guess                                                                    
     that's  what comes  to mind  first because  I did  hear                                                                    
     from the  other side  of the coin,  per say,  that feel                                                                    
     like a  liability hanging out  there for  an additional                                                                    
     three  years  is  not  advantageous  to  good  business                                                                    
     practices.   They have to  carry larger  liabilities on                                                                    
     their  books for  potential loss  of revenue  in future                                                                    
     years.   So I'm  trying to balance  your request  - and                                                                    
     understanding [that] bureaucracy and government don't                                                                      
     move as fast as the private sector in some instances.                                                                      
                                                                                                                                
COMMISSIONER GALVIN asked  a staff member to join  him to provide                                                               
a more detailed description of  discussions with the auditors and                                                               
their  experience and,  particularly, whether  the extension  was                                                               
requested because  of "bureaucratic  crawl" or  because companies                                                               
need more time.                                                                                                                 
                                                                                                                                
1:59:58 PM                                                                                                                    
                                                                                                                                
JONATHON  IVERSEN,  Director,  Anchorage  Office,  Tax  Division,                                                               
Department of Revenue, introduced himself.                                                                                      
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH  asked whether  the answer is  "yes" or                                                               
"no."                                                                                                                           
                                                                                                                                
MR. IVERSON said it is yes.                                                                                                     
                                                                                                                                
2:00:21 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO said it seems to  have taken a fairly long time to                                                               
reach  the  end  of  the  auditing  cycle  under  the  gross  tax                                                               
situation.  That would mean that  under a net tax situation, [the                                                               
process]   will  be   stretched   out  beyond   the  statute   of                                                               
limitations.  He asked Representative  Fairclough to rephrase her                                                               
question.                                                                                                                       
                                                                                                                                
2:00:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH  noted DOR has recommended  an increase                                                               
in  the statute  of  limitations on  the  auditing function  from                                                               
three  to six  years.   She  recalled  that Representative  Roses                                                               
asked how often the  problem was a matter of fact.   To which the                                                               
response was  there has been  an 85 percent history  showing non-                                                               
compliance  and having  to extend  past the  three-year deadline.                                                               
She clarified  that her  question is if  DOR only  has experience                                                               
under ELF, and  extensions were required 85 percent  of the time,                                                               
what is causing  the delay in completing the audits,  and how did                                                               
DOR ascertain that three years would  help when, with a gross tax                                                               
system, the three-year limit needs to be extended.                                                                              
                                                                                                                                
MR. IVERSON referred to DOR's  10/30/07 letter and read, "For the                                                               
largest  taxpayers,  where  we   conduct  full  audits,  we  need                                                               
extensions for 85  percent of those taxpayers."   He explained in                                                               
general,  15 to  20 taxpayers  pay oil  and gas  production taxes                                                               
annually.  The state has a  handful of large taxpayers.  Of those                                                               
taxpayers, 85 percent extend past the three year deadline,                                                                      
therefore 3 or 4 taxpayers need waivers.  Those waivers would be                                                                
for six months to one year.                                                                                                     
                                                                                                                                
                                                                                                                                
2:03:06 PM                                                                                                                    
                                                                                                                                
MR. IVERSEN continued:                                                                                                          
                                                                                                                                
     ... The  first question, if I'm  interpreting it right,                                                                    
     is what is  driving the need for an  extra three years;                                                                    
     a couple of  things. The first is that we  are going to                                                                    
     be  relying on,  to the  extent that  it's going  to be                                                                    
     helpful - and we plan on  using these in audits - joint                                                                    
     interest  billings  and  joint interest  audits  as  an                                                                    
     input  into our  audit function.   These  would be  the                                                                    
     audits that  are conducted  by working  interest owners                                                                    
     in  a  unit  on  the  operator -  in  other  words,  to                                                                    
     determine  if they've  been billed  appropriately under                                                                    
     the  operating agreement.   Those  audits take  time in                                                                    
     the first instance anywhere from  a year to a few years                                                                    
     - two  or three years  ostensibly.  From  there there's                                                                    
     going to be  issues that are exceptions  that are going                                                                    
     to have to be worked out  between the parties.  What we                                                                    
     would  like to  do in  order to  benefit from  those is                                                                    
     have that time on the front  end to be able to actually                                                                    
     use  those joint  interest  audits  and joint  interest                                                                    
     billings and be  able to see how those  are resolved as                                                                    
     a means  to feed into  our audit  process.  If  a joint                                                                    
     interest audit  is completed after two  years, and then                                                                    
     there's exceptions still lingering,  we would only have                                                                    
     the benefit  of that joint  interest audit on  the very                                                                    
     tail end  of our audit  cycle if we're on  a three-year                                                                    
     statute  of  limitations,  which  puts  us  in  a  very                                                                    
     compressed timeline.                                                                                                       
                                                                                                                                
     In  addition, we  are dealing  with, as  Chairman Gatto                                                                    
     pointed out,  we are dealing  with a net tax  world now                                                                    
     so we are looking at an  increased bucket of costs.  So                                                                    
     that additionally adds into why  we need the additional                                                                    
     time.                                                                                                                      
                                                                                                                                
2:04:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH  asked if DOR looked  at joint interest                                                               
agreements under  the audits  it did under  ELF and  whether that                                                               
entailed  auditing  four  or  five  companies  and  required,  on                                                               
average, a six-month extension.                                                                                                 
                                                                                                                                
MR. IVERSEN said the primary  driver for the extensions under the                                                               
ELF audits  is the  fact that several  exchanges of  requests are                                                               
necessary to get  the information to do the audit.   Sometimes it                                                               
is  in  the  taxpayer's  interest   to  make  sure  it  gets  the                                                               
information to  DOR to  substantiate its tax  return so  that DOR                                                               
does not have to estimate the amounts.                                                                                          
                                                                                                                                
2:06:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FAIRCLOUGH  referred  to   a  response  in  DOR's                                                               
10/30/07 letter that says one  corporation refuses to comply with                                                               
the extensions based on its corporate philosophy.  She noted:                                                                   
                                                                                                                                
     What I want to make sure of is that's not how we're                                                                        
     reacting to the six years to penalize all producers or                                                                     
     all people filing tax returns because one individual                                                                       
     taxpayer is refusing to extend like you would like.                                                                        
                                                                                                                                
MR. IVERSEN said that is certainly not  the case.  The DOR is not                                                               
basing  its request  on the  acts  of a  single taxpayer.     The                                                               
purpose of DOR's  request is to get the information  it needs out                                                               
of the  joint interest audits  and have adequate time  to address                                                               
the upstream costs that are not addressed in the ELF audits.                                                                    
                                                                                                                                
2:07:22 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  stated a  properly filed tax  return has  no need                                                               
for  an extension.   He  said he  doubts whether  the legislature                                                               
could pass  any legislation to  address the timeline for  the one                                                               
entity  that is  causing  so much  grief.   He  added a  six-year                                                               
timeline  would not  be a  penalty for  those taxpayers  who have                                                               
properly filed their returns.                                                                                                   
                                                                                                                                
MR. IVERSEN nodded affirmatively.                                                                                               
                                                                                                                                
2:08:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON admitted that she  is amazed that a company                                                               
can get away  with [non-compliance] by saying it  has a different                                                               
corporate policy.                                                                                                               
                                                                                                                                
COMMISSIONER GALVIN  clarified the issue  is that when  a company                                                               
says  that, the  state  is  put in  the  position  of facing  the                                                               
statute of  limitations so it  has to  file a claim  against that                                                               
company  based on  the information  it has  at that  time.   That                                                               
creates a  less than optimal  situation for either  party because                                                               
the claim is based on a worst case assumption.                                                                                  
                                                                                                                                
2:09:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON surmised then that a lawsuit occurs.                                                                      
                                                                                                                                
COMMISSIONER  GAVIN said  the audit  supervisor first  works with                                                               
the company.   If the  point comes when the  state has to  make a                                                               
claim, the  next step is  the administrative appeal process.   If                                                               
no resolution occurs, the next step  would be to take the case to                                                               
court.                                                                                                                          
                                                                                                                                
REPRESENTATIVE WILSON asked if that happens in every case.                                                                      
                                                                                                                                
COMMISSIONER GALVIN said it happens  every time a company refuses                                                               
to give an extension.                                                                                                           
                                                                                                                                
REPRESENTATIVE  WILSON asked  if it  is always  the same  company                                                               
that refuses to give an extension.                                                                                              
                                                                                                                                
COMMISSIONER GALVIN replied:                                                                                                    
                                                                                                                                
     Only when  that company -  when their tax  return isn't                                                                    
     completed  by  the  time  you get  to  the  statute  of                                                                    
     limitations. So  it's not every  time that they  file a                                                                    
     return  that we  end up  backed  up to  the statute  of                                                                    
     limitations, but  every time that  we do get  backed up                                                                    
     to   the  statute   of   limitations,   we  have   this                                                                    
     experience.                                                                                                                
                                                                                                                                
2:10:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON said  she is  appalled by  that situation.                                                               
She then  said DOR has  asked for  more auditors, not  because it                                                               
would help  get the  audits done sooner,  but because  it doesn't                                                               
have the information.                                                                                                           
                                                                                                                                
COMMISSIONER GALVIN  said an extension  might be requested  for a                                                               
variety or  reasons.  It  could be that  DOR has a  difference in                                                               
opinion about whether a particular  cost should be credited. That                                                               
dispute  would  require  additional  discussion  to  resolve  the                                                               
dispute,  the deadline  kicks  in  and the  case  moves into  the                                                               
formal appeal  process.   It's not  necessarily that  DOR doesn't                                                               
have  the   information,  sometimes  more  time   is  needed  for                                                               
negotiation and agreement.                                                                                                      
                                                                                                                                
2:12:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE    SEATON   related    his   understanding    that                                                               
Commissioner Gavin is saying the net  tax will have more costs to                                                               
review.   However,  if the  audits  required of  the partners  in                                                               
joint  interest  agreements become  the  starting  point for  the                                                               
state  audits,  the  joint  interest  agreements  must  first  be                                                               
completed, which could  take two years.  In  addition, the filing                                                               
date for federal purposes is in October, almost a year later.                                                                   
                                                                                                                                
COMMISSIONER GALVIN said that is correct.                                                                                       
                                                                                                                                
2:13:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH asked:                                                                                                
                                                                                                                                
     ... If the  taxpayer who refuses to  file the extension                                                                    
     has  submitted at  the same  time that  the one  - that                                                                    
     another  large taxpayer  submits to  say yes,  it's all                                                                    
     right  for   the  extension,  whose  tax   return  gets                                                                    
     finished first?                                                                                                            
                                                                                                                                
COMMISSIONER GALVIN  said at the  risk of generalizing  too much,                                                               
it  is more  likely the  taxpayer who  offers the  extension will                                                               
finish first  because the  process will  continue in  an informal                                                               
way.  The one  who doesn't grant the extension ends  up in a more                                                               
formal  process  with  additional procedural  requirements.  That                                                               
creates barriers to resolving the issue.                                                                                        
                                                                                                                                
2:15:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FAIRCLOUGH  commented  that if  big  business  is                                                               
choosing to  be confrontational, a  time or money  advantage must                                                               
be involved or it would change its business practice.                                                                           
                                                                                                                                
COMMISSIONER GALVIN replied:                                                                                                    
                                                                                                                                
     ... You  asked me whether  they are resolved in  a more                                                                    
     timely manner.   ...  I don't  know whether  they would                                                                    
     end up  calculating that  they ended  up with  a better                                                                    
     outcome by  going through the  formal process.   It may                                                                    
     have taken  longer but  they may feel  like they  got a                                                                    
     better outcome  because they  formalized it  and didn't                                                                    
     compromise in an informal way.                                                                                             
                                                                                                                                
2:16:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON  noted  it  costs the  state  more  to  go                                                               
through the extra  steps and asked if anything can  be changed to                                                               
prevent that scenario from occurring.                                                                                           
                                                                                                                                
COMMISSIONER  GALVIN  said either  you  have  a deadline  or  you                                                               
don't; when you  have a deadline both parties are  forced to deal                                                               
with  that deadline.  It would  be a  mischaracterization to  say                                                               
they are  in the  wrong when  they refuse  to give  an extension.                                                               
Any company has the right to  force the process to the next step.                                                               
He expressed  concern that  unintended consequences  would result                                                               
if  this issue  was addressed  as if  a company  that refuses  to                                                               
grant an extension is always in the wrong.                                                                                      
                                                                                                                                
2:17:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON asked  if the time period  is extended from                                                               
3 years to 6 years, a  company's approval of an extension will be                                                               
unnecessary.                                                                                                                    
                                                                                                                                
COMMISSIONER  GAVIN said  the state  will not  be faced  with the                                                               
need to get an extension at the third year.                                                                                     
                                                                                                                                
REPRESENTATIVE  WILSON asked  if  the state  will  face the  same                                                               
problem later down the line.                                                                                                    
                                                                                                                                
COMMISSIONER  GALVIN said  he  didn't know,  but  added that  DOR                                                               
expects to have its audits done within that timeframe.                                                                          
                                                                                                                                
2:18:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked  if a national association  of auditors sets                                                               
standards that might  apply to this type of  situation or provide                                                               
parameters  from  which  to  work.   He  said  he  thought  those                                                               
standards might  include a standard  fine when the  deadlines are                                                               
exceeded.                                                                                                                       
                                                                                                                                
MR.  IVERSEN informed  members that  standards  that govern  both                                                               
accounting  principles and  petroleum  accounting do  exist.   He                                                               
related that to  his knowledge, those standards do  not include a                                                               
specific timeframe.  Regarding penalties,  DOR can only authorize                                                               
them by Alaska statute.                                                                                                         
                                                                                                                                
2:20:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROSES  noted the  committee  has  a deadline  for                                                               
submitting amendments  and his are  based on CSHB 2001(O&G).   He                                                               
told  members the  legal drafters  believe the  amendments should                                                               
apply  to  the  original  ACES  bill. He  asked  which  bill  the                                                               
committee will be working from.                                                                                                 
                                                                                                                                
2:21:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO said he will address  that question as soon as the                                                               
meeting is over.                                                                                                                
                                                                                                                                
REPRESENTATIVE GUTTENBERG  said he asked Co-Chair  Gatto the same                                                               
question during the  break and was told the  amendments should be                                                               
drafted  to the  CSHB  2001(O&G)  version.   He  opined that  the                                                               
drafters should be informed of which version.                                                                                   
                                                                                                                                
The committee took an at-ease from 2:21 p.m. to 2:41 p.m.                                                                       
                                                                                                                                
2:41:22 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO  reconvened  the  meeting and  told  members  the                                                               
committee will be working from the CSHB 2001(O&G) version.                                                                      
                                                                                                                                
2:41:58 PM                                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN continued with his presentation, as follows:                                                                
                                                                                                                                
     So turning to the economic  terms, the base rate within                                                                    
     the  CS is  22.5.   The  administration feels  strongly                                                                    
     that it should be 25 percent as  a base rate.  On a tax                                                                    
     floor, the original  bill included a 10  percent tax on                                                                    
     the gross for  the Legacy fields.  We  still believe it                                                                    
     is the state's interest to  have that protection on the                                                                    
     downside when you  have low prices.   We recognize that                                                                    
     if the  legislature chooses not  to have that  floor in                                                                    
     exchange for  higher progressivity, that's a  choice of                                                                    
     the legislature  but, if  so, it  should be  traded out                                                                    
     for that upside  and it should be greater  than what is                                                                    
     proposed in the original bill.                                                                                             
                                                                                                                                
2:42:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  noted the  two sections are  not married  so each                                                               
would have to be dealt with separately.                                                                                         
                                                                                                                                
COMMISSIONER GALVIN responded:                                                                                                  
                                                                                                                                
     Right, but  we recognize that it  is a bit of  a choice                                                                    
     in  terms of  if  you protect  yourself  from the  risk                                                                    
     associated with  low prices, to  a certain  extent, you                                                                    
     can be  expected to  ask less  on the  upside.   But if                                                                    
     you're dropping  that risk, you're going  to accept the                                                                    
     risk of  the low prices  and take that on,  then you're                                                                    
     trading  that off  for more  on  the high  side and  we                                                                    
     would also expect  that it would be the  intent to save                                                                    
     that  money to  cover those  times when  we might  have                                                                    
     lower prices.                                                                                                              
                                                                                                                                
2:43:48 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOHNSON asked  if the  state gets  more revenue  at the                                                               
high  end through  progressivity under  CSHB 2001(O&G)  using the                                                               
current system.                                                                                                                 
                                                                                                                                
COMMISSIONER  GALVIN said  all the  consultants agreed  that CSHB
2001(O&G) brings  in less than ACES  will until 2012.   At an $80                                                               
price,  the  CS  would  exceed  ACES  after  2012  based  on  the                                                               
combination of  the whole package  included in the  CS, including                                                               
progressivity and the credits.                                                                                                  
                                                                                                                                
2:44:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOHNSON asked  if Commissioner  Galvin had  information                                                               
about the difference  between the progressivity on  the gross and                                                               
the net.                                                                                                                        
                                                                                                                                
COMMISSIONER GALVIN  said from the  administration's perspective,                                                               
when looking  at the  impact of progressivity  on the  variety of                                                               
fields and  the variety  of players, it  recognizes the  value of                                                               
having the  progressivity triggered off  of the margin.   Gaffney                                                               
Kline made  an extremely compelling  argument about the  value of                                                               
achieving two  primary objectives:   to bring  in revenue  and to                                                               
positively  impact  the  investment  drive to  attract  the  more                                                               
challenged fields.  That is done  by having it set on the margin.                                                               
The rate  is a balance  between the low and  high end. The  CS is                                                               
fairly close to the original ACES  with just a little bit more on                                                               
the upper reaches.  If the committee  is going to be looking at a                                                               
proposal  where  the  administration's proposal  is  rejected  to                                                               
protect the  state on the  floor side, it would  highly recommend                                                               
taking  more on  the  upper end.   If  the  committee presents  a                                                               
proposal  where  it  rejects  the  administration's  proposal  to                                                               
protect the  state on the floor  side, it recommends the  CS take                                                               
more on the upper end.                                                                                                          
                                                                                                                                
2:46:39 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOHNSON asked  if  the  same would  apply  to the  22.5                                                               
versus the  25, so  that recouping it  on the  progressivity side                                                               
would accomplish the same goal.                                                                                                 
                                                                                                                                
COMMISSIONER GALVIN  related that the administration's  belief is                                                               
when the price  comes down to a level where  progressivity is not                                                               
kicking in, the  rate should be 25.  That's  the appropriate rate                                                               
given the investment opportunities according to the models.                                                                     
                                                                                                                                
2:47:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROSES   asked  if  escalators  were   built  into                                                               
marginal rates,  the administration would  retain that view.   He                                                               
said progressivity is now fixed at  one rate based on the margin.                                                               
He questioned whether the administration  would feel the same way                                                               
about 25  if the  margin was a  certain amount at  $30 or  $40 or                                                               
$80.                                                                                                                            
                                                                                                                                
COMMISSIONER   GALVIN  said   it  would   because  that   is  the                                                               
appropriate place  for the system  to land  when it gets  down to                                                               
where  new projects  start  when they  are  dealing with  smaller                                                               
margins without progressivity yet.                                                                                              
                                                                                                                                
2:48:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES recalled that three  of the four experts the                                                               
committee has heard from about that  issue and one of the reasons                                                               
the House Special Committee on Oil and Gas did what it did was:                                                                 
                                                                                                                                
     The philosophy was if you're working off of the net or                                                                     
     working off of a margin, you get to share a greater                                                                        
     amount of the profits on the higher end and you take                                                                       
     less of the profits on the lower end and you're                                                                            
     willing to take a little bit more risk when you're                                                                         
     taking risk.                                                                                                               
                                                                                                                                
Representative Roses  expressed concern that  if it gets  down to                                                               
that  lower   end,  the  legislature   will  be  back   for  more                                                               
discussions anyway.                                                                                                             
                                                                                                                                
COMMISSIONER GALVIN  said the principle  is one that  is commonly                                                               
accepted.  When talking about what  the rate should be, Pedro Van                                                               
Meurs said 25 percent is  the right number.  The administration's                                                               
consultants said  25 percent is  the right number.   The previous                                                               
administration   said   25  percent   was   the   number.     The                                                               
administration,  he  related,  believes the  collective  analysis                                                               
proves 25 percent is the number.  He questioned:                                                                                
                                                                                                                                
     Again, is that the steady state where projects are                                                                         
     burgeoning until they get to where their profit margin                                                                     
     reaches a point where they should be paying more?  We                                                                      
     feel strongly that 25 percent is the right number to                                                                       
     start with.                                                                                                                
                                                                                                                                
2:50:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG said  legislators are  dealing with  a                                                               
world with many corporate models for  structure.  It looks to him                                                               
like the different versions being  presented use a "one size fits                                                               
all" concept  with differences  in how  the credits  would apply.                                                               
He asked if  it would be simpler  to draw a line  to separate the                                                               
Legacy fields from  the new fields that are  farther away because                                                               
even though the operating expenses  might be higher on the legacy                                                               
fields, their volumes are exponentially higher.                                                                                 
                                                                                                                                
COMMISSIONER GALVIN  specified that  the starting point  would be                                                               
that distinction.  He explained that  a variety of new fields and                                                               
some  of the  long-term  existing fields  outside  of the  legacy                                                               
fields and they have economic  structures and challenges that are                                                               
more diverse than the legacy fields.  He said:                                                                                  
                                                                                                                                
     However, as we move forward in time and we look at the                                                                     
     evolution of those legacy fields, what we see is the                                                                       
     legacy fields themselves become a microcosm of the                                                                         
     rest of the North Slope in that they are going to be                                                                       
     moving into smaller fields...decisions on smaller                                                                          
     developments that have those same challenges that we                                                                       
     see outside of the Legacy fields.                                                                                          
                                                                                                                                
     And  so when  you end  up taking  the analysis  to that                                                                    
     level and you  say okay, let's just  isolate the Legacy                                                                    
     fields and say  what system should we  have just within                                                                    
     these, you end  up making a similar line and  - call it                                                                    
     a  line  in  the  sand  ... and  you  say  okay,  well,                                                                    
     geographically  we  can  describe  the  Legacy  fields.                                                                    
     But when you get inside  those fields and you're trying                                                                    
     to  distinguish  those  new  developments  that  you're                                                                    
     trying to  encourage and help  along with a  tax system                                                                    
     that  doesn't overly  burden them  while still  hitting                                                                    
     the  fields  at  the  rate  that we  want  to  hit  the                                                                    
     existing production,  then you no longer  have the ease                                                                    
     of just  drawing a line on  a map and saying  this unit                                                                    
     is going to be under one  and this is going to be under                                                                    
     a   different  one   because  those   fields  now   are                                                                    
     distinguished no  longer by ...  horizontal separation.                                                                    
     Now  you've  got  vertical  and  you've  got  just  the                                                                    
     essence  of the  product,  of the  resource.   When  we                                                                    
     looked   at  ways   of  distinguishing   that  in-field                                                                    
     development,  what   we  found  was  there   were  just                                                                    
     physical limitations  of being able to  distinguish one                                                                    
     type of  development from  the existing  production and                                                                    
     treat one differently than the  other and we just hit a                                                                    
     wall there in terms of what we -                                                                                           
                                                                                                                                
     So, just backing  up, we could come up  with one system                                                                    
     for  the   Legacy  fields  and   a  separate   one  for                                                                    
     everything else that  may be more dynamic  and this one                                                                    
     is more  static.  But in  doing so, you're back  to the                                                                    
     same  choice.    Are  we  going to  sacrifice, in  some                                                                    
     sense, the  flexibility of the  system within  that and                                                                    
     potentially  jeopardize that  new investment?   It's  a                                                                    
     choice that's  a very  difficult one  to make  when you                                                                    
     actually see  the economic results resulting  in a lack                                                                    
     of investment.                                                                                                             
                                                                                                                                
2:54:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG said credits are already delineated by                                                                
mileage from an existing well.  He pointed out:                                                                                 
                                                                                                                                
     There  is a  phenomenal  economic advantage  to be  in-                                                                    
     field  drilling between  directional  drilling and  ...                                                                    
     multiple holes in  the same place -  multilateral - and                                                                    
     then laterals  off the laterals and  laterals off those                                                                    
     that you  could still use  the same model,  whether the                                                                    
     pads are  there and the  few places where  there's more                                                                    
     than 3  miles, 6  miles between  - because  that's what                                                                    
     you're  talking about.   If  you're more  than 6  miles                                                                    
     between  drill pads,  there might  be  that little  gap                                                                    
     between the two of them -  it's 3 miles.  It just seems                                                                    
     like  the   infrastructure  is  there  in   place,  the                                                                    
     knowledge is there in place  in some ways now that they                                                                    
     are now  drilling on  the same pad  and they  have been                                                                    
     able to get to different structures down below.                                                                            
                                                                                                                                
COMMISSIONER GALVIN  said that is  exactly right.   Companies are                                                               
drilling off of  the same pads to access  different resources, so                                                               
distinguishing     characteristics,     like    distance     from                                                               
infrastructure, cannot  be used.   Once  the resource  comes into                                                               
the system, it integrates with the existing production.                                                                         
                                                                                                                                
REPRESENTATIVE GUTTENBERG said that was his point also.                                                                         
                                                                                                                                
COMMISSIONER GALVIN  said the bottom  line is that  the companies                                                               
that are exploring and developing  within the existing field have                                                               
an  economic  advantage  because  they  have  the  infrastructure                                                               
there.  The question is how  to recognize that in the tax system,                                                               
which is to  do it off the  margin and recognize that  it will be                                                               
more profitable for them rather than  for a company that needs to                                                               
put infrastructure in place.                                                                                                    
                                                                                                                                
     2:57:22 PM                                                                                                               
                                                                                                                                
COMMISSIONER GALVIN returned to his presentation, as follows:                                                                   
                                                                                                                                
     Now turning on the economic  side to something that was                                                                    
     added -  this is a  new area that  was not part  of the                                                                    
     original  bill  that was  a  desire  to provide  a  tax                                                                    
     treatment  for gas  that's produced  in a  part of  the                                                                    
     state outside  of Cook  Inlet that's  going to  be used                                                                    
     within the state  and to ensure that they  get the same                                                                    
     type  of a  tax  treatment that  is  available for  gas                                                                    
     produced within  Cook Inlet.   In  the [House]  Oil and                                                                    
     Gas version,  and it  was particularly  focused on  - I                                                                    
     think  Nenana  was the  primary  -  there's the  Nenana                                                                    
     Basin - we've got an  exploration license in that area,                                                                    
     that that was  the target and the language  was used by                                                                    
     expanding what  is, within the Department,  referred to                                                                    
     as "Middle Earth," the part  between Cook Inlet and ...                                                                    
     you've got the North Slope,  you've got Cook Inlet, and                                                                    
     you've got Middle Earth -  that's everything else.  ...                                                                    
     And what we  recognize is that this  isn't complete and                                                                    
     it's not complete for a  variety of reasons.  We've got                                                                    
     a project that's being proposed  and I know that people                                                                    
     are talking to  a number of you where  they are looking                                                                    
     at taking  gas from the  North Slope and  liquefying it                                                                    
     and  trucking it  down to  Fairbanks to  deal with  the                                                                    
     market there.  That gas  is being produced on the North                                                                    
     Slope and so  it doesn't qualify for  this.  Similarly,                                                                    
     if   Cominco  wanted   to  pursue   -  they   have  gas                                                                    
     possibilities at the  Red Dog Mine, and  they wanted to                                                                    
     produce that gas  and use it for their  purposes at the                                                                    
     mine  site, they're  above the  cut-off line  currently                                                                    
     for the North  Slope and so they would  face the higher                                                                    
     rates.                                                                                                                     
                                                                                                                                
2:59:29 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked  if any distinction is  made between shallow                                                               
gas versus conventional gas.                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN  said that  trying to  make a  distinction by                                                               
depth  becomes problematic  because, for  example, in  Cook Inlet                                                               
the gas  is both fairly  shallow and fairly  deep.  On  the North                                                               
Slope the  gas is probably deep  in one situation and  shallow in                                                               
another.   That distinction would  not help in this regard.  Many                                                               
legislators  are concerned  about addressing  disparate treatment                                                               
for  Cook  Inlet  versus  other  places.   He  related  that  DOR                                                               
believes the  way to address  that is to  say if gas  is produced                                                               
for in-state  use, it gets  the Cook  Inlet tax treatment.   That                                                               
would apply statewide, he noted.                                                                                                
                                                                                                                                
3:01:19 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON noted that staff has compiled a list of all of                                                                 
the questions that have been asked in Legislative Budget and                                                                    
Audit Committee, the House Special Committee on Oil and Gas and                                                                 
the House Resources Standing Committee.  He said he would like                                                                  
to verify which ones have been answered to date.  He then said                                                                  
he has some questions about the broad definition of "gas                                                                        
produced for in-state use" and that he would like DNR to come up                                                                
with a definition of "below 64" that would not include the North                                                                
Slope.                                                                                                                          
                                                                                                                                
3:02:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FAIRCLOUGH   asked  if  the   administration  has                                                               
prepared an amendment to address the in-state use issue.                                                                        
                                                                                                                                
COMMISSIONER  GALVIN  said  he  will  provide  that  shortly  for                                                               
members' consideration.                                                                                                         
                                                                                                                                
3:03:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON said  he would  like to  know whether  the                                                               
administration  has worked  on distinguishing  between commercial                                                               
and residential use versus industrial use.                                                                                      
                                                                                                                                
3:03:34 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  announced that the  committee would  recess until                                                               
5:05 p.m.                                                                                                                       
                                                                                                                                
CO-CHAIR GATTO reconvened the meeting at 5:25 p.m.                                                                              
                                                                                                                                
5:25:02 PM                                                                                                                    
                                                                                                                                
MARCIA DAVIS, Deputy Commissioner, Department of Revenue, told                                                                  
members she was filling in for Commissioner Galvin because he is                                                                
attending another committee meeting.  She told members:                                                                         
                                                                                                                                
     As I understand it, we're  in the process of describing                                                                    
     what  is   bullet  point  number   2,  which   are  the                                                                    
     adjustments  from the  administration's  view we  would                                                                    
     like  to see  addressed in  a CS  that would  come from                                                                    
     this body. We are down to  - I think you had closed out                                                                    
     what  I'll call  the  economic terms  and  I'd like  to                                                                    
     raise   as   the  next   point   of   concern  of   the                                                                    
     administration the carry-forward loss  rate.  I believe                                                                    
     that was  discussed briefly  in the  House Oil  and Gas                                                                    
     [Committee] and  Representative Samuels made  a closing                                                                    
     note that  they had  intended to  capture this  and had                                                                    
     run out of time.                                                                                                           
                                                                                                                                
     And  so, what  we would  counsel  this body  to do  is,                                                                    
     regardless of the base tax  rate you arrive at, whether                                                                    
     it remains  at 22.5 or  is our recommended  25 percent,                                                                    
     we'll make  sure that it  matches in  the carry-forward                                                                    
     loss rate.                                                                                                                 
                                                                                                                                
     The other issue regards  the DOR procedures for issuing                                                                    
     credit certificates and,  again, because we've switched                                                                    
     out  of doing  it over  two  years, we  don't need  the                                                                    
     provisions that talk  about splitting certificates into                                                                    
     two certificates.  But there  is a piece in the section                                                                    
     in the  Governor's bill  that we want  to not  lose and                                                                    
     that is  the extension  of time for  the administration                                                                    
     to  issue certificates.    Right now  it's  at 60  days                                                                    
     instead of  - we've asked  for 120 days and  the reason                                                                    
     we  have is  because we  are getting  those submissions                                                                    
     and they  have a lot of  information.  We need  to make                                                                    
     some initial  determinations and qualifications  and we                                                                    
     are getting  pressed because we  don't really  have any                                                                    
     [indisc.] to say gee, you  got your information late to                                                                    
     us  or whatever.   There's  no authority  for us  to go                                                                    
     beyond 60  days so our auditors  and our administrative                                                                    
     staff would like 120 days to  process those.   And we'd                                                                    
     like  that timeline  to  run from  the  date that  that                                                                    
     taxpayer  is in  good standing.   Again,  because we're                                                                    
     requiring  them  to file  annual  reports,  if for  any                                                                    
     reason they had failed to  file their annual reports or                                                                    
     resisted filing them,  for the state to  then issue tax                                                                    
     certificates  at  the  same   time  while  they're  not                                                                    
     providing  what they  are supposed  to provide  for us.                                                                    
     We want those linked.                                                                                                      
                                                                                                                                
5:27:21 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOHNSON   asked  Ms.  Davis  if   the  administration's                                                               
adjustments will  be presented  to the committee  in the  form of                                                               
amendments.                                                                                                                     
                                                                                                                                
MS. DAVIS said they will.                                                                                                       
                                                                                                                                
5:27:39 PM                                                                                                                    
                                                                                                                                
MS.  DAVIS  continued  discussing  the  administration's  desired                                                               
changes, as follows:                                                                                                            
                                                                                                                                
     The next  item is the administration  does believe that                                                                    
     an  oil   and  gas   tax  credit   fund  would   be  an                                                                    
     administratively better  way to approach  providing the                                                                    
     funds necessary  to provide refunds of  the exploration                                                                    
     credits and  the capital credits.   While  currently we                                                                    
     are  having to  submit to  the appropriations  and keep                                                                    
     coming  back  and trying  to,  it's  a very  disruptive                                                                    
     process   for  the   legislature  and   also  for   the                                                                    
     individuals we  are trying to provide  an incentive to,                                                                    
     which is to  assure them that when we  hit our deadline                                                                    
     and   we  give   them   their   certificate  and   it's                                                                    
     appropriate for them  to get that cash  refund, that we                                                                    
     don't  say  sorry,  no  can   do,  we're  still  in  an                                                                    
     appropriations cycle and there's no funds.                                                                                 
                                                                                                                                
5:28:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   GUTTENBERG    asked,   recognizing    that   the                                                               
administration  does   not  want   to  wait  for   a  legislative                                                               
appropriation, whether  there would be reporting  requirements to                                                               
keep the legislature informed of what happened.                                                                                 
                                                                                                                                
MS. DAVIS  said it is  her understanding  that DOR has  to report                                                               
and account  for the flow.   The funds  are not dedicated  so DOR                                                               
needs  to  keep  the  legislature  informed  of  the  inflow  and                                                               
outflow.                                                                                                                        
                                                                                                                                
5:29:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if the  administration is seeking a separate                                                               
account with a name on it.                                                                                                      
                                                                                                                                
MS. DAVIS deferred to a staff member to answer that question.                                                                   
                                                                                                                                
5:29:17 PM                                                                                                                    
                                                                                                                                
JERRY  BURNETT,   Director,  Administrative   Services  Division,                                                               
Department of  Revenue, said  the answer  is yes,  it would  be a                                                               
separate-named   fund.     In  the   original  bill,   an  annual                                                               
appropriation  would be  made  to  the fund  as  a percentage  of                                                               
production tax  revenues.  Payments  would be made  directly from                                                               
the fund.                                                                                                                       
                                                                                                                                
5:30:02 PM                                                                                                                    
                                                                                                                                
MS. DAVIS continued:                                                                                                            
                                                                                                                                
     The next item is TIE  credits and the administration is                                                                    
     concerned about the TIE credit  language that is in the                                                                    
     current House  bill committee  substitute from  Oil and                                                                    
     Gas.   We also  don't necessarily like  what we  did in                                                                    
     ACES,  which  was to  completely  eliminate  them.   As                                                                    
     we've  been learning  and seeing  what the  legislative                                                                    
     body has  been discussing, we actually  like the change                                                                    
     that the Senate  had in their version.   The reason is,                                                                    
     we  heard from  the  small producers  since we  drafted                                                                    
     ACES, and  their concern about  being cut off  from the                                                                    
     ability  to  use TIE  credits  for  their '06  and  '07                                                                    
     expenditures  that puts  them on  an even  footing with                                                                    
     the incumbents  that had production and  could use them                                                                    
     in those years.   So we like the  revised language that                                                                    
     the Senate  has on that  that changes ACES so  we would                                                                    
     be proposing  to put that  language in place  of what's                                                                    
     there now in the House committee substitute.                                                                               
                                                                                                                                
5:30:59 PM                                                                                                                    
                                                                                                                                
MS.  DAVIS explained  that  exploration  incentive credits  (EIC)                                                               
existed  prior to  PPT  so they  were not  changed  when PPT  was                                                               
enacted.   The administration has  proposed some  enhancements to                                                               
the EIC  program.  She deferred  to Ms. Thompson to  describe the                                                               
key enhancements.                                                                                                               
                                                                                                                                
5:31:41 PM                                                                                                                    
                                                                                                                                
NANETTE  THOMPSON,   Unit/Tech Support,  Division of  Oil &  Gas,                                                               
Department  of  Natural  Resources,  told  members  the  bill  as                                                               
originally  proposed  would  expand   the  program  and  make  it                                                               
available to  more wells.   Also, the enhancements  were designed                                                               
to better  define the data  that the  state would receive  and to                                                               
make sure it is received.                                                                                                       
                                                                                                                                
MS. DAVIS said  one other key change the  administration wants is                                                               
to increase  the base credit  from 20 to  30 percent and  that is                                                               
better than what is available under the capital credit program.                                                                 
                                                                                                                                
5:32:32 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if the changes were "costed" out.                                                                          
                                                                                                                                
MS.  DAVIS   said  they  were  by   determining  the  incremental                                                               
difference in costs if the change had been in place last year.                                                                  
                                                                                                                                
5:32:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if DOR  could make that determination in the                                                               
Gaffney Kline model.                                                                                                            
                                                                                                                                
MS. DAVIS  said she did  not know whether the  exploration credit                                                               
was broken out  in detail, but she said the  staff that worked on                                                               
that will arrive shortly and be able to answer that question.                                                                   
                                                                                                                                
5:33:13 PM                                                                                                                    
                                                                                                                                
MS. THOMPSON  said the other  reason to increase the  base credit                                                               
from 20 to  30 percent is that the  administration realized there                                                               
might not be enough value  because of the additional requirements                                                               
involved in applying for an EIC.                                                                                                
                                                                                                                                
MS. DAVIS continued:                                                                                                            
                                                                                                                                
     The next area  is the penalties for  failure to report.                                                                    
     The  House picked  up  the  reporting requirements  and                                                                    
     left out the two penalty  sections and we would like to                                                                    
     see those  restored so that  there is  some enforcement                                                                    
     on the reporting requirements.                                                                                             
                                                                                                                                
5:34:01 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked  if the failure to report  carries a penalty                                                               
with interest.                                                                                                                  
                                                                                                                                
MS. DAVIS said it does.                                                                                                         
                                                                                                                                
REPRESENTATIVE  FAIRCLOUGH  said  she believes  an  amendment  is                                                               
being drafted to address that issue.                                                                                            
                                                                                                                                
5:34:24 PM                                                                                                                    
                                                                                                                                
MS. DAVIS continued:                                                                                                            
                                                                                                                                
     Another  key  area  of  difference  between  the  House                                                                    
     committee  substitute and  the original  ACES structure                                                                    
     was  lease  expenditures  are described  and  what  our                                                                    
     language  sought  to  accomplish was  have  regulations                                                                    
     define what  ... allowable lease expenditures  [are] as                                                                    
     opposed to leaving the burden  upon the agency to start                                                                    
     to  look  at  the  universe of  costs  that  are  being                                                                    
     claimed and  start to pick  out the ones that  they are                                                                    
     disallowing because before it was self-implementing.                                                                       
                                                                                                                                
     What  the  House  bill  has   is  currently  that  same                                                                    
     language,  which says  lease expenditures  are anything                                                                    
     that are reasonable, direct -  you know, et cetera that                                                                    
     meet these  broad adjectives and  then it comes  in and                                                                    
     it's  up to  us  to  then pick  them  back out  through                                                                    
     regulation.   What  we're suggesting  be done  and what                                                                    
     was  in  ACES  is  essentially  say  they  need  to  be                                                                    
     reasonable, direct,  et cetera, and be  embodied in the                                                                    
     department's  regulations.   That certainly  places the                                                                    
     monkey on  our back to  get the regulations out  by the                                                                    
     first of the year and  provide the guidance to industry                                                                    
     as to what those lease expenditures are going to be.                                                                       
                                                                                                                                
5:35:33 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON asked if committee members will have an                                                                        
opportunity to get a list of the anticipated amendments to check                                                                
that there is no duplicity for the legal drafters.                                                                              
                                                                                                                                
MS. DAVIS said that effort will be made.                                                                                        
                                                                                                                                
5:36:07 PM                                                                                                                    
                                                                                                                                
MS. DAVIS continued:                                                                                                            
                                                                                                                                
     One other  aspect of the  changes, the role  of company                                                                    
     operating  agreements -  whereas the  House CS  did, in                                                                    
     fact, remove  .165(c) and (d),  which ...  created this                                                                    
     whole collateral process for  the department to have to                                                                    
     assess  and decide  whether they  were going  to accept                                                                    
     them -  kind of rubber stamp  them.  In the  ACES bill,                                                                    
     knowing that  that was going  away, we still  wanted to                                                                    
     hardwire   a  mandatory   review  by   the  agency   in                                                                    
     consideration   of   operating   agreements,   industry                                                                    
     practices so that  language got left out.   So we think                                                                    
     that  might have  been inadvertent  on the  [House] Oil                                                                    
     and Gas  Committee substitute but we  will be proposing                                                                    
     that that language  come in to ensure  that those items                                                                    
     are taken into consideration by the department.                                                                            
                                                                                                                                
     Finally,  in definitions,  in the  CS they  dropped out                                                                    
     the definition  of "unit"  probably because  the legacy                                                                    
     language  went away  but, in  fact, if  the EIC  credit                                                                    
     language  does come  in we'll  need a  unit description                                                                    
     because  DOR's  view  of units  is  statewide,  whereas                                                                    
     DNR's definition would only pertain to state lands.                                                                        
                                                                                                                                
     With respect to  the final one, it's  actually going to                                                                    
     get  toward  this  transportation deduction  issue  and                                                                    
     again, I  may resort to  Nan Thompson on the  phone for                                                                    
     the  intricacies regarding  the  FERC language.     But                                                                    
     what  we're recommending  is a  change to  Section 150.                                                                    
     This was  not in our ACES  bill and what we  feel needs                                                                    
     to go  into Section .150 (a)  and (b) of DOR's  net tax                                                                    
     structure.   In order  to derive a  net tax  value, you                                                                    
     need  to deduct  transportation costs  and the  way the                                                                    
     statute  is currently  written in  .150, it  reads more                                                                    
     like the  royalty language  in the  sense that  it hard                                                                    
     wires  the tariff  and it  presumes the  tariff is  the                                                                    
     right charge  to be deducted.   The reason it  was done                                                                    
     in   royalty  was   through  contract   and  settlement                                                                    
     agreements.                                                                                                                
                                                                                                                                
     DOR is  not similarly  constrained.  It  is our  job to                                                                    
     assess  what is  a reasonable  cost for  transportation                                                                    
     and, therefore,  we're looking at  .150 (a) and  (b) to                                                                    
     restore that  balance so that  what we deduct  from the                                                                    
     revenue  to derive  the taxing  value  is a  reasonable                                                                    
     charge for transportation.  So  some change is going to                                                                    
     have to be made to the bill to get there.                                                                                  
                                                                                                                                
5:38:38 PM                                                                                                                    
                                                                                                                                
MS. DAVIS  said those  are the  broad changes  the administration                                                               
would  like to  see made.   The  bill would  also need  statutory                                                               
conforming language,  depending on which language  is included or                                                               
removed.    She said  the  administration's  goal is  to  present                                                               
appropriate amendments that will be  grouped and that can be read                                                               
as  a  cohesive  whole.     She  said  she  would  contact  DOR's                                                               
progressivity experts to come discuss that topic.                                                                               
                                                                                                                                
5:40:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON asked  if  the  amendment about  assessing                                                               
transportation charges will look  at the Regulatory Commission of                                                               
Alaska's (RCA's) settlement regarding reasonable fees.                                                                          
                                                                                                                                
MS.  DAVIS  said  no.    The administration  is  looking  at  the                                                               
existing  statutory  language  in  .150, which  requires  that  a                                                               
finding of three  criteria be met.  Before the  state can deviate                                                               
from a FERC  established charge, it would have to  prove that the                                                               
parties are  affiliated, that  the transport  contract is  not an                                                               
arm's length  transaction or not representative  of market value,                                                               
and that the  transportation method is not reasonable  in view of                                                               
alternative methods.   She explained that elsewhere  in DOR's tax                                                               
code, when  it tries to  establish the appropriate value  of, for                                                               
example,  diesel   on  the  Slope,   it  looks  at   whether  the                                                               
transaction is an  arm's length transaction.  If  not, it reverts                                                               
to a  different average price from  the closest locale.   That is                                                               
the only  criteria so DOR  is looking to reestablish  its ability                                                               
to consider  whether the  charge is  reasonable.   Currently, the                                                               
statutory hurdle is  very high because DOR has to  meet all three                                                               
criteria.                                                                                                                       
                                                                                                                                
5:42:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG stated, in  this instance, the state is                                                               
unable to  change FERC's tariff  rate to what RCA  has determined                                                               
to  be reasonable.    He asked  if  the state  could  use a  rate                                                               
established   by   a   regulatory  agency   on   the   calculated                                                               
transportation costs.                                                                                                           
                                                                                                                                
MS. DAVIS said DOR could  look at the regulatory agency's finding                                                               
as evidence of reasonableness.                                                                                                  
                                                                                                                                
REPRESENTATIVE GUTTENBERG  noted the  amendment has  already been                                                               
written.                                                                                                                        
                                                                                                                                
5:43:12 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  asked, if  the TAPS line  has established  a rate                                                               
that is well  outside of what anyone expected, how  that is paid.                                                               
He questioned whether it is paid first and then challenged.                                                                     
                                                                                                                                
MS. DAVIS explained  that a shipper would be required  to pay the                                                               
approved rate  and then follow  the procedures in place,  in that                                                               
case  FERC's procedures  and for  intrastate transport  the RCA's                                                               
procedures.  The rate payer would  file an appeal and allege that                                                               
the  rate  was  not  authorized  by  statute.  From  the  state's                                                               
perspective, when shipping royalty oil,  it would be in the shoes                                                               
of  a shipper.   If  the  state is  acting as  the sovereign,  it                                                               
incurs the tariff costs when deducted for tax purposes.                                                                         
                                                                                                                                
5:44:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked what  the administration is proposing                                                               
regarding TIE credits.                                                                                                          
                                                                                                                                
MS.  DAVIS said  the proposal  is to  include all  five years  of                                                               
prior investments  from the '01  to '06 time  period, so it  is a                                                               
single  number  accumulated  during   that  time  period  as  any                                                               
particular producer's TIE credits.                                                                                              
                                                                                                                                
5:45:28 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if that covers a six-year time span.                                                                       
                                                                                                                                
MS. DAVIS  said it  is considered  to be five  years.   With that                                                               
bucket  of credits,  the producers  will  be allowed  to look  at                                                               
their expenditures  in '06 and  '07 and,  to the extent  they can                                                               
carry 20 percent  of that bucket of five-year costs  forward as a                                                               
TIE credit for each year, they  can do so provided the 20 percent                                                               
number is  not in  excess of  10 percent  of their  total capital                                                               
credits.  The incumbents can  realize the benefit of that because                                                               
they  had production  in '06  and '07  and DOR  will allow  those                                                               
credits.   A  group of  explorers that  invested and  spent money                                                               
during that  five year  time period have  a bucket  of [credits].                                                               
She furthered:                                                                                                                  
                                                                                                                                
     What we're  proposing be done  is that the  amount that                                                                    
     they could have  carried forward in '06  and '07, based                                                                    
     on how much money they've  expended in those two years,                                                                    
     because they have  to spend money to  have some benefit                                                                    
     there, we're going  to allow them to  carry forward for                                                                    
     that  time period  that captures  the  value, and  it's                                                                    
     benchmarked  against how  much  they spent  in '06  and                                                                    
     '07.                                                                                                                       
                                                                                                                                
     So that  will be locked in  time.  It's as  though that                                                                    
     ability to  use TIE  credits gets  vested by  virtue of                                                                    
     the investments they made in '06 and '07.                                                                                  
                                                                                                                                
5:47:16 PM                                                                                                                    
                                                                                                                                
MR. BURNETT  noted in  the PPT bill,  companies were  required to                                                               
spend twice the  amount they could claim in credits.   When these                                                               
companies spent  in '06  and '07,  they relied  on being  able to                                                               
take  advantage of  this provision.     He said  it's a  fairness                                                               
issue since the companies with  tax liabilities were able to take                                                               
those credits against their tax liabilities.                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  surmised  that would  mean  the  proposed                                                               
amendment  still has  a January  2008  "drop dead"  date so  that                                                               
those credits  that couldn't  be used  in '06  or '07  fade away,                                                               
except for those  companies that didn't have  production to write                                                               
the credits off against.                                                                                                        
                                                                                                                                
5:48:25 PM                                                                                                                    
                                                                                                                                
MS. DAVIS explained:                                                                                                            
                                                                                                                                
     It fades away for everybody.  After January of '08, except                                                                 
     for what got vested in either got used or didn't get used                                                                  
    because they couldn't.  No one else can reach back into                                                                     
    that bucket and dig out 20 percent and carry it forward                                                                     
     into '08, '09, and '10, so no one will be carrying TIE                                                                     
     credits beyond '08.                                                                                                        
                                                                                                                                
5:48:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked if TIE  credits stop in  '08, except                                                               
that those  companies without production  can carry  them forward                                                               
for the  investment equal to  10 percent in  '06 and '07  and the                                                               
effect would be minimal.                                                                                                        
                                                                                                                                
MS. DAVIS replied  yes.  In order of magnitude,  DOR's ability to                                                               
forecast  the  value  of  the  TIE  credits  hinges  in  part  on                                                               
producers voluntarily telling DOR about  them before they file to                                                               
collect.   Based  on DOR's  knowledge, the  value of  the credits                                                               
that could  still be used in  the future by non-producers  is $60                                                               
million.  Based on  what  DOR knows  about  the large  producers,                                                               
another $700 million could be used in '08.                                                                                      
                                                                                                                                
CO-CHAIR GATTO noted that is a substantial change.                                                                              
                                                                                                                                
5:50:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH asked Co-Chair  Gatto to take committee                                                               
members' amendments  prior to [the  administration's] amendments.                                                               
She opined that the administration should have found a sponsor                                                                  
for its amendments.                                                                                                             
                                                                                                                                
5:51:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO said he intends to group the amendments according                                                                
to subject.                                                                                                                     
                                                                                                                                
5:51:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH asked that each committee member be                                                                   
given the opportunity to submit an amendment so that one member                                                                 
does not use all of the allotted time.                                                                                          
                                                                                                                                
5:51:53 PM                                                                                                                    
                                                                                                                                
BOB GEORGE, Gaffney Kline and Associates, told members:                                                                         
                                                                                                                                
     Much  as we  have warned  against the  issue of  taking                                                                    
     snapshots on anything, I would  just like to add before                                                                    
     we go  on here is  what we have  is a work  in progress                                                                    
     coming up.   We've  been looking  beyond where  we were                                                                    
     two or  three days  ago when we  did a  presentation on                                                                    
     the  nature   of  the  ACES'  PPT   structure  and  how                                                                    
     different    alternatives,    particularly    on    the                                                                    
     progressivity, impacted things.                                                                                            
                                                                                                                                
     We've taken  that one  step further  and looked  at one                                                                    
     additional  idea that's  come  forward on  the way  the                                                                    
     progressivity  may be  handled.   We  are  also in  the                                                                    
     process of looking at further  alternatives on that but                                                                    
     have not quite  got there yet so I  beg your indulgence                                                                    
     while we progress  that at the moment.   But, we'd like                                                                    
     to share  with you at this  point what we have  got and                                                                    
     what things are looking like from there.                                                                                   
                                                                                                                                
CO-CHAIR GATTO asked if they intend to produce more or whether                                                                  
they are working against a deadline.                                                                                            
                                                                                                                                
5:53:59 PM                                                                                                                    
                                                                                                                                
MR. GEORGE said it was their intention to do their best to serve                                                                
everybody's needs in a rapidly changing landscape. He continued:                                                                
                                                                                                                                
     What I'd like to do is  I'm going to [indisc.] three or                                                                    
     four slides from  last time as a link on  from where we                                                                    
     were and then I have  just a couple more slides dealing                                                                    
     with this  additional progressivity component  and then                                                                    
     Rich  has  got  some  dealing  with  another  issue  in                                                                    
     relation to it.                                                                                                            
                                                                                                                                
     The slides I put up last  time looked at a portfolio of                                                                    
     investments and  compared the outcomes on  it under PPT                                                                    
     as it  currently exists.  The  progressivity portion of                                                                    
     that on  which I will  focus in here increased  the tax                                                                    
     rate  on the  profitability  as expressed  in net  cash                                                                    
     flow per  barrel by 1/4  of 1 percent for  every dollar                                                                    
     that  that net  cash flow  per barrel  exceeds $40.   I                                                                    
     have called it an amendment  here - I guess the correct                                                                    
     term  is the  wording in  the House  Oil and  Gas CS  -                                                                    
     maintain the  basic PPT rate  of 22.5 percent  based on                                                                    
     the net cash  flow per barrel, but  added an additional                                                                    
     tax of  .225 for every  dollar that the gross  value at                                                                    
     the point  of production exceeded  $50.  That  rate was                                                                    
     applied to the gross value at the point of production.                                                                     
                                                                                                                                
5:55:59 PM                                                                                                                    
                                                                                                                                
     I again  would just  add in  here what  I have  used as                                                                    
     some illustrative  examples. They  are not  intended to                                                                    
     portray any forecast  of revenues or the  fact that the                                                                    
     DOR's  strong recommendations  for  a  25 percent  base                                                                    
     rate.   I  used 22.5  percent in  mine, merely  because                                                                    
     that was  the existing PPT  rate.  I showed  this slide                                                                    
     before, where under the existing  PPT system, if we had                                                                    
     a  portfolio   of  investments  and   each  incremental                                                                    
     investment  was economically  a little  more challenged                                                                    
     than   the  previous   one,   and   my  definition   of                                                                    
     economically more challenged was  that it had a smaller                                                                    
     margin than  the previous  one, the  progressive nature                                                                    
     of  PPT  and  under  the  net  system  meant  the  more                                                                    
     challenged  investments  actually got  some  assistance                                                                    
     from  the PPT  structure and  therefore concluded  that                                                                    
     within  a single  system, such  as PPT,  you could  co-                                                                    
     exist opportunities of  different profitability and the                                                                    
     system would accommodate and adjust to that.                                                                               
                                                                                                                                
     I showed also this slide,  where with the House Oil and                                                                    
     Gas  CS progressivity  proposal, that  assistance given                                                                    
     to the lower margin  properties was significantly taken                                                                    
     away.   I have added  one more  slide that was  in fact                                                                    
     shown in  front of  the Senate Judiciary  the following                                                                    
     day  but had  not been  prepared when  we presented  in                                                                    
     front of  you, and  also showed that  if that  margin -                                                                    
     and  as  you  move  from  the  existing  reservoirs  to                                                                    
     investments  X, Y,  and Z,  if that  margin was  caused                                                                    
     entirely by an increase in  the production costs at the                                                                    
     field,  as opposed  to some  part of  the margin  being                                                                    
     caused by a  squeeze in the price as  well as increased                                                                    
     production, then  you could  actually get  a regressive                                                                    
     structure  getting  out  of  it,  such  that  the  more                                                                    
     marginal fields  were actually being taxed  at a higher                                                                    
     rate ...  than the more  profitable fields.   It's just                                                                    
     the  mathematics of  the  way  it works  out.   So  the                                                                    
     conclusion there  was there was  a difficulty  with the                                                                    
     structure that  is a pure  gross progressive  margin on                                                                    
     top.   That  was the  one additional  slide looking  at                                                                    
     that.                                                                                                                      
                                                                                                                                
MR. GEORGE continued:                                                                                                           
                                                                                                                                
    We've then gone on and looked at a further idea that has                                                                    
     been out there and what I have termed in here, the net                                                                     
     gross progressivity, whereby the rate of tax is calculated                                                                 
     on the net cash flow per barrel, but it is applied to the                                                                  
     gross value at the point of production.  For the purposes                                                                  
    of this example, I maintained a progressivity slope that                                                                    
     produces about the same amount of petroleum tax revenue                                                                    
     after capital investment after the House Oil and Gas one.                                                                  
                                                                                                                                
     So the net, again to be clear, the net gross progressivity                                                                 
     structure has a rate that is based on the net margin but is                                                                
     applied to the gross and, in this case, I took away the net                                                                
     in excess of the point at which the base rate kicks in in                                                                  
     order to maintain a reasonable slope in there.  If you took                                                                
     the whole of the net margin, you'd have to have a much                                                                     
     lower slope than is actually possible in there.                                                                            
                                                                                                                                
6:00:14 PM                                                                                                                    
                                                                                                                                
     So what I've put up here  now is, again, that same base                                                                    
     slide that  I've shown  before based  on PPT.  And then                                                                    
     when you apply the sort  of net gross progressivity, it                                                                    
     provides, in  that snapshot, a  very similar  result in                                                                    
     there.   Again, it  maintains the  progressive feature,                                                                    
     not quite as much as on  a pure net system, but largely                                                                    
     the  same based  on the  fact that  the rate  itself is                                                                    
     being  set   off  profitability.    Even   though  it's                                                                    
     actually been  applied to  a higher  tax base,  that is                                                                    
     the gross value at the point of production itself.                                                                         
                                                                                                                                
     I looked  at these  as well in  a couple  of additional                                                                    
     ways here and  I looked at the effective  tax rate, and                                                                    
     by   effective  tax   rate,  I   mean  the   additional                                                                    
     progressive   tax   being   taken,   divided   by   the                                                                    
     profitability and I've got three  colored bars on there                                                                    
     that are  variously annotated  as NN, NG,  and GG  - NN                                                                    
     for a  pure net system  - a  tax calculated on  the net                                                                    
     margin applied  to the  net margin.   The NG,  which is                                                                    
     this new  addition in  there, is  a rate  calculated on                                                                    
     the net  margin but applied  to the gross value  at the                                                                    
     point  of production,  and the  GG, which  is the  pure                                                                    
     gross system  we looked at  previously.   The effective                                                                    
     tax rate,  particularly on the gross-gross  one, can be                                                                    
     seen  to  raise  much,  much  more  quickly  on  there,                                                                    
     because everything has been applied off the gross.                                                                         
                                                                                                                                
     I have  isolated, in this particular  example, just the                                                                    
     effect  on  the  most marginally  challenged  field  in                                                                    
     there so I sort of subtracted  out that on the basis of                                                                    
     just looking, if I can go  back up on here, on to field                                                                    
     Z  on there,  I  just  looked at  the  effect that  was                                                                    
     taking  place on  field  Z alone  if  you develop  that                                                                    
     incrementally to everything else in there.                                                                                 
                                                                                                                                
     On  the pure  gross system,  the rate  rises much  more                                                                    
     rapidly  and   challenges  the  properties,   the  more                                                                    
     marginal  properties, much  more  rapidly  than if  you                                                                    
     base it  on the net.   Basically, these are  two slides                                                                    
     with  the  same basic  information  but  where, on  the                                                                    
     gross system, some  of the margin squeeze  is caused by                                                                    
     lower  value per  barrel at  the point  of sale,  so it                                                                    
     actually does lower the total  gross value at the point                                                                    
     of production as well.                                                                                                     
                                                                                                                                
6:03:22 PM                                                                                                                    
                                                                                                                                
     The conclusions,  such as we  might draw at  this point                                                                    
     in time from them, I think  the first one is to caution                                                                    
     that any of  this needs to be tested on  a much broader                                                                    
     portfolio of  properties and example fields  as we were                                                                    
     just really looking at the  structure in this case, but                                                                    
     with that caution.   The gross progressivity structure,                                                                    
     which is based on oil price  and the gross value at the                                                                    
     point of  production, does hit the  lower profitability                                                                    
     fields harder to  the point where you  can actually get                                                                    
     a regressive  feature coming in  on it  there, although                                                                    
     again,  we  note  in  that  proposal  there,  the  main                                                                    
     portion of  the tax  that will  be collected,  which is                                                                    
     actually  from  the base  rate,  is  actually based  on                                                                    
     profitability.                                                                                                             
                                                                                                                                
     The  gross progressivity,  where the  rate is  based on                                                                    
     the net  cash flow per  barrel, that's the sort  of so-                                                                    
     called net  gross one, does damp  that issue reasonably                                                                    
     significantly  it  would appear.    It  still has  some                                                                    
     increase  on -  it  has  a rising  impact  on the  real                                                                    
     profit  because it's  based on  gross at  the point  of                                                                    
     production  but  does  produce results  that  are  much                                                                    
     closer to the net system in there.                                                                                         
                                                                                                                                
     I think  that was basically  all I  had to add  at this                                                                    
     point  on  it and,  as  I  say,  right now  we're  also                                                                    
     looking at this further,  at additional ways of looking                                                                    
     at the slopes on the net gross system.                                                                                     
                                                                                                                                
6:05:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON asked if Mr. George and Mr. Ruggiero would be                                                                  
attending the round table discussion.                                                                                           
                                                                                                                                
MR. GEORGE said either he or Mr. Ruggiero would attend.                                                                         
                                                                                                                                
6:05:45 PM                                                                                                                    
                                                                                                                                
RICH RUGGIERO, Gaffney Kline and Associates, provided the                                                                       
following testimony:                                                                                                            
                                                                                                                                
     Thank  you, Mr.  Chairman and  Representatives.   As we                                                                    
     were giving  our previous presentations  - particularly                                                                    
     Representative Seaton  asked many questions  and raised                                                                    
     concerns that we  really take a look  at and understand                                                                    
     that if you  end up with a progressive  system based on                                                                    
     net  margin, what  would be  the contribution  that the                                                                    
     state would be making  to investments at certain points                                                                    
     along,  if you  will,  the  graph or  the  plot of  the                                                                    
     production tax rate that you might put in place.                                                                           
                                                                                                                                
     So  one of  the  things that  I was  asked  to do  this                                                                    
     morning is  to use  the words "find  an exit  ramp" for                                                                    
     when  the  speed starts  getting  up  there and  you're                                                                    
     getting up  high on that progressivity  slope, is there                                                                    
     an exit  ramp that might  be sensible for the  state to                                                                    
     take and for you all to  take as you deliberate on this                                                                    
     bill as  to where you would  want the off ramp,  if you                                                                    
     would,  with   respect  to  topping  out   the  state's                                                                    
     contribution in any investment scenario.                                                                                   
                                                                                                                                
     What  I  wanted  to  do, because  I  found  this  quite                                                                    
     enlightening myself,  is if you actually  start playing                                                                    
     with some of  the nuances of the system  that you have,                                                                    
     you  start to  find  that  there are  a  few kinks  and                                                                    
     corners  or elbows  as we've  talked  about them,  that                                                                    
     have   some   interesting   things  happen   at   those                                                                    
     inflection points.  And so  we wanted to go through and                                                                    
     talk about  what those look  like, give an idea  of how                                                                    
     they  come about,  why they  come about,  and therefore                                                                    
     you'll have  this as background  as you  deliberate and                                                                    
     then further questions tomorrow at the round table.                                                                        
                                                                                                                                
     A  couple of  things I  wanted to  do in  here is  talk                                                                    
     about  a  progressive  system,   and  especially  in  a                                                                    
     progressive  system what  happens when  the net  margin                                                                    
     changes  by a  dollar.   Remember  we're talking  about                                                                    
     margin and  not price  so this is  when the  net profit                                                                    
     before tax changes  by a dollar a barrel.   What is the                                                                    
     impact  if  an  operator   should  choose  to  make  an                                                                    
     investment before he finishes out that tax year.                                                                           
                                                                                                                                
     What we  have depicted  here is a  hypothetical system.                                                                    
     This would be  initially based on the  net-net and then                                                                    
     Representative Seaton,  about an hour ago,  asked if we                                                                    
     could take  a look at the  net gross so I'll  have that                                                                    
     on the last  slide.  I was able to  get that plotted up                                                                    
     for him.                                                                                                                   
                                                                                                                                
     But  anyway,  we're  talking about  a  basic  structure                                                                    
     where you'll  start out  with some  base rate,  so from                                                                    
     zero margin  you'll have a base  rate up to a  kick off                                                                    
     point and, for  this example, using $30  net margin per                                                                    
     barrel is the kick-off point.   The slope, in this case                                                                    
     using a  .4 slope  for the entire  range, and  then you                                                                    
     cap off  at some  maximum. We  chose to  do that  at 50                                                                    
     percent for this illustration.                                                                                             
                                                                                                                                
     What  you  also  have  then   is  a  contribution  when                                                                    
     figuring out the production taxes  to be paid as you do                                                                    
     have an investment credit that  sits in there right now                                                                    
     at 20  percent.   When we start  talking about  the tax                                                                    
     deduction that would be available  to a company if they                                                                    
     should invest  and write  it off in  the year  in which                                                                    
     they spend  the money,  they would not  only get  a tax                                                                    
     break on  the production  tax, but  they would  also be                                                                    
     receiving the investment credit.                                                                                           
                                                                                                                                
     So a way  of looking at this is that  the tax credit is                                                                    
     on  top of  the marginal  tax rate  that they  would be                                                                    
     receiving or the tax break  they would be receiving for                                                                    
     the investment.  I've got  some examples to run through                                                                    
     this for us.                                                                                                               
                                                                                                                                
6:09:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES referred to the previous slide that                                                                        
contained a 25 percent base with a $30 margin kick-off at .4                                                                    
and asked how those numbers were arrived at.                                                                                    
                                                                                                                                
MR. RUGGIERO said he had a range of .1, .2, .3, .4.  He used                                                                    
those numbers because it tops out at about $100 per barrel,                                                                     
which is in today's range.                                                                                                      
                                                                                                                                
6:10:24 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO continued:                                                                                                         
                                                                                                                                
     To kind  of show -  I'll take you through  a simplistic                                                                    
     example.   But, as it  says up here, let's  just assume                                                                    
     there's a  company that on  a net basis, that  is after                                                                    
     their operating  expenses have been covered,  they have                                                                    
     $1,000 available as pre-tax cash  flow.  If we go ahead                                                                    
     and say - they can be  anywhere along that slope - if I                                                                    
     go back up, having a  position of $1,000, they could be                                                                    
     anywhere from just barely making  a margin because they                                                                    
     have lots of  barrels.  For example, I  could be making                                                                    
     a $1 margin on 1,000 barrels  or I could be all the way                                                                    
     at the other end making  a $1,000 margin on one barrel.                                                                    
     That situation could put you anywhere on the curve.                                                                        
                                                                                                                                
     What I  do say up  here is that  if the margin  is such                                                                    
     that  the   per  barrel  margin   is  under   $30,  the                                                                    
     production tax  savings then  associated with  making a                                                                    
     $100  investment,  so  at  that  point  making  a  $100                                                                    
     investment, they  would have an associated  tax savings                                                                    
     of  25   percent.    That's  because   they're  on  the                                                                    
     baseline.   If we  then go  all the  way above  the top                                                                    
     end, where it  caps out, so if there's  a margin that's                                                                    
     significantly greater than $92.50  per barrel, then the                                                                    
     production tax savings for  making that $100 investment                                                                    
     would end up being 50 percent or $50.                                                                                      
                                                                                                                                
     But  here  is  where  it  gets  interesting.    If  I'm                                                                    
     somewhere  between $31  per barrel  and $92.50,  when I                                                                    
     make that investment  and we run through  the math, the                                                                    
     production  tax  savings  could  be  anywhere  from  25                                                                    
     percent,  or $25,  to over  100 percent,  basically the                                                                    
     state writing a check for  the investment and I'll show                                                                    
     you how that happens.                                                                                                      
                                                                                                                                
6:12:21 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO continued:                                                                                                         
                                                                                                                                
     What I want to do is take  a look at four cases at each                                                                    
     one of these  points and I'll explain them  in order as                                                                    
     A, which  is where I'm  on the  base rate, so  that's a                                                                    
     margin below  30. We'll  then go to  case B,  where I'm                                                                    
     much above  the $92.50 point  where it caps out.   Then                                                                    
     I'll  choose two  different  points, C  and  D, on  the                                                                    
     slope  to show  you that  the change  of each  of those                                                                    
     points is not identical, and I will talk through that.                                                                     
                                                                                                                                
     If we  first go to a  taxpayer who is sitting  at Point                                                                    
     A,  basically to  do the  math on  the net-net  system,                                                                    
     you'd  take the  $1,000  revenue, you'd  go  up on  the                                                                    
     graph at  the margin,  and we're  going to  assume here                                                                    
     that  we've got  40 barrels  so the  margin is  $25 per                                                                    
     barrel, the tax  would just work out to  be that $1,000                                                                    
     times the 25 percent rate, which would be a $250 tax.                                                                      
                                                                                                                                
     But  let's say  now, right  here  near the  end of  the                                                                    
     year, looking at things I think  this is a good time to                                                                    
     invest $100 up  there.   What that does  is it takes my                                                                    
     net cash flow  before taxes down to  $900, because I've                                                                    
     invested  that  $100.  Because I  had  40  barrels,  my                                                                    
     margin  is now  down  to  plus or  minus  around $22  a                                                                    
     barrel.   And you can see  my tax rate though,  at that                                                                    
     margin, is still 25 percent so  my tax is 225 and, if I                                                                    
     come down  to the bottom,  what I've actually  saved in                                                                    
     taxes overall  is $25  over my  $100 investment  so the                                                                    
     marginal tax savings investing at  that point is $25 or                                                                    
     25 percent.                                                                                                                
                                                                                                                                
6:14:07 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO continued:                                                                                                         
                                                                                                                                
     If  I go  all the  way, as  you remember,  to Point  B,                                                                    
     which is up there at  about $120 per barrel, I actually                                                                    
     ran this  case at $125  and then  you can see  that the                                                                    
     investment  of  the  $100  brings me  down  to  $110  a                                                                    
     barrel.  It's similar math  but because the tax rate at                                                                    
     both points - both the  cash flow before I invested and                                                                    
     the  cash flow  after  I  invested -  is  $50, it's  no                                                                    
     surprise that the marginal rate  turns itself out to be                                                                    
     $50 as  well.  So  if I'm  already capped out,  at that                                                                    
     point  the state's  contribution to  a $100  investment                                                                    
     would be $50.                                                                                                              
                                                                                                                                
6:14:39 PM                                                                                                                    
                                                                                                                                
     But now let's move to Point  C, which is on the low end                                                                    
     of the slope.   This is where the math  gets a bit more                                                                    
     interesting  so if  I confuse  anyone, please  stop and                                                                    
     ask me  questions.  I'm  going to take that  $1,000 and                                                                    
     I'm going  to put me initially  at a $50 margin.   That                                                                    
     means I have 20 barrels,  I'm making $50 a barrel, I've                                                                    
     got $1,000. If  I go up that curve at  the base rate of                                                                    
     25 percent  plus the progressivity,  it said my  tax at                                                                    
     that point  would be 33  percent.  So multiply  it out.                                                                    
     If I don't invest, my tax  bill will be $330.  However,                                                                    
     now I  decide to invest  and actually it takes  my cash                                                                    
     flow  back down  to  $900  and I  still  have those  20                                                                    
     barrels.  My net margin comes  down to $45 and now if I                                                                    
     work   that  through   the   base  plus   progressivity                                                                    
     calculation,  I'll find  out  that my  tax  rate is  31                                                                    
     percent and  my overall tax  bill is  now $279.   So if                                                                    
     then  go down  and look  at my  tax savings  for having                                                                    
     made that investment,  I take the $330,  I subtract the                                                                    
     $279, which is $51 divided by  the $100, and I found at                                                                    
     that  point, even  though  the  overall production  tax                                                                    
     rates  were   between  31  and  33,   marginal  savings                                                                    
     available to a company  for making that $100 investment                                                                    
     would be a 51 percent contribution by the state.                                                                           
                                                                                                                                
6:16:11 PM                                                                                                                    
                                                                                                                                
     Now  let's move  up the  slope, which  is not  far from                                                                    
     where we're at  today.  If I start at  $85 per barrel -                                                                    
     again starting with  25 percent base tax  at a kick-off                                                                    
     point  of $30  per  barrel  - I've  got  $55 above  the                                                                    
     index.  I put  my slope on, I find that  my tax rate is                                                                    
     47 percent or  I'd have a tax bill  prior to investment                                                                    
     of $470.   Again, subtracting  the $100 because  I make                                                                    
     it  as investment,  I'd go  and  find out  that my  net                                                                    
     margin per  barrel is now 72.   That makes my  tax rate                                                                    
     43.6 percent, or  my total taxes would be  $392. When I                                                                    
     then subtract  the $392 after investment  from the $470                                                                    
     before investment, you  find that my tax  savings is 78                                                                    
     percent  and  that  overall,  then  my  marginal  rate,                                                                    
     because  it's a  $100 investment,  is 78  percent.   In                                                                    
     this case the state's  contribution would be 78 percent                                                                    
     of the investment.                                                                                                         
                                                                                                                                
     So here  we have  situations, and  I know  that they're                                                                    
     made up numbers,  but I can put someone  in that $1,000                                                                    
     cash  flow before  tax position  anywhere on  the curve                                                                    
     and, depending  where on  the curve,  there would  be a                                                                    
     different  contribution   by  the  state   towards  any                                                                    
     investment that they made.                                                                                                 
                                                                                                                                
6:17:43 PM                                                                                                                    
                                                                                                                                
     If we  actually - instead  of just looking  at distinct                                                                    
     points  - but  let's  take  it as  a  curve, what  I've                                                                    
     plotted up here is the bottom  line - is the arrow that                                                                    
     points to no investment.  That's basically the tax rate                                                                    
     that  would  be paid  on  the  $1,000.   If  I  invest,                                                                    
     depending on where I am on  the net margin curve or the                                                                    
     X axis, you  then have to follow the top  line and that                                                                    
     is  the marginal  tax  rate that  would  apply at  each                                                                    
     point along  that system.   So, you can see  that right                                                                    
     before we  hit the  max rate,  the way  the mathematics                                                                    
     works,  ... is  you actually  get to  an 82-83  percent                                                                    
     marginal rate on a $100 investment at that point.                                                                          
                                                                                                                                
     What I then did - that  line if you remember was a $100                                                                    
     out of  $1,000.   That was 10  percent of  pre-tax cash                                                                    
     flow being reinvested  in the business.  So  what I did                                                                    
     is  I actually  ran this  at a  1 percent  reinvestment                                                                    
     rate,  a  5 percent  reinvestment  rate,  a 10  percent                                                                    
     reinvestment rate, and a 10 percent reinvestment rate.                                                                     
                                                                                                                                
     What you see is the  reinvestment rate gets higher.  We                                                                    
     still  have   the  same  general  effect   but  as  the                                                                    
     reinvestment  rate  gets  higher, the  curve  tends  to                                                                    
     flatten out  and extend  in time.   The reason  that it                                                                    
     extends is  that the more  that you reinvest,  then the                                                                    
     more your  net margin  comes down after  the investment                                                                    
     and that actually brings you  back down below that 92.5                                                                    
     point where you max out on the total tax.                                                                                  
                                                                                                                                
6:19:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON asked  if  20 percent  is reinvested,  the                                                               
rate would be longer but lower.                                                                                                 
                                                                                                                                
MR.  RUGGIERO  said  that  is  correct.  The  marginal  rate  for                                                               
investing at 20 percent is a  little less than it would have been                                                               
if  you'd only  invested 10  percent  at that  point. The  impact                                                               
continues  on  for  much  longer  because  of  the  size  of  the                                                               
investment.                                                                                                                     
                                                                                                                                
6:20:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  asked if  the  marginal  rate is  on  the                                                               
investment dollars or on the entire $1,000.                                                                                     
                                                                                                                                
MR.  RUGGIERO  said two  impacts  are  taking  place.   When  the                                                               
investment is made,  it reduces the taxable base.   In this case,                                                               
the taxable  base was reduced from  $1,000 to $900.   At the same                                                               
time, a  double impact occurs because  not only did the  tax base                                                               
decrease from  $1,000 to  $900, the tax  rate applicable  to that                                                               
amount  decreased from  47 to  43.   That  creates a  compounding                                                               
effect.    It  comes  in  two parts:  part  because  the  capital                                                               
spending can  be deducted in  the year in  which it is  spent and                                                               
part because it takes you down the tax curve.                                                                                   
                                                                                                                                
6:21:21 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO continued with his presentation, as follows:                                                                       
                                                                                                                                
     If  you then  put the  20 percent  tax credit  and make                                                                    
     that available,  and you plot that  above these curves,                                                                    
     and I  did this  just above the  10 percent  curve that                                                                    
     we've been  working with, you'll  see that when  we get                                                                    
     near the $80 to $90  net margin range, the contribution                                                                    
     overall  from  the  state  could get  as  high  as  104                                                                    
     percent.                                                                                                                   
                                                                                                                                
6:21:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked if federal income tax is included.                                                                  
                                                                                                                                
MR. RUGGIERO  said it is excluded.   This [graph] only  shows the                                                               
production  tax and  the tax  credits for  investments.   He said                                                               
[the federal tax]  would increase the overall  government take or                                                               
the government  share of any  investment made  by one of  the oil                                                               
companies.                                                                                                                      
                                                                                                                                
6:22:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked if Mr.  Ruggiero was referring to the                                                               
government contribution to  the cost when he  spoke of government                                                               
share.                                                                                                                          
                                                                                                                                
MR.  RUGGIERO  said  adding  the federal  and  state  income  tax                                                               
impacts into this, the number would get larger.                                                                                 
                                                                                                                                
6:22:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON  asked  if  Mr.  Ruggiero  is  saying  the                                                               
legislature  needs to  be very  careful  about the  progressivity                                                               
number because the state's risk could be higher than intended.                                                                  
                                                                                                                                
MR. RUGGIERO replied:                                                                                                           
                                                                                                                                
     Representative Wilson,  the questions were  being asked                                                                    
     so  we went  and  started marching  our  way along  the                                                                    
     curve and saying  were there any anomalies  that we can                                                                    
     see and  yes, there  was an anomaly  and so  what we're                                                                    
     doing is  just bringing  it to  your attention  so that                                                                    
     you can choose how to use that in your deliberations.                                                                      
                                                                                                                                
REPRESENTATIVE WILSON questioned whether the answer is yes.                                                                     
                                                                                                                                
6:23:43 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO said he has a few  more slides to show but no matter                                                               
what  progressive type  of system  is  used, that  issue must  be                                                               
dealt with. He continued with his presentation.  He explained:                                                                  
                                                                                                                                
     Again,  we kind  of put  up a  question. Is  there some                                                                    
     sort  of cap  mechanism  that  you may  want  to put  -                                                                    
     location   on   here  again   is   just   for  use   of                                                                    
     illustration, but you may want  to say that the state's                                                                    
     share or the state's  contribution toward an investment                                                                    
     at any point need not exceed a certain level.                                                                              
                                                                                                                                
6:24:29 PM                                                                                                                    
                                                                                                                                
CO-CHAIR   JOHNSON  referred   to   Mr.   Ruggiero's  answer   to                                                               
Representative Wilson's question and asked  if he was saying that                                                               
regardless  of the  progressivity  system used,  an anomaly  will                                                               
occur.                                                                                                                          
                                                                                                                                
MR.  RUGGIERO said  a double  contribution will  always occur  if                                                               
progressivity is based on the net  margin where both the tax base                                                               
and tax  rate are changed.   It  will have a  compounding effect,                                                               
which is the anomaly, he remarked.                                                                                              
                                                                                                                                
6:25:02 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOHNSON  recalled  that   in  Mr.  Ruggiero's  previous                                                               
presentation, he  heard of two  changes the  administration would                                                               
like to see  made to ACES, perhaps a third.   The legislature has                                                               
30  days, with  14  days  left, and  Mr.  Ruggiero is  presenting                                                               
changes to his original plan.   He suspected the legislature will                                                               
have to return  again to address this issue. He  said he sees red                                                               
flags  everywhere  and  questioned  whether  ACES  was  not  well                                                               
thought out.                                                                                                                    
                                                                                                                                
MS. DAVIS explained that  because ACES is  built on  the backbone                                                               
of PPT, the administration is  trying to build in refinements and                                                               
understandings that take  place with time and study.   During the                                                               
last go-around, this body worked  very hard to understand PPT and                                                               
establish  a progressivity  structure.    What  ACES proposes  at                                                               
this  time is  a tweaking  of  the numbers  of the  progressivity                                                               
structure.  The current form of  ACES merely contains a change in                                                               
the trigger price  and the change in the slope,  so no structural                                                               
changes  were made  to progressivity.  Ms.  Davis explained  that                                                               
what has  come about through  the continuing study is  the effort                                                               
to educate  members on the  linkages with capital credits  and on                                                               
how  changes  affect investment.    She  said  DOR was  asked  to                                                               
identify  anything it  has seen  in its  course of  study.   What                                                               
staff  has been  discussing today  is the  aspect of  what exists                                                               
with PPT so,  if nothing is done, those things  remain.  She said                                                               
if this body does not want  to discuss aspects of the current law                                                               
or the content of the amendments that is its choice.                                                                            
                                                                                                                                
6:27:52 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON said he believes the  PPT needs to be given time                                                               
to  work. In  two weeks,  the committee  has been  presented with                                                               
three  changes.   The  existing  information  [about its  impact]                                                               
conflicts and consultants present  dueling information. He is not                                                               
comfortable with it.                                                                                                            
                                                                                                                                
6:29:18 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO opined  that 85 percent of the  state's revenue is                                                               
based  on oil.   Every  year  the state  will discover  something                                                               
about the oil industry that it  did not anticipate.  As a result,                                                               
the  state  is  at  a  disadvantage.    If  the  state  discovers                                                               
something  it did  not anticipate  that  is an  advantage, he  is                                                               
willing to face that too if it was  not in the plan.  He admitted                                                               
that he does  not think the legislature's actions in  the next 15                                                               
days will be the  end of the story.  He  likened the situation to                                                               
studying for a  law exam.  He  is hopeful, with PPT  or ACES, the                                                               
legislature finally reaches  a point where the  changes that need                                                               
to be made are  like fine tuning an engine.   He believes at this                                                               
point  the legislature  is working  on a  1972 small  block Chevy                                                               
with bad valves.                                                                                                                
                                                                                                                                
6:31:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES commented:                                                                                                 
                                                                                                                                
     Earlier I asked  you to go back to a  slide and I asked                                                                    
     you why you picked 25 percent  and .4 and I didn't know                                                                    
     whether that  was something that you  had generated for                                                                    
     the Senate  or if it  was something that  you generated                                                                    
     on behalf  of the  administration to coincide  with the                                                                    
     compass piece  saying if  you're going  to drop  the 10                                                                    
     percent floor,  then you've got  to be  more aggressive                                                                    
     on the progressivity.   That's why I asked  if this was                                                                    
     just  a simple  snapshot,  a perfect  example, or  this                                                                    
     actually was  fitting what  had been  requested, either                                                                    
     through  the  administration  as   part  of  their  new                                                                    
     proposal or  whether it was  something you  created for                                                                    
     the  Senate in  their  Judiciary Committee  as part  of                                                                    
     their process.                                                                                                             
                                                                                                                                
     So that's why I asked the  question and I think it goes                                                                    
     along with  what Representative Johnson  was suggesting                                                                    
     that this was the  administration's proposed new change                                                                    
     to ACES and  that's why I asked.  I  don't know that it                                                                    
     was.  That's  why I asked the question.   I didn't want                                                                    
     to make that assumption.                                                                                                   
                                                                                                                                
6:32:17 PM                                                                                                                    
                                                                                                                                
MS. DAVIS  told the  committee that  the administration  does not                                                               
have  a  formalized  cap  proposal.   It  has  not  talked  about                                                               
language.  It  knows the issue exists and simply  wanted to bring                                                               
it  to the  legislature's attention  when developing  tax policy.                                                               
She believes  legislators are  owed the  service of  getting this                                                               
information.   She repeated the  administration does not  have an                                                               
amendment to address this issue.                                                                                                
                                                                                                                                
6:32:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROSES  said  he  was not  referring  to  the  cap                                                               
proposal.  He was addressing the 25 percent and .4 scenario.                                                                    
                                                                                                                                
MS. DAVIS  replied, "We don't  have it.   There have been  a huge                                                               
number  of   pieces  floating   through  with   everybody  having                                                               
different options.   I didn't know  what the number was  until it                                                               
showed up here."                                                                                                                
                                                                                                                                
REPRESENTATIVE ROSES thanked her for the information.                                                                           
                                                                                                                                
6:33:40 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO  told members he  chose the  number to show  that it                                                               
can be  over 100 percent.   Within the  realm of prices  over the                                                               
next  few months,  the state  could be  operating near  that peak                                                               
where  it could  be  contributing over  100  percent of  anything                                                               
spent by a number of the companies.                                                                                             
                                                                                                                                
6:34:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON assumed he did  not know that ahead of time                                                               
so  showed the  committee how  various numbers  would change  the                                                               
outcome.                                                                                                                        
                                                                                                                                
MR. RUGGIERO said  the model is not  a snapshot but a  model of a                                                               
cash  flow program  from the  Prudhoe Bay  drilling program.   By                                                               
modifying the  numbers in  the cash flow  model, the  inputs were                                                               
changed.    The model  was  not  created to  illustrate  marginal                                                               
impacts  seen  with  this  type   of  a  fiscal  structure.    He                                                               
explained:                                                                                                                      
                                                                                                                                
     But it was then going  back and playing with the fiscal                                                                    
     structure -  and in, actually, this  came about because                                                                    
     in  running  that,  we'd  step   through  1/10th  of  a                                                                    
     progressivity,  1/10th of  progressivity and  every now                                                                    
     and then we'd  see things jump big, instead  of a small                                                                    
     jump.   That's the type of  thing - the engineer  - you                                                                    
     go hmmm,  something happened, I've  got to  figure that                                                                    
     out.                                                                                                                       
                                                                                                                                
     That's when  we started -  and then the  questions that                                                                    
     came    from    Representative   Seaton    about    the                                                                    
     participation  that we  then started  looking into  and                                                                    
     saying there  is a compounding  effect just  looking at                                                                    
     the state  tax that is  apparent.  And then  we haven't                                                                    
     even started to  model what that means  from adding the                                                                    
     federal and the corporate income tax into it.                                                                              
                                                                                                                                
6:35:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON  expressed concern that the  state could be                                                               
jeopardized because it is taking on  much more risk than it wants                                                               
to. She believes a cap is necessary.                                                                                            
                                                                                                                                
MR. RUGGIERO  said the legislature  needs to assess  whether that                                                               
is a risk and decide whether it  wants to use state money to back                                                               
the  oil   companies'  investments.     He  believes   one  point                                                               
overlooked  in  the discussion  is  that  if  the state  is  ever                                                               
contributing a marginal 80 percent that  will be on 10 percent of                                                               
the  taxable  cash   flow.    The  advantage  is   if  the  state                                                               
contributes 82  percent to that  investment to encourage  it, the                                                               
other 90  percent of  their cash  flow is  attracting a  high tax                                                               
rate as well. If the price  increases to where a company makes an                                                               
additional $100  but no more  barrels are produced,  the marginal                                                               
tax paid on that increase is also 82 percent.                                                                                   
                                                                                                                                
REPRESENTATIVE WILSON commented that the amounts are tremendous.                                                                
                                                                                                                                
6:37:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON told members:                                                                                             
                                                                                                                                
     I think everybody needs to  realize that in PPT we were                                                                    
     putting together  a tax plan  and we were asked  to tie                                                                    
     that up for  35 years and we said wait  a minute, we're                                                                    
     designing a new  tax plan and somebody wants  us to tie                                                                    
     this  up for  35 years.   We  don't know  what all  the                                                                    
     consequences of  this tax plan  are going to be  and so                                                                    
     we said  no.  This is  one of the reasons  because what                                                                    
     we did  in PPT is we  said we're going to  contribute -                                                                    
     we did  a net-net.   We didn't  out of  this committee.                                                                    
     This  committee said  that progressivity  should be  on                                                                    
     the gross,  which means  this effect  does not  come in                                                                    
     because  progressivity  does  not  kick  in  additional                                                                    
     state participation into the cost.                                                                                         
                                                                                                                                
     When it went through the  process, it got turned into a                                                                    
     net  progressivity.   Nowhere was  this ever  discussed                                                                    
     that turning  that progressivity  into the  net doubled                                                                    
     the state's risk of participation  and capital into the                                                                    
     program.   The problem  is that our  participation into                                                                    
     the program through deductions and  credits is meant to                                                                    
     say we want to get projects  sanctioned.  So we went to                                                                    
     these   levels  where   they're   going  to   influence                                                                    
     decisions  to  go forward  with  the  projects but  the                                                                    
     progressivity  feature  comes   at  high  prices  where                                                                    
     you're beyond  that analysis beyond those  decisions to                                                                    
     sanction.                                                                                                                  
                                                                                                                                
     So if  we do the progressivity  on the net, we  are now                                                                    
     learning  we  are  contributing  a  massive  amount  of                                                                    
     capital,  which will  have  absolutely  zero effect  on                                                                    
     project sanctioning  because it's outside of  the realm                                                                    
     where  those  analyses are  made.    So I  specifically                                                                    
     requested  the analysis  of state  risk  and Pedro  Van                                                                    
     Meurs  brought this  up to  us  in a  little 30  second                                                                    
     comment he made  when we were first here.   He said ...                                                                    
     exactly the first day -  was asking about progressivity                                                                    
     and  he  said  your  risk   to  the  state  having  net                                                                    
     progressivity   is   high   and   if   you   have   net                                                                    
     progressivity and  you have  it keyed to  the net  - in                                                                    
     other  words  to the  profit  margin,  you doubly  risk                                                                    
     yourself.                                                                                                                  
                                                                                                                                
     So I don't think any  of us really concentrated on what                                                                    
     that meant and so  I understand Representative Wilson's                                                                    
     concern because, you  know, how long has  it been since                                                                    
     we did  PPT and I  never caught  it.  I  never realized                                                                    
     that - but  we were never looking at -  we knew we went                                                                    
     up and capped at 25 percent  to try to harvest an equal                                                                    
     share, about 25,  25 percent in the base  rate and then                                                                    
     another 25  percent in  the upper rate,  which is  a 50                                                                    
     percent split.  But we  never got around to thinking at                                                                    
     a  50  percent tax  rate,  that  means before  credits,                                                                    
     we're  contributing 50  percent of  the costs  and then                                                                    
     you add 20 percent credits on  top of that and then you                                                                    
     can   add  the   corporate   income  tax   contribution                                                                    
     deductible against  that on  top of that  and all  of a                                                                    
     sudden we  are up into  a range where those  are things                                                                    
     we didn't consider.                                                                                                        
                                                                                                                                
6:41:36 PM                                                                                                                    
                                                                                                                                
     So I'm very happy that  we're here today looking at the                                                                    
     tax, PPT,  or ACES.   This is  not a function  of ACES.                                                                    
     This is a  function of PPT and what we  came forward in                                                                    
     that and looking at it and  seeing that - do we want to                                                                    
     take  that  additional risk  and  get  no gain  because                                                                    
     we're  not going  to get  any projects  sanctioned when                                                                    
     we're  talking  about  making  contributions  when  the                                                                    
     price of oil is $100 per barrel.                                                                                           
                                                                                                                                
     There's  lots  of money  on  the  table. We've  got  to                                                                    
     remember if  it's $100  a barrel  and we're  getting $5                                                                    
     billion out  of the production tax,  that means they're                                                                    
     getting  another $5  billion so  it is  not as  if more                                                                    
     cash  taken out  of  the progressivity  and putting  on                                                                    
     costs  is  going  to  gain   us  anything.    I'm  very                                                                    
     comfortable that we're here  talking about these issues                                                                    
     that weren't addressed  when we went through  PPT and I                                                                    
     hope that we  look for solving those problems  as we go                                                                    
     forward.  Sorry for taking so long.                                                                                        
                                                                                                                                
6:42:27 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON said  he thought Mr. Romero said  [the state] is                                                               
encouraging production,  increasing investment and  generating no                                                               
more money  in the  big picture.   He  thought Mr.  Ruggiero also                                                               
said even  though we may be  risking in this marginal  area, once                                                               
we  get into  that  price  structure we're  generating  a lot  of                                                               
money.   This can  be translated onto  many fronts:   employment,                                                               
housing,  taxes, and  other benefits  to the  state.   He further                                                               
stated:                                                                                                                         
                                                                                                                                
     I think your answer to her [Representative Wilson] was                                                                     
     the most telling thing I've heard.  One snapshot, yea                                                                      
     we get gamed a little bit, they invest a lot of money                                                                      
     or more money. We get jobs for that - all the things                                                                       
     that go along with that. On the other end of that,                                                                         
     when we're at those prices, the treasury doesn't do so                                                                     
     bad either.                                                                                                                
                                                                                                                                
6:44:26 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO said he hoped no  one believes he was saying the oil                                                               
companies are "gaming"  the system.  He said it  can be viewed as                                                               
a problem  or an opportunity.   One  thing this tax  system could                                                               
encourage is  if a company is  near the top end,  it might decide                                                               
to invest $120 million into a  heavy oil test well because it can                                                               
do  so  with the  state's  contribution.    Part of  the  state's                                                               
contribution would be  to R&D work, which  is actual in-the-field                                                               
testing.   That  would lower  the technology  risk and  raise the                                                               
possibility of  investment in the  higher cost, low  market value                                                               
heavy oil development.   He noted the amount could  be as high as                                                               
35 billion barrels.                                                                                                             
                                                                                                                                
6:45:30 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON asked how that would be a problem.                                                                             
                                                                                                                                
MR. RUGGIERO repeated it is not a  problem; some may see it as an                                                               
opportunity.   He said in  a previous presentation,  he discussed                                                               
five goals.   Goal number 2  is that a highly  progressive system                                                               
will  actually encourage  investment  in the  Legacy  units.   He                                                               
continued:                                                                                                                      
                                                                                                                                
     And  it's  this  impact,  because of  where  they  find                                                                    
     themselves on this curve, they  should be interested in                                                                    
     investing  in  that  point  in   time  because  of  the                                                                    
     contribution that the state's making.   If you design a                                                                    
     system like  this, in a  way, as a state  you're saying                                                                    
     you have  faith in  their ability and  their capability                                                                    
     and  the  rest actually  spend  that  money wisely  and                                                                    
     bring more barrels in for the state.                                                                                       
                                                                                                                                
6:46:29 PM                                                                                                                    
                                                                                                                                
MS. DAVIS explained part of  the purpose of bringing this forward                                                               
is  to recognize  the positive  aspects  and realize  this as  an                                                               
embedded opportunity.  She said  it requires a conscious decision                                                               
so that the full magnitude  of the incentive that's being created                                                               
for industry  is understood.   She pointed out the  House Special                                                               
Committee on  Oil and  Gas was  very concerned  about quantifying                                                               
impacts to  investment and whether  it would be enhanced.   DOR's                                                               
ability   to   answer   those  questions   requires   a   precise                                                               
understanding of each  element of the PPT  structure, as modified                                                               
here does.   With that understanding, committee  members can test                                                               
their  own personal  resolve and  decisions about  what level  of                                                               
state support should be involved.                                                                                               
                                                                                                                                
6:47:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH asked if  the DOR forecast reflects the                                                               
$90-plus per barrel cost of oil.                                                                                                
                                                                                                                                
MS. DAVIS  said DOR  just completed a  Delphi protocol,  where an                                                               
economist and industry  experts are brought in.  They developed a                                                               
near  and long  term forecast,  which should  be released  within                                                               
days.  She  said she was not  at liberty to say  what the numbers                                                               
are but  they reflect the  current market  conditions.    So, DOR                                                               
does reflect  near terms to  some extent  but it does  not assume                                                               
that price will remain.                                                                                                         
                                                                                                                                
6:49:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH said  she believes if one  looks at the                                                               
history of revenue projection, the  state has been overestimating                                                               
the  price per  barrel  and  production that  goes  through on  a                                                               
continuous basis.                                                                                                               
                                                                                                                                
Several  members  clarified  that  DOR  was  underestimating  the                                                               
price.                                                                                                                          
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH  said she truly believes  Alaskans need                                                               
to get  their fair  share for their  resource through  a taxation                                                               
mechanism  that  encourages  exploration and  development.    She                                                               
wants  the pipeline  to be  used maximally.   She  asked for  Mr.                                                               
Ruggiero's opinion on the future outlook on crude oil.                                                                          
                                                                                                                                
6:51:38 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO replied:                                                                                                           
                                                                                                                                
     What I  would say is  what we're presenting  today, and                                                                    
     even what  we presented  a couple of  days ago  to this                                                                    
     committee, is not  to be predictors of  where the price                                                                    
     is.  We're firm believers  that ... as Mr. George said,                                                                    
     we'd be  on his  private island right  now if  we could                                                                    
     predict prices that well.                                                                                                  
                                                                                                                                
     What we've  been trying to  bring forward is  1) views,                                                                    
     perspectives and a little  bit mixed in recommendations                                                                    
     based  on  the  fact  that the  three-legged  stool  of                                                                    
     production  price  and  cost  is  always  going  to  be                                                                    
     tilting one  way or another  from where you  thought it                                                                    
     was going to be.  Because  of that, what you want to do                                                                    
     is  think  about,  as you  put  your  fiscal  structure                                                                    
     together,  what   is  the   structure,  what   are  the                                                                    
     mechanisms  -  if you  would,  where  are the  bail-out                                                                    
     points or where are the  pressure relief valves in that                                                                    
     system,  such  that  you  don't  have  to  worry  about                                                                    
     whether or  not DOR gets  it exactly right  because the                                                                    
     system  that you  will put  in place  will help  Alaska                                                                    
     overall  to  react  properly  to  however  those  three                                                                    
     things change.  ... I  think all  we're trying  to show                                                                    
     here is  not to say  that you should pick  something to                                                                    
     happen at  92.  You  may pick it  to happen at  62, you                                                                    
     may pick it to happen at 162.  That's your choice.                                                                         
                                                                                                                                
     This effect that we show  on the slide will help happen                                                                    
     regardless  of where  you  pick  your kick-off  points;                                                                    
     your capping points are the  rest.  It's just something                                                                    
     you're going  to have to deal  with unless you go  to a                                                                    
     straight increased royalty -  straight gross tax, which                                                                    
     I highly recommend  against.  But if you  pick a system                                                                    
     that meets  the goals of  the state, gets  equitable or                                                                    
     fair  share  at  high  prices, but  at  the  same  time                                                                    
     encouraging investment  where you want  the investment,                                                                    
     then  these are  the type  of issues  you are  going to                                                                    
     have to deal with.                                                                                                         
                                                                                                                                
6:53:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH  commented that  no matter  whether the                                                               
price of oil is  $10 or $100 per barrel, it  is important to have                                                               
a  model that  is good  for Alaskans,  the state,  employment and                                                               
businesses.     She  said she  didn't  want to  get  caught in  a                                                               
"rabbit hole" by failing to  recognize that extremes may occur on                                                               
either  end.    She  again  asked Mr.  Ruggiero  for  his  future                                                               
forecast on the price of oil.                                                                                                   
                                                                                                                                
MR.  RUGGIERO  spoke  about  an  ongoing piece  of  work  from  a                                                               
California university  which charts  the predictions  of renowned                                                               
experts  in  the  oil  and  gas  business.    The  most  accurate                                                               
predictor, with  twice the accuracy  of any other  predictor, was                                                               
the five-year forward strip on the NYMEX.                                                                                       
                                                                                                                                
6:55:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG said one of  the experts tracked in the                                                               
report is  named Yergen  (ph) and  he was  wrong more  often than                                                               
right.   He  said  the  graph raises  concern  about the  state's                                                               
involvement,  but  the  expectation  was  that  production  would                                                               
increase as  the result  of an increase  in development.   That's                                                               
the goal.   He pointed out  that in some years  the liability may                                                               
be high but eventually the production  curve will rise.  He asked                                                               
if that is the balance Mr. Ruggiero is referring to.                                                                            
                                                                                                                                
MR. RUGGIERO said that is exactly  correct.  If the state chooses                                                               
to believe  the oil companies  are doing  a good job,  backs them                                                               
and  provides  this incentive  that  should  lead to  significant                                                               
production.                                                                                                                     
                                                                                                                                
6:56:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES said the discussion  has been about a cap on                                                               
the credits at a certain level.  He asked:                                                                                      
                                                                                                                                
     Don't we also have a cap on the progressivity at this                                                                      
     point and what would happen worrying about the effect                                                                      
     on the progressivity of investment if there were no                                                                        
     cap on the take?  Because in the bills we have right                                                                       
     now, we have progressivity built in but when it gets                                                                       
     to 25 percent it stops.  It doesn't go beyond that.                                                                        
     But if the price continues to go, there's less take                                                                        
     even though the price is higher.  Does it have an                                                                          
     effect on whether or not this cap changes if you                                                                           
     didn't stop the cap on the progressivity?                                                                                  
                                                                                                                                
                                                                                                                                
MR. RUGGIERO  said the  shape of  the curves  on the  graph occur                                                               
because  of  the cap.    That  curve  occurs  at the  50  percent                                                               
overall, or 25 percent progressivity  added to a 25 percent base.                                                               
If that  was allowed to continue,  the curve that is   very steep                                                               
and  high would  continue to  track way  above the  progressivity                                                               
curve if it continued to go up as  well.  He has heard people say                                                               
when  the progressivity  caps out,  the state  does not  make any                                                               
more   money.  He   explained  it   actually  means   that  every                                                               
incremental  dollar  is  shared   50/50  with  the  oil  company.                                                               
Therefore, as the price increases to  where it goes off the right                                                               
hand side of  the plot, the progressivity has capped  out but the                                                               
state's share  continues to grow  with each dollar  of additional                                                               
margin that's realized.                                                                                                         
                                                                                                                                
6:58:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON  asked Ms.  Davis if  she asked  that other                                                               
anomalies be looked for by the model makers.                                                                                    
                                                                                                                                
MS. DAVIS said the process has  been iterative.  Mr. Ruggiero and                                                               
Mr.  George have  been  working  with DOR  economists  to try  to                                                               
identify these  effects.   She said the  only other  concern that                                                               
has been  raised is whether or  not anything needs to  be done as                                                               
the result of this effect.  She added:                                                                                          
                                                                                                                                
     Frankly, it is properly the remit of the legislature                                                                       
     to look at this and decide what level of investment we                                                                     
     want to provide as a state - co-investment, so to                                                                          
     speak, as a state, encouraging this kind of future                                                                         
     investment.                                                                                                                
                                                                                                                                
      As we've modeled, all of our models have taken into                                                                       
          account in any given - we've stated what our                                                                          
     assumptions are so this effect  is embedded in part and                                                                    
     parcel of  everything we've presented. We  just haven't                                                                    
     gone  in  and extracted  it  as  an independent  slide.                                                                    
     Frankly, these  gentlemen have  been working  very hard                                                                    
     and fast and furiously in the  last day and one half to                                                                    
     help us  understand how to  portray it.  So, hopefully,                                                                    
     after  this point,  if there's  a  structure that  this                                                                    
     group  decides  on, we  would  be  able to  back  into,                                                                    
     again, just letting  folks know what this  effect is so                                                                    
     they have  a comfort  level that  they like  where that                                                                    
     is.                                                                                                                        
                                                                                                                                
7:00:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON said  she was  thinking about  the state's                                                               
overall goals and one is to increase production.                                                                                
                                                                                                                                
7:00:53 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO said he considers  tonight's meeting an investment                                                               
in tomorrow,  when the committee  considers amendments  that deal                                                               
with progressivity.                                                                                                             
                                                                                                                                
7:01:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE EDGMON  questioned whether  a similar model  is in                                                               
use in other places around the  world or whether Alaska is moving                                                               
into uncharted waters.                                                                                                          
                                                                                                                                
MR.  RUGGIERO said  other regimes  have progressive  systems that                                                               
address this type of issue.   The structure of those systems is a                                                               
little bit different.   That is why it is not  always easy to see                                                               
where these types of events will occur.                                                                                         
                                                                                                                                
7:02:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  EDGMON  questioned  whether  this  situation  has                                                               
variables  that differ  from other  tax  regimes, but  it is  not                                                               
entirely unique regarding a cap with a progressivity feature.                                                                   
                                                                                                                                
MR. RUGGIERO said  the last two [models] that he  was involved in                                                               
dealt with rate of return.   Because of some of the features seen                                                               
here, S curves were created.  The  S curve along the X axis would                                                               
be the actual  rate of return already realized with  the tax rate                                                               
up the Y axis. Part of the reason  for the rate of change and the                                                               
rest was to address some of  the issues with respect to the delta                                                               
movement up  or down on  the curve and the  state's participation                                                               
in that.                                                                                                                        
                                                                                                                                
7:03:33 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO noted several other  states have mature fields. He                                                               
asked  if the  legislators in  those states  were wrestling  with                                                               
these questions five  years ago and resolved the  issues to their                                                               
satisfaction.                                                                                                                   
                                                                                                                                
MR. RUGGIERO said he did not know.                                                                                              
                                                                                                                                
MR. GEORGE thought the systems in those states are based on a                                                                   
royalty and severance tax, which would be a gross system.                                                                       
                                                                                                                                
7:04:23 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO told members:                                                                                                      
                                                                                                                                
     If  I  can, Mr.  Chairman,  continue?   We've  actually                                                                    
     addressed a lot that's on  this slide but I just wanted                                                                    
     to  put it  up  and I  think this  goes  right to  your                                                                    
     point, Representative  Roses. You  can choose  when you                                                                    
     eventually  do set  up, whatever  it is,  the structure                                                                    
     that you are going to vote on  as a House.  But, as you                                                                    
     change base  rate, as  you change  kick off  points, as                                                                    
     you change  slopes, as you  change caps, any  change in                                                                    
     any  of those,  including the  investment credit  rate,                                                                    
     will lead to a different  answer on the previous slide.                                                                    
     Each time you change one  of those variables, the plots                                                                    
     are going  to change  ever so slightly.   That's  why I                                                                    
     said, we did this to  be illustrative, and what you can                                                                    
     know is that  as you choose something, this  is just an                                                                    
     issue you need  to affirmatively address as  to how you                                                                    
     want it to be handled once you get there.                                                                                  
                                                                                                                                
     The other thing is - before you adjourned, I guess                                                                         
     that was about 3:30, Representative Seaton said, geez,                                                                     
     I have an idea, can you run this for me?  So, this is                                                                      
     a slide I just threw into the presentation.   It is                                                                        
     the previous slide with two additions.  It's the lower                                                                     
     two lines.  The one that's listed as net gross, which                                                                      
     is the solid blue, it is actually the lowest-most line                                                                     
     that is sloping from left to right.  And then we have                                                                      
     a 30 percent credit above that.  I was kind of                                                                             
     listening with my ear to the discussion that was going                                                                     
     on here and I think Marcia threw the task over the                                                                         
     shoulder - you know, should you do a 30 percent credit                                                                     
     or not and said those Gaffney Kline guys would be                                                                          
     here.                                                                                                                      
                                                                                                                                
     So, I went  ahead and put it up there  just to see what                                                                    
     it  would   do.    Even   off  the   recommendation  of                                                                    
     Representative  Seaton that  we look  at, for  the base                                                                    
     tax, whatever that  is, it's a base rate  times the net                                                                    
     margin  that's   made.     But  then   to  look   at  a                                                                    
     progressivity factor, which is  based on the net margin                                                                    
     per barrel,  but applied to  the gross  value realized.                                                                    
     And  so,  what  we  did  is we  ran  through  the  same                                                                    
     examples at $1  increments all the way  from the bottom                                                                    
     to  the  top, that  same  sort  of $1,000  question  of                                                                    
     revenue before  cash flow and do  I invest or do  I not                                                                    
     invest that  $100. And  what you'll  see is  because of                                                                    
     the  nature of  it  being  based on  gross,  you get  a                                                                    
     slightly different kick  off point and the  slope of it                                                                    
     is   much  more   shallow  as   far   as  the   state's                                                                    
     participation.   This has to  do with basing it  on the                                                                    
     gross value overall before costs.                                                                                          
                                                                                                                                
     What you have in there -  it eventually will cap out at                                                                    
     75  percent but  it gets  far into  the future  when it                                                                    
     does  that because  of the  much slower  growth of  it.                                                                    
     But as you  put any investment credit on top  of it, be                                                                    
     it 20, be it 30 - I  just did this as an extreme, based                                                                    
     on  the discussion  I'm going  in  here, and  I put  30                                                                    
     percent  and   you  can  see  that   because  the  base                                                                    
     progressivity on  a marginal  basis continues  to grow,                                                                    
     when you put  the cap on it the  overall would continue                                                                    
     to grow.  At roughly $135  margin, you can see that the                                                                    
     marginal rate just based on  the progressivity based on                                                                    
     the gross, is at roughly  63, 64 percent and that would                                                                    
     put the overall with  the 30 percent investment credit,                                                                    
     a contribution  in the  92 to  93 percent  range.    So                                                                    
     that  at  least  gives  an   early  indication  of  the                                                                    
     difference between, call it the  net-net system, as Bob                                                                    
     showed earlier,  and then  the net-gross  system, which                                                                    
     is  the  progressivity  calculation based  on  the  net                                                                    
     margin but applied  to the gross value at  the point of                                                                    
     production.                                                                                                                
                                                                                                                                
7:08:26 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO continued:                                                                                                         
                                                                                                                                
     This  is the  last slide.  One  of the  things we  were                                                                    
     asked is if  you were to do something with  a cap, stir                                                                    
     up the  gray cells  in the  back of  the brain  and say                                                                    
     what  would you  come up  with? I  guess from  personal                                                                    
     experience, the idea  of something like an  AMT came to                                                                    
     mind.  If  you  should  choose  to  cap,  for  whatever                                                                    
     reason, the  contribution of the  state, and I  guess I                                                                    
     need  to   be  clear   this  is  not   Gaffney  Kline's                                                                    
     recommendation  that you  do so,  but, as  we said,  we                                                                    
     presented an issue,  one of the ways you  can choose to                                                                    
     deal with it is  to cap it off.  And  so what we've got                                                                    
     up here is basically is  you can calculate your tax the                                                                    
     normal  way.    You   have  your  wellhead  value,  you                                                                    
     subtract   your   costs,   you   then   subtract   your                                                                    
     investments.  You  get a net margin or a  net cash flow                                                                    
     per barrel.   You find the tax rate,  you calculate the                                                                    
     tax due.                                                                                                                   
                                                                                                                                
     The other  way you could  do it, for example,  based on                                                                    
     where I  had my  suggested line,  is you  can calculate                                                                    
     the tax payable without any  deduction of the capital -                                                                    
     or the  qualifying capital expenditures but,  for those                                                                    
     qualifying capital expenditures, apply  a fixed rate or                                                                    
     a  fixed  credit  rate,  if  you  will,  overall,  then                                                                    
     compare  with  that  credit  applied  against  the  tax                                                                    
     without the investment deduction  against the total tax                                                                    
     to be paid with the  investment deduction and you could                                                                    
     have it pay the greater or, like an AMT.                                                                                   
                                                                                                                                
     There probably are some other  mechanisms that could be                                                                    
     looked at, that could be  used, if that's something you                                                                    
     wish  to do.  This is  a mechanism  that can  be easily                                                                    
     carried out  with the data  that would be  available at                                                                    
     the time of return.                                                                                                        
                                                                                                                                
7:10:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG  noted  the  production  side  of  the                                                               
equation  is not  on the  board.   Industry representatives  told                                                               
members they do  not chase investments without  production on the                                                               
other end.   He questioned whether the state should  take on risk                                                               
if the industry has not sanctioned a particular project.                                                                        
                                                                                                                                
7:12:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  said the  discussion is  about stimulating                                                               
the  oil  industry's behavior  to  invest  in projects  that  are                                                               
economically viable.   Whenever the  state gets into  a situation                                                               
where it pays 100 percent,  it risks stimulating investments that                                                               
make no sense.   He thought the  goal behind PPT was to  put in a                                                               
base rate  that is deductible and  give tax credits, so  that the                                                               
state would be  investing 45 or 50 percent of  the capital costs.                                                               
If the state is in a situation where  it is putting up all of the                                                               
money  for investment  via  tax credits  and  tax deductions,  it                                                               
could be  participating in  projects that  are occurring  for tax                                                               
purposes only.   He opined that the legislature  needs to develop                                                               
mechanisms that stimulate investment  in economical projects.  He                                                               
fully agrees  with state participation  but does not  believe the                                                               
state  should be  a 100  percent owner.   He  noted when  federal                                                               
corporate  income tax  is considered,  an oil  company might  get                                                               
$1.25  or more  back from  the state  and federal  government for                                                               
each dollar spent on a project.                                                                                                 
                                                                                                                                
7:15:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FAIRCLOUGH said  she looks  forward to  seeing an                                                               
amendment  that  will  address the  issue  Representative  Seaton                                                               
raised.  She agreed  that "if there is not skin  in the game, you                                                               
can  lose value  for those  who are  contributing," but  she also                                                               
agreed  with  Representative  Johnson that  jobs,  especially  in                                                               
rural  Alaska, are  very  important.   She  stated  that she  has                                                               
repeatedly heard Alaska  has a maturing basin on  the North Slope                                                               
and that  the state is in  a transition period in  which it wants                                                               
to  encourage smaller  explorers  to start  producing barrels  of                                                               
oil. She asserted:                                                                                                              
                                                                                                                                
     And so, we  will need to carefully balance  the look at                                                                    
     those costs  because as, at least  from one economist's                                                                    
     perspective,  the conversation  has been  that in  this                                                                    
     transition  we  will  see more  exploration  after  the                                                                    
     puddles,  per say,  the smaller  fields that  are under                                                                    
     ...  500,000 barrels  per puddle  - it's  a pretty  big                                                                    
     puddle  for anyone  to step  in  - and  that the  major                                                                    
     players  will move  to explorations  that  may be  more                                                                    
     risky but looking for  the elephant projects. Hopefully                                                                    
     that  will still  be in  Alaska but  - the  bottom line                                                                    
     though  that I  remember  from  everything we've  heard                                                                    
     over the last  16 days is it's about the  rocks, as far                                                                    
     as  the risk  and  investment goes  when producers  and                                                                    
     explorers are out there looking for fines.                                                                                 
                                                                                                                                
     So,   I   think  that   I   look   forward  to   seeing                                                                    
     Representative Seaton  what you  have, because  I think                                                                    
     you make a valid point and  I will be looking at how we                                                                    
     balance  that  so  that  we  make  sure  that  the  new                                                                    
     explorers that  don't have production  that we  do sort                                                                    
     of want  to participate in  that incentive with  how do                                                                    
     we  make  that   differentiation  between  those  costs                                                                    
     versus the big players and  keeping the playing, as the                                                                    
     administration has  so admirably  put forward,  to make                                                                    
     sure it's flat  and fair for all who want  to enter the                                                                    
     market. Thank you Mr. Chairman.                                                                                            
                                                                                                                                
7:18:06 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON asked  Mr. George and Mr. Ruggiero  if they have                                                               
both worked for  oil companies and presented projects  to a board                                                               
or acted as advisors.                                                                                                           
                                                                                                                                
[No response was audible.]                                                                                                      
                                                                                                                                
CO-CHAIR JOHNSON  asked what  a board of  directors would  say if                                                               
they  presented a  project  that cost  $100  million with  little                                                               
chance of hitting oil, but provided a tax deduction.                                                                            
                                                                                                                                
MR. GEORGE said  the board of directors would look  at the after-                                                               
tax impact when making an investment decision.                                                                                  
                                                                                                                                
CO-CHAIR  JOHNSON   asked  if  the  after-tax   impact  would  be                                                               
production of oil.                                                                                                              
                                                                                                                                
MR. GEORGE said  if the board is looking at  an exploration play,                                                               
it will  balance off  the reward  if successful  on an  after tax                                                               
basis.  The  board would also look at the  cost if not successful                                                               
on an after tax basis.                                                                                                          
                                                                                                                                
7:19:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON asked  if the board would want to  go ahead with                                                               
a  project that  might not  produce oil  under this  scenario. He                                                               
elaborated:                                                                                                                     
                                                                                                                                
     You've got  a chance  where we're going  to go  out and                                                                    
     invest $100 million.  We may not hit a barrel  of oil -                                                                    
     no  bookable  reserves, none  of  the  things that  our                                                                    
     stock  shareholders are  going  to look  at, but  we're                                                                    
     going  to get  a  tax  deduction that  may  or may  not                                                                    
     because we do  live in an environment  where things can                                                                    
     change around  here in this  state, that we may  or may                                                                    
     not  hit  oil. Can  you  tell  me  what that  board  of                                                                    
     directors would tell you?                                                                                                  
                                                                                                                                
MR. GEORGE said that question  cannot be answered without looking                                                               
at  numbers.   The  answer  depends  on  the  size of  the  prize                                                               
relative to  the size  of the investment  and the  risk involved.                                                               
He thought  Chevron showed a  slide during its  presentation that                                                               
showed  the calculation.   Chevron  would look  at the  after-tax                                                               
effect.                                                                                                                         
                                                                                                                                
CO-CHAIR JOHNSON  asked, "So,  there's a  board of  directors out                                                               
there for an oil company that are  going to take a risk that they                                                               
may not  find oil  or a very  low risk they  may find  oil, based                                                               
upon getting a tax credit?"                                                                                                     
                                                                                                                                
MR. GEORGE  replied the decision  will move with the  net benefit                                                               
after tax and the net cost after tax.                                                                                           
                                                                                                                                
CO-CHAIR JOHNSON asked Mr. Ruggiero if he agreed.                                                                               
                                                                                                                                
7:20:29 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO  said that depends  on where you were  when, because                                                               
different circumstances  come into  play.  He  said when  the PPT                                                               
credits were  opened up  in the UK,  people were  actually buying                                                               
small  pieces of  a field  so that  they could  purchase the  PPT                                                               
liability, which  would be cover  for the exploration  they would                                                               
do.  He  said boards of directors do make  decisions based on tax                                                               
credits to lower the risk of risky exploration.                                                                                 
                                                                                                                                
7:21:20 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON said he thought they  were in the job of finding                                                               
oil.  He said he couldn't  think of any other business that would                                                               
do that.                                                                                                                        
                                                                                                                                
MR. RUGGIERO opined  that a board of directors  would spend money                                                               
just to receive  a tax credit.   They are not in  the business to                                                               
spend money  just because  it is  government money.  He explained                                                               
that oil  companies have to keep  track of internal metrics.   He                                                               
believes an  oil company's most  valuable asset right now  is its                                                               
employees.  He furthered:                                                                                                       
                                                                                                                                
     Just  because  there's  a tax  credit,  the  number  of                                                                    
     people it  will take just  to drill  - let's call  it a                                                                    
     wildcat exploration  well in this state,  especially on                                                                    
     the  northern  part of  the  state  - would  take  away                                                                    
     valuable  assets from  other operations.  I do  not see                                                                    
     any  of the  board  of directors,  just because  you're                                                                    
     giving  a  little  tax  credit,  going  out  there  and                                                                    
     spending your  money just because  of that  tax credit.                                                                    
     No. They would  have to take a look at  it with respect                                                                    
     to the  rest of their  portfolio.  They'd have  to look                                                                    
     at  it  -  are  they   getting  value  for  the  people                                                                    
     involved? They'd  have to  look at it  as -  and they'd                                                                    
     still want  a chance  at success  before they  would do                                                                    
     that.                                                                                                                      
                                                                                                                                
CO-CHAIR JOHNSON thanked Mr. Ruggiero.                                                                                          
                                                                                                                                
7:22:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO said  he  suspects that  is a  matter  of how  to                                                               
calculate  the risk  and  how  to estimate  the  reward and  then                                                               
evaluate which  projects are  the best.   A  lot of  guesswork is                                                               
involved so  a decision would depend  on the ratio.   He said the                                                               
calculation is  what is so  hard and  that is why  good employees                                                               
are so valuable.                                                                                                                
                                                                                                                                
7:24:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE EDGMON inquired about the next day's agenda.                                                                     
                                                                                                                                
7:24:57 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  announced the  next meeting  would begin  at 9:00                                                               
a.m. and a group discussion would take place.                                                                                   
                                                                                                                                
[HB 2001 was held over.]                                                                                                        
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 7:25 p.m.                                                                 
                                                                                                                                

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