Legislature(2007 - 2008)HOUSE FINANCE 519
11/03/2007 09:00 AM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB2001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
November 3, 2007
9:12 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
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Mike Chenault
Representative Sharon Cissna
Representative Les Gara
Representative Max Gruenberg
Representative Kyle Johansen
Representative Mike Kelly
Representative Beth Kerttula
Representative Kurt Olson
Representative Ralph Samuels
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
11/02/07 (H) Presentations by:
11/03/07 (H) RES AT 9:00 AM HOUSE FINANCE 519
WITNESS REGISTER
STEVE PORTER, Consultant
for the Legislative Budget and Audit Committee
Alaska State Legislature
Tehachapi, California
POSITION STATEMENT: During hearing of HB 2001, answered
questions.
BOB GEORGE
Gaffney, Cline & Associates
Houston, Texas
POSITION STATEMENT: During hearing of HB 2001, answered
questions.
MARCIA DAVIS, Deputy Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During hearing of HB 2001, answered
questions.
MARK HANLEY, Public Affairs Manager, Alaska
Regional Public Affairs
Anadarko Petroleum Corporation
Anchorage, Alaska
POSITION STATEMENT: During hearing of HB 2001, answered
questions.
CLAIRE FITZPATRICK, Commercial Senior Vice President
BP Exploration (Alaska) Inc.
(No address provided)
POSITION STATEMENT: During hearing of HB 2001, answered
questions.
KEVIN MITCHELL, Vice President
Finance & Administration
ConocoPhillips Alaska, Inc.
(No address provided)
POSITION STATEMENT: During hearing of HB 2001, answered
questions.
DAN SECOURS (PH)
ExxonMobil Corporation
(No address provided)
POSITION STATEMENT: During hearing of HB 2001, answered
questions.
RICH RUGGIERO
Gaffney, Cline & Associates
Houston, Texas
POSITION STATEMENT: During hearing of HB 2001, answered
questions.
BERNARD HAJNY, Manager
Production Tax & Royalty
BP
(No address provided)
POSITION STATEMENT: During hearing of HB 2001, answered
questions.
PATRICK GALVIN, Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: During hearing of HB 2001, answered
questions.
JOHN MESSENGER, Staff
to Representative Kerttula
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: During hearing of HB 2001, provided
explanation of Amendment 20.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 9:12:38 AM. Representatives
Gatto, Johnson, Fairclough, Roses, Seaton, Wilson, Edgmon,
Guttenberg, and Kawasaki were present at the call to order.
Also in attendance were Representatives Chenault, Cissna, Gara,
Gruenberg, Johansen, Kelly, Kerttula, Olson, and Samuels.
HB2001-OIL & GAS TAX AMENDMENTS
9:14:03 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 is CSHB 2001(O&G).]
[The committee briefly discussed how it would proceed.]
9:20:26 AM
STEVE PORTER, Consultant for the Legislative Budget and Audit
Committee, Alaska State Legislature, remarked that the financial
points aren't the only important things to consider. In fact,
many of the amendments before the committee today address
administrative issues that will have a substantial impact on the
daily business of the stakeholders. He mentioned that he is
interested in the questions the committee has because issues
beyond the financial matters haven't been fleshed out as
thoroughly.
9:22:05 AM
REPRESENTATIVE FAIRCLOUGH referred to a presentation given by
Gaffney, Cline & Associates, Inc. (GCA) during which there was
discussion of the topic of gold plating. There was discussion
about progressivity and a climbing price per barrel market in
which the state would be 100 percent responsible for all of the
costs a producer would invest into a project. She requested
discussion with regard to the state's perspective and whether
the producer should have "some skin in the game" or whether 100
percent state contribution is appropriate in a changing,
transitioning, basin if the desire is to have smaller explorers
enter.
9:23:39 AM
BOB GEORGE, Gaffney, Cline & Associates, reminded members that
the chart shown yesterday illustrated the impact of the tax
reduction on capital investment at different points on the net
margin chart. The chart basically looked at a system that was
entirely based on the net margin as well as a system on the net
margin for setting the progressivity rate and then applied to
the gross value at the point of production. The chart
illustrated that the effective capital expenditures on a pure
net system has the following two effects: it lowers the
progressivity component of the tax rate and it lowers the tax
base. The combined effect of these results in a tax break
that's greater than the actual rate of tax. Therefore, as one
moves up the curve from a base level of 25 percent to a maximum
rate of 50 percent, the effect can - by doing nothing else -
result in that investment of $1 returning $.80-$.90. On a
theoretical basis, it can tip over 100 percent. Furthermore, a
tax credit on top of that can push it slightly higher. There
are ways to address the aforementioned, such as by placing an
absolute tax cap that limits the tax break to some number that
he recalled was at 70 percent for illustrative purposes. The
aforementioned was the position, in terms of the mathematics,
laid out yesterday.
9:25:56 AM
CO-CHAIR GATTO offered an anecdote in which a store had a sale
and various other discounts going on that could result in the
consumer being paid $5 to purchase an item. The store may tell
the consumer that he/she can't stack the discounts, and
therefore the consumer would have to chose the type of discount
to take. He opined that the aforementioned scenario is similar
to yesterday's chart that had a line through it specifying 70
percent. He commented, "That struck me ... that it is possible
... to get more than 100 percent discount, then perhaps that
something we should look into."
9:27:24 AM
CO-CHAIR JOHNSON recalled when he consulted retail clients and
informed the committee that what Co-Chair Gatto is speaking of
is a loss leader. He pointed out that often retailers [offer
multiple discounts] in hopes that a consumer will purchase other
merchandise on which it makes a larger profit. He opined that
Co-Chair Gatto's analogy is appropriate in that on occasion,
there may be a loss leader and that stores gamble that once a
consumer is in the store, he/she will purchase the high ticket
item. "There's a reason retailers do it and there's a reason we
should do it," he opined.
9:28:50 AM
MARCIA DAVIS, Deputy Commissioner, Department of Revenue (DOR),
concurred with the point that it is a balance when there's a
situation in which the state's share of the costs is fairly
high. She opined that one must keep in mind that it's only part
of the picture as Alaska's fiscal structure is essentially a
flat tax in the guise of royalty and the state has property tax
and corporate income tax. Therefore, there's a base income
stream that comes from the activity. However, it remains
important for the legislature to see how the system works. She
acknowledged that there can be some level of gold plating, but
not significant amounts. Perhaps, the advantage in Alaska is
that most large investments will take several years to come
about. Ms. Davis said that until gold plating is rampant, there
may be other ways in which to control it. As a body, the
legislature has been balancing incentivizing investment with
obtaining a fair share. Therefore, it must remain somewhere in
the middle and be calibrated as it proceeds.
9:31:11 AM
MARK HANLEY, Public Affairs Manager, Alaska, Regional Public
Affairs, Anadarko Petroleum Corporation, opined that to the
extent that there might be minimal gold plating, "I don't think
anybody wants, as a state, to see that you can have more money
than it cost to put something in ... that does create an issue."
On the other hand, he said he suspected that one would have to
look very closely to find that. Furthermore, to get there would
mean that the tax rate would be so high that by the time there
is production "you're not getting anything." Mr. Hanley
expressed an interest in seeing the specific numbers and the
example as it's difficult to comment on something that he didn't
see.
9:32:50 AM
CO-CHAIR GATTO recalled that it was within a narrow range of oil
prices.
9:33:03 AM
MR. GEORGE clarified that the effect he described does occur at
high margins, not just high prices. Although the take increases
when sitting, there's also a very high margin. However, if
there was a situation in which there were high prices with low
margins, the take wouldn't be so high.
CO-CHAIR GATTO interjected that price isn't equal to margin.
MR. GEORGE confirmed that to be correct.
MR. HANLEY inquired as to the assumptions of such a scenario.
He related his assumption that the example would be one in which
the entity has existing production and is making an additional
investment.
MR. GEORGE said that the situation reviewed a spectrum. He
clarified that an entity with no production at all would receive
the tax credit as well as the net operating loss (NOL) credits.
The issues being discussed are those situations in which the
margins are high and those with the most impact to the margins
are those with a small amount of production that is high margin
production such that the capital expenditures are a high
proportion of the operating margin.
9:35:13 AM
REPRESENTATIVE FAIRCLOUGH opined that companies are investing
more than just the production coming through the line and the
costs. She requested that someone speak to the credits or
investments. She then related her understanding that companies
who are investing are obtaining the exploration credits as well
as some capital contributions, depending upon the location in
relation to an existing well. She inquired as to whether
companies are recouping under the escalation example presented
yesterday, "there are still expenses that are outside the realm
so that company has it's skin in the game."
9:36:32 AM
MS. DAVIS said that in terms of thinking about the credits and
the deductions allowed under this revision of the tax system,
it's easy for folks to review the numbers. In response to
queries regarding whether the state is giving away too much, Ms.
Davis says she asks herself whether she would purchase a
Cadillac after receiving a $100 gift certificate in the mail for
it. She further said that her response is that she wouldn't
purchase the Cadillac unless she was intending to do so prior to
the receipt of the gift certificate. In regard to the tax
system, Ms. Davis stated that gold plating is an area in which
the system is broken such that there are so many incentives that
have allowed credits to combine that the value of what is being
induced is not worth what was given to [induce investment]. To
find the balance between a mature field with infill drilling
versus bringing in new entrants and explorers, is a real
challenge, she opined. Where that line is cut may be different
under different circumstances, which is why there is a credit
specifically for exploration that is set at a level that's
perhaps different than a standard capital credit that would be
applied for mature fields. Therefore, each time credits or
inducements are given, the state must ask itself whether it's in
a position to receive more than what was given. The concern
with regard to gold plating is only in instances in which there
are inducements for "silly behavior". In terms of the chart and
where the state sits with regard to exploration activity, Ms.
Davis deferred to Mr. George.
9:39:10 AM
REPRESENTATIVE FAIRCLOUGH pointed out that BP, ExxonMobil
Corporation ("ExxonMobil"), and ConocoPhillips Alaska, Inc.
("ConocoPhillips") and explorers such as Anadarko Petroleum
Corporation ("Anadarko") and Pioneer have investments throughout
the state, some of which produce and others of which don't. In
a situation in which a company drills a dry hole, does it recoup
its costs under the system related by Mr. George, she asked.
MR. GEORGE stated that under the petroleum production profits
tax (PPT)an entity that has no income at all would, qualify for
22.5 percent and 20 percent on the NOLs. He related his
understanding that as proposed the aforementioned would increase
slightly. The companies would receive 20 or 40 percent
investment credits depending on the location of the exploration
well. With a 20 percent credit and a 25 percent base rate, they
would be operating on a 45 percent tax rebate.
MS. DAVIS pointed out that there is a difference between the
state being willing to share the cost in a failure outcome
[versus sharing the risk in a successful outcome]. She opined
that only sharing the cost in a successful outcome doesn't
induce much. Industry, she highlighted, is looking for some
mitigation of the risk on the down side. The aforementioned is
a completely different concept than gold plating in which the
state puts in money for which it may not get anything. "But,
what we did get out of it: we induced the behavior to go out,
search, and take risks," she said.
9:41:10 AM
REPRESENTATIVE EDGMON asked whether a cap is in order.
MS. DAVIS related that the administration sees that there is an
anomaly that occurs in the mid range. It comes down to a
balance, in terms of putting together the rates of investment,
what the state is trying to induce. The administration's
perspective is that it's willing to see what the will of the
body is because that balance of encouraging investment versus
the state's fair share provides benefits in both directions.
The administration hasn't taken a position on advocating a cap
at a specific level at this time.
CO-CHAIR JOHNSON posed a situation in which an oil company that
comes to Alaska, spends $5 million drilling a well. In such a
situation, he surmised that since there's no production and no
taxes, the state pays nothing because there's no revenue against
which the tax can be charged.
MS. DAVIS confirmed that the oil company wouldn't pay the
production tax, but by virtue of the activity if the company
invests, it has capital credit certificates that can be sold or
the state will purchase back in the following year. Therefore,
there's capital. The state's corporate income tax works on an
apportionment factor such that if the company also has
activities in other locations in the world, the state takes a
fraction in terms of how much infrastructure and laborers are in
the state. Therefore, a company could have no income and still
pay corporate income tax in Alaska, by virtue of the
aforementioned activity. However, the administration is still
incentivizing companies to stay and take the risk and induce the
company to do so by giving the company something even if the
worst happens.
CO-CHAIR JOHNSON surmised, then, that once a company enters, the
state will make money because there will be a benefit to the
state for that tax credit.
MS. DAVIS concurred.
9:44:22 AM
REPRESENTATIVE ROSES offered his understanding that the state
gets more than that. He recalled that some of the concerns
expressed by the explorers and the producers relates to the vast
amount of information the state would receive in the form of
core samples, seismic data, and drilling data that it wouldn't
have received had the well not been drilled. Therefore, the
question is whether the amount of money being given in a credit
is equal to what it would cost for another entity to gather the
information in another manner. He opined that the answer is
yes, otherwise the state wouldn't have developed a plan to
provide these credits.
9:45:10 AM
REPRESENTATIVE SEATON continued discussion on the example in
which an entity comes into the state with no revenue. He
related his understanding that an explorer could qualify for 30
or 40 percent tax credit on its investment for exploration. Any
losses, expenses above and beyond revenue, would be converted
into net operating loss credits, which can be sold or
transferred. Therefore, the expenses an [explorer] incurs come
as credits as well as the credits for capital expenses. He
indicated that [an explorer entering with no revenue] is in the
worst position while those receiving a higher benefit from the
state are those that have revenue. Those entities with revenue
at a high price and progressivity exists, depending on how
progressivity is structured. If it's on the net basis, the
company would receive the state proportion of that contribution
because they can subtract it from the oil taxes they would've
paid. Representative Seaton opined:
So, if we're at the level of margin where they're
paying max, then that's another 25 percent of their
costs that are paid by the state in the form of
decreased taxes paid from their other operations. So,
the explorers ... do not have that benefit .... If
you do progressivity on the net ... because they have
no progressivity because they don't have any credit
from that because they had no revenue. And so, there
is definitely a difference and ... the explorers are
definitely not treated as ... fairly as those with
revenue.
9:47:23 AM
REPRESENTATIVE FAIRCLOUGH requested hearing from the producers
and explorers regarding their position as to gold plating.
9:47:55 AM
CLAIRE FITZPATRICK, Commercial Senior Vice President, BP
Exploration (Alaska) Inc., related that from BP's perspective
the concept of the cap has the same effect as the floor. She
related her understanding that the over 100 percent concept
kicks in when there is a high margin, and therefore there are
high prices such that costs aren't necessarily at the point at
which one would equate a link to the high price. Therefore,
it's a spike scenario. She clarified that she's referring to
potentially low production in a theoretical situation in which
there are high margins and thus cash is being generated. As
pointed out by Ms. Davis, Ms. Fitzpatrick stated that she
doesn't make decisions based on a spike price but rather views
it over a variety of prices. She emphasized that years of
planning [go into these decisions]. Ms. Fitzpatrick opined:
If there is that scenario, and it's sustained, where
you have a period of higher margins. If there's money
available to do the investment, is that actually the
thing you're trying to stop? By putting a cap in
place, that is a scenario in the same way as the
floor. And you might, in fact, prevent the investment
you might be trying to encourage. But what I'm not
sure is I'm aware that it was presented ... very
clearly as this was a theoretical position, I have no
ideas as to when or how or if that would happen in
Alaska. And what is the level of investment that
would need to be happening for that to actually occur?
And I'm not sure whether that's, in fact, information
that might be relevant ... if it's ... in a scenario
where prices are staying at $90, $100, $120 costs are
staying at a $50 world and there's $60 billion of
investment going on. If we're in that scenario, I
think we're having a very different conversation.
KEVIN MITCHELL, Vice President, Finance & Administration,
ConocoPhillips Alaska, Inc., began by characterizing it as a
theoretical point. He acknowledged that there is a scenario
that can lead to very high credits. At the point when there is
the potential for the maximum state contribution toward those
investments, it's also the point at which the underlying tax the
state is collecting is at its highest because it's at the
highest margin and the progressivity has peaked out. The
aforementioned would be the best of times for everyone. Clearly
the industry has the benefit of the high margin and the state
has the benefit of the very high rates and the maxed out
progressivity. With regard to gold plating, Mr. Mitchell said
that he didn't see a scenario within his company in which
investment decisions would be made on the basis that there might
be a scenario under which the company could recoup more credit
than the initial outlay. Within any company, there's a natural
tension as the capital budgets are reviewed, debated, and set
that will prevent gold plating type activity. "It's not what we
do to invest capital because we think we might get additional
... tax credit back," he stated.
9:52:51 AM
REPRESENTATIVE SEATON surmised that Mr. Mitchell is saying that
at the high margins, the extra credit or deduction generated
isn't the driver of corporate decisions or the sanctioning of a
project or proceeding with a project.
MR. MITCHELL concurred.
REPRESENTATIVE FAIRCLOUGH questioned, "On that point, then, why
wouldn't we cap it?" She related her understanding from the
companies that the [credit] doesn't matter. However, some
members think it does matter because "we want to make sure that
there are additional holes punched in the ground, and other
things happening." Representative Fairclough opined that while
it doesn't drive that one particular decision in those high
prices, [the state is] trying to [consider the additional jobs,
wells, et cetera.]
MR. PORTER commented that he wasn't sure everyone was referring
to the same meaning of cap. He clarified that he assumes that
what is meant by the term cap is that the benefits are being
capped in order not to push the producers and the state over 100
percent. He directed attention to the chart, and pointed out
that over 100 percent is reached because of the 20 percent
credit. With regard to capping the capital to protect the state
in an environment with extremely high cash flow on a per barrel
basis, he explained that the aforementioned would likely be
addressed as one approaches taking 25 percent of the production
tax and 12.5 percent of the royalty and the percent of the base
tax. He opined that in a high environment, the situation could
be addressed by reducing the capital expenditures (capex) in the
top, in terms of capex credit.
9:56:44 AM
MR. PORTER turned to the notion that the state is taking 100
percent of the risk. He opined that the state is taking a
substantial amount of the cash in the beginning, and therefore
the companies are placed in a low margin area in which everyone
is making a lot of cash. He indicated that the effect of future
cash flow is that it will be shared. The aforementioned is
merely the production tax world. He reminded the committee that
[the state] still receives from the companies corporate income
tax, property tax, and royalty. Therefore, he said that the
state has a disproportionate portion of the take. The model
laid out by Gaffney Cline illustrates that from the net present
value (NPV) basis one can observe the relationship. If one were
to input the PPT into the model, the balance on a NPV basis is
fairly close. Mr. Porter pointed out that [the state] arrives
at 100 percent by taking a huge amount of the tax to begin with,
which can be prevented by dropping the capex credit in an
extremely high environment. He commented that it would be an
unusual world.
9:59:08 AM
REPRESENTATIVE FAIRCLOUGH opined that when the state invests
Alaskan's money in the form of a credit, the desire is to
benefit Alaskans. The aforementioned is achieved by encouraging
more production and more oil flowing into the pipeline. She
clarified that she wants discussion with regard to comments that
it's "a bad thing" to leave the progressivity at a gross at 50
because it doesn't reflect costs and encourage investment. She
related that the question is whether the gross floor is
appropriate and should be checked later or is the net more
nimble and flexible to create an investment that increases
production.
10:00:53 AM
DAN SECOURS (PH), ExxonMobil Corporation, offered that in
ExxonMobil's view, one must review Alaska's past and what it
wants in the future. He said that although gross taxes can
work, it as well as the progressivity trigger on gross are
problematic because both don't tax economic reality. He pointed
out that in such a situation the costs and investment risks
aren't taken into consideration as the hypothetical profit that
may or may not be present is being taxed. Therefore, the
aforementioned can lead to problems of investment and concerns
with regard to "shutting in and not making those investments."
From the perspective of a very high tax, which the state already
has and is now considering increasing, going on the gross
compounds the problem, he opined. As was indicated earlier,
companies continue to pay royalty, property, and income taxes.
He emphasized the need to [know the] underlying impact on
current investment. He suggested that from his perspective, one
must question what's in the best long-term interest for Alaska
to help stem the decline.
10:03:09 AM
CO-CHAIR GATTO inquired as to what's in the long-term best
interest of the state.
10:03:29 AM
MR. PORTER suggested breaking down the tax into impacts to
Prudhoe Bay, Kuparuk River Unit, satellite fields, and
explorers, especially as it relates to the cap. He reminded the
committee that the net tax is on a dollar per barrel basis. For
example, if in Prudhoe Bay and Kuparuk River Unit one receives
$100 worth of cash flow per barrel, the capital can't even be
spent to reach the point of 100 percent because the actual total
capital that would have to be spent far exceeds the
capabilities. The only way to reach 100 percent is if a field
reaches the end of its useful life. There are some things that
might occur on a marginal basis that could maybe create a
situation in which capital spending exceeds the relationship on
a per barrel basis. Mr. Porter opined that it's possible to
reach the disproportionate relationship and perhaps in the small
world that's desirable in the short term because it will be paid
for since the state would give the company the capital benefit
on the front-end while the state will pickup the tax on the
backend. The value to the state in terms of jobs and revenue,
"roughly works in that environment," he opined.
10:05:34 AM
MR. HANLEY indicated that Anadarko fits the scenario of a small
producer. He said that if Anadarko is successful in a large
field in which it's the operator, the taxes could be reduced to
zero from Alpine. If Anadarko were the operator of another
multi-billion development to bring another Alpine field online,
the credits in a normal world environment would likely result in
Anadarko not paying taxes, he explained. However, the company
can't reduce the tax below zero and a 12.5 percent royalty would
still be paid and thus the state would continue to receive money
from that as well as some property taxes. Mr. Hanley opined
that the aforementioned is what he believes the state wants for
a very short term, in terms of NPV, because Anadarko would
hopefully develop the sites that would result in production. At
the time of production there would be a higher tax rate and the
credits will have already been used such that the state would
receive a much larger net margin. He highlighted the long lead
times for development and the cost to develop projects, which is
why [Anadarko] has pitched the net profit system in which the
state offers help on the front-end, thus allowing a company to
afford to pay more on the backend. The aforementioned is
exactly what this system does, he pointed out.
10:10:05 AM
REPRESENTATIVE ROSES noted his agreement that a company may
reduce its production taxes to zero, but that's the tradeoff the
state is making so that the company can bring on more oil to
fill the pipe. The aforementioned is exactly why the credits
were included. However, he expressed concern with the model
being presented as factual as it's a theoretical snapshot in
time in a particular scenario. The legislature must review
everything on the North Slope in totality.
10:13:46 AM
CO-CHAIR GATTO explained that in the past the term production
tax meant that a resource that is irreplaceable is being
depleted. "One way or another we have to convert a nonrenewable
resource into an renewable resource, and that's why we have a
permanent fund," he said. Therefore, whatever production tax
the state has must be useful for the purpose of [the permanent
fund].
10:15:55 AM
REPRESENTATIVE WILSON, returning to Representative Roses'
comments, pointed out that each of the graphs and charts were
merely a snapshot in time and weren't complete pictures since
they didn't have all the parts of the equation.
10:17:19 AM
REPRESENTATIVE FAIRCLOUGH said she supports the administration's
efforts to obtain information regarding costs that are real and
the ability for auditors to review those. However, she said she
is uncertain regarding how that information will be kept
confidential, although she noted that there has been mention of
regulations. Therefore, she inquired as to how the
administration will ensure the aforementioned. She requested
discussion regarding the six-year audit, the transparency of the
information, and confidentiality between the exchange of
information.
10:19:03 AM
MS. DAVIS relayed that the problem with regulations are that
they are intended to be a control by the state of third parties.
Essentially, the protocols and rules adopted within the agency
will manage the information, as is the case now. The department
will manage where the information is located, how it's locked
up, how the department maintains complete awareness of who looks
at it and when, and ensure that whomever that information is
shared with maintains the same degree of control and procedures
as the department. She maintained that the department takes
this seriously and would seek assurance that the department's
controls are imposed wherever the information goes.
REPRESENTATIVE FAIRCLOUGH maintained that she is still uncertain
that confidentiality can be maintained, and referred to a recent
incident wherein it wasn't. She expressed interest in obtaining
[documentation] "to hold this administration's feet to the fire
in regards to information that ... will be new to the department
in a sharing manner." Representative Fairclough emphasized that
those working for the state are extremely dedicated and trying
to do the right thing. She commented that she has confidence
that they can do the right thing, but she expressed interest in
seeing a chain of custody with regard to information that will
pass from one department to another.
MS. DAVIS offered to provide written information regarding the
state's protocols with regard to confidential taxpayer
information and the initial impressions as to how the department
contemplates managing the additional information received due to
HB 2001. She noted that the initial impressions would have to
evolve and improve.
REPRESENTATIVE FAIRCLOUGH stated that she supports the
administration's need for the information and need to exchange
it. However, she expressed the need to have this point
addressed before the legislation reaches the House floor.
MS. DAVIS informed the committee that the administration has
been advised of concern regarding prior instances of disclosure
of confidential information by one of the producers. The
details of those instances have been requested in order to
improve protocols.
10:23:56 AM
REPRESENTATIVE FAIRCLOUGH expressed the need to have an
appropriate penalty for breaches of confidential information.
MS. DAVIS reminded the committee that a breach of confidential
information is a felony. However, because it's a felony
embodied within DOR's statutes, as opposed to the criminal law
statutes, it doesn't bear the designation of a class C. The
administration feels the aforementioned penalty is a significant
penalty.
CO-CHAIR JOHNSON said that he isn't comfortable with
confidentiality rules being in regulation. To that end, he
announced that he has an amendment being drafted to address
confidentiality in statute. He offered to provide the amendment
to the administration in order for it to review it and offer
comments.
10:26:33 AM
MR. SECOURS said that ExxonMobil also shares some of
Representative Fairclough's concerns with regard to information,
statute of limitations, confidentiality, et cetera. With
respect to the administration's proposal to extend the statute
of limitations to six years, he questioned why it is being
changed now. He emphasized that an audit under the PPT hasn't
even been started. Part of the foundation of the PPT was to
simplify the audit process by, for example, using the joint
interest billings. With regard to comments that the joint
interest billings is something that companies can game the
system on, he assured the committee that isn't the case. He
emphasized that ExxonMobil won't pay others any more than it has
to; there's no incentive to do so. The joint interest billings
are audited over 100 staff weeks every year. For the department
to perform its own audits is a waste of the department's
resources as well as a company's. The statute of limitations
has worked in the past and companies have generally given
extensions when it's necessary. Mr. Secours emphasized that it
makes no sense to extend it to six years, and furthermore it
places a burden on the companies.
MR. SECOURS turned to information sharing. As was indicated by
Mr. Haymes, [ExxonMobil] met with DOR months ago and said it
would be willing to share information and would like to help the
process. However, there have to be some safeguards. He pointed
out that the proposed law includes a provision in which the DOR
auditor can ask any explorer or producer every month for any
document it deems necessary. He inquired as to how compliance
would occur since every month could be different. Mr. Secours
noted his agreement with Co-Chair Johnson that the statute
should [specify] clear standards with regard compliance. He
then turned to the proposed penalties related to compliance. He
highlighted the penalty of $1,000 a day for every document or
report requested [not received]. For example, what if the
department requested 50 items, 48 of which the company
[provides] and 2 it believes to be duplicative and covered by
one of the 48 items. The company submits the 48 items and
relates that it believes the other 2 are covered. After six
months, the department reviews the information and says that the
2 aren't covered within the 48. If those two items are five
pages, that amounts to $5,000 a day for six months, which sums
almost $1 million. He questioned whether that makes sense or is
fair. He emphasized that the [proposed law] doesn't provide any
closure or guidelines as it will be left to the department's
regulations.
MR. SECOURS then addressed [AS 43.55.890], which specifies that
the department, regardless of propriety, will disclose tax
information so long as it's aggregated with at least three
taxpayers. He questioned which three taxpayers will be
aggregated. Furthermore, it's not that difficult to distill the
information and determine the taxpayers, which raises the
question of confidentiality. Mr. Secours questioned why the
information is aggregated with only three taxpayers rather than
all taxpayers. He indicated that there could be questions as to
whether this provision violates federal law. "We can't give
information to our competitors, yet if they can discern it from
that information the department releases; is that wrong," he
asked. He further asked why that information is necessary,
pointing out that there are no guarantees.
CO-CHAIR GATTO acknowledged that there are no guarantees, but
noted his disagreement that there are no safeguards. He
recalled Mr. Iversen's testimony regarding the three-taxpayer
scenario whereby the information of ExxonMobil and two of the
smallest companies were aggregated, everyone could tell much
about ExxonMobil. However, there has been a history of
information that hasn't been forthcoming in a reasonable manner.
Co-Chair Gatto said he didn't believe that when the department
performs an audit that it disregards everything submitted and
does its own.
10:33:27 AM
MR. PORTER, referring to taxpayer confidentiality and the
possibility of combining any taxpayers, opined that detailed
taxpayer information can be extrapolated from that. Every other
taxpayer in the state enjoys umbrella protection in which there
is a prohibition regarding revealing a specific amount of data
that has the potential of revealing individual taxpayer
information. The aforementioned should be included in the
proposed law.
CO-CHAIR GATTO said he agrees that's a good idea. He
acknowledged that there will be breaches and the hope is to
minimize them. Furthermore, the hope is that if there is a
breach to find those responsible, take care of it, and make up
for it. He then recalled that more time is beneficial because
limiting the time to the existing three years will result in not
receiving information about some issues. He opined that it's
not the department's intent to defraud or gain an advantage,
rather it's a reasonable request. Therefore, until there is
evidence of abuse that will continue, Co-Chair Gatto surmised
that he will likely remain in favor of the extension.
MR. PORTER recalled his time in a position that received reports
regarding whether companies were current with tax evaluations
and audits. The three-year timeframe provides a balance such
that the agency ensures it has enough staff to perform the
audits timely. Moving that to six years, extends the amount of
time auditors have to get to [the audits]. He indicated that an
extension of the statute of limitations will delay the process.
With the three-year timeframe, there is a polite negotiation
between the industry and the department in which the department
requests an extension and everyone voluntarily agrees to do so.
If the industry isn't amenable to an extension, the agency will
protect itself and assign a high audit number. He opined that
everyone understands that there is a benefit to extending some
of these deadlines. Mr. Porter said that one of the main
reasons he likes the three years over an extension to six years
is because it maintains the pressure on the agency to perform
the audits in a timely fashion.
10:39:31 AM
REPRESENTATIVE FAIRCLOUGH said that she understands the
administration's position on the matter of the proposed six-year
extension. She then noted her agreement that there is a
timeframe in which there is a pressure point that encourages the
work be completed.
10:40:45 AM
RICH RUGGIERO, Gaffney, Cline & Associates, reminded the
committee at a [House Special Committee on Oil and Gas meeting
Gaffney, Cline & Associates] presented a document regarding data
submission. That document identified that the type of
information DOR is trying to obtain is provided regardless of
the U.S. Securities Exchange Commission (SEC) and anti-trust
concerns. He specified that the information is being provided
in other venues by the very companies that have spoken today
because they are required to do so. He noted that he has
suggested that if there was more time, the legislation shouldn't
be written to provide the information to DOR because the oil
companies will say that all information given to DOR is taxpayer
information. The aforementioned will be problematic, he opined.
He then informed the committee that forecast data isn't taxpayer
information, although it comes from a taxpayer. The type of
data being requested normally goes to energy ministries or other
commercial entities established to help manage and steward a
country's resources. Therefore, he suggested that members be
cognizant of what is truly taxpayer, tax return, information
versus information that has to come from a taxpayer.
10:42:40 AM
MR. SECOURS clarified, "I don't disagree with what he just said,
in some respects." He confirmed that the information DOR is
requesting from tax returns is being given. However, the
concern is in regard to publication of that information, which
under the new law is allowed. The concern, he reiterated, is
that it wouldn't be difficult to take apart aggregated taxpayer
information and determine who is who. He reiterated the earlier
question as to why the information is aggregated only between
three taxpayers. The taxpayer protected information needs to be
protected.
10:43:58 AM
MS. DAVIS pointed out that the language refers to aggregating
the information with no fewer than three taxpayers. She
acknowledged that notwithstanding any statute passed by the
legislature, the provision is governed by the constitutional
laws regarding privacy. Additionally, there are federal laws
that would preempt state law, such as those addressing
trademarks. Ms. Davis noted her agreement with Mr. Porter's
comment that the existing language [should include] a proviso
that the information can't be deconstructed. The administration
doesn't intend to put out information that's readily
"deconstructable" as it understands the other legal constraints
in play.
10:45:21 AM
REPRESENTATIVE WILSON asked whether Mr. Secours really believes
the department will aggregate information from a large company
with two smaller companies.
MR. SECOURS stated that he doesn't know what the intent is, only
what the proposed statute says. The concern is that some of the
information may already be published by other companies in other
venues. Again, he opined that it won't be difficult to
deconstruct the information. Furthermore, this information
includes contract information, sales price data, which is data
that the company can't disclose. He reiterated that he doesn't
know what the department will do nor the necessity for this
provision. He reiterated his earlier question as to why
aggregating taxpayer information from three taxpayers was chosen
versus aggregating all taxpayer information.
10:47:52 AM
MS. DAVIS, in response to Representative Wilson, clarified that
the department's intention with this provision is to ensure the
Alaska public can see how the money is flowing. The intent was
to be able to aggregate information so as to ensure that the
incentives the state is giving to explorers are working as
intended, that the incentives being given to mature fields are
or aren't encouraging reinvestment, and illustrate how it's
impacting the decline. The aggregation is to look at units
without targeting in an attempt to display something about a
taxpayer. This is about classes of development to ensure
Alaskans that the balance struck by the legislature is working
and if not, there's the opportunity to ask questions of the
legislature.
10:50:51 AM
MR. PORTER opined that it's important to review the current law
in the context of the proposed law. The current law allows DOR
to publish any statistical information so long as individual
taxpayer information isn't revealed. Therefore, he questioned
why it would be necessary to combine and reveal the tax
information of three taxpayers unless the intent is to reveal
individual taxpayer information, which he didn't believe to be
the intent. Mr. Porter said that the aforementioned can already
be done so long as individual taxpayer information isn't
revealed. The provision isn't necessary because the standard
umbrella covers it.
MS. DAVIS specified that one of the reasons the administration
wanted to set it out specifically is that the current law
regarding statistical information is fairly oblique.
Historically, statistical information has been "rolled up", that
is in gross production and gross taxes paid. As the department
has asked for information that it hasn't requested in such
detail in the past, the companies are shocked. Ms. Davis
likened the situation to growing pains. For instance, there
have been challenges against providing information due to SEC
concerns or that the state, since it markets its royalty oil,
could be a competitor. Hopefully, that can be worked out.
Since there has been resistance, the legislation was made very
explicit in mandating the types of information required on an
annual basis and on a monthly basis. Ms. Davis emphasized that
[the administration] wants to make it clear to the Alaskan
public that the information will be more detailed than what was
received historically. Furthermore, this explicit statement in
the legislation is necessary for staff.
10:56:28 AM
CO-CHAIR JOHNSON inquired as to why not obtain the information
from all [the companies] and provide it to the public so that it
can't be extrapolated out for individual companies.
MS. DAVIS related that some of the newer countries are opening
up this information from the beginning. The challenge for
Alaska is that the state can't change the U.S. Constitution and
trademark laws, and therefore there will be constraints with
regard to what can be shared.
CO-CHAIR JOHNSON specified that he is inquiring as to why the
state doesn't aggregate [all the companies] completely.
MS. DAVIS said that the challenge is that the incentives are
different for explorers versus mature fields. Furthermore,
they're different on the North Slope versus the Cook Inlet.
Once the information [from the various situations] is rolled
together, it's relatively meaningless statistics.
REPRESENTATIVE SEATON returned to the matter of the statute of
limitations. He related his understanding that industry wants
the state to maintain that the basis for audits will be the
audited joint billing statements. Therefore, he inquired as to
how soon after [DOR] receives the joint billing statements are
they audited and available to the state. He further inquired as
to whether additional time is included in the auditing process
if the industry wants to use the joint billing statements as the
basis for starting state audits.
10:59:52 AM
MR. SECOURS said he isn't certain what timeline that would be.
He informed the committee that the joint interest billings are
audited as soon as they are received. If there is a situation
in which there is a time lag and there are adjustments, those
adjustments would be to decrease costs. Therefore, any
adjustment would flow through to the return through an amended
return or through the current period, depending upon how it's
structured. Mr. Secours acknowledged the concern of the state,
but emphasized that these [joint interest billings] are the only
costs that a non-operator see. Therefore, it doesn't make sense
for the state to not review those at the beginning because those
are the charges the parties have agreed to pay. Mr. Secours
opined that it doesn't make sense for the state to completely
ignore [these joint interest billings], although CSHB 2001(O&G)
basically does just that. The legislation deletes AS
[43.55].165(c)(d). Although those provisions aren't mandatory,
it provides the department the option to review joint interest
billings. He questioned what it [means] when the legislature
takes away the specific authority to use joint interest
billings.
11:01:45 AM
REPRESENTATIVE SEATON inquired as to how soon after the initial
filing to the state in March are the audited joint billing
statements available.
11:03:28 AM
BERNARD HAJNY, Manager, Production Tax & Royalty, BP, stated
that BP's perspective regarding the proposed audit extension
provision is similar to that of Mr. Secours. With regard to
joint interest billing audits, he related his understanding that
those joint billing audits begin almost immediately after the
cycle ends. He noted his agreement with Mr. Secours in that the
idea is that as those [audits] occur, post true up revisions
would be filed. He explained that BP filed its return on March
31, 2007, and at that time the company is relying on many of the
partnership returns from Prudhoe Bay and Kuparuk. At that time
those partnership returns aren't necessarily completed as they
aren't filed until September or October of this year.
Therefore, BP files on the basis of a draft tax trial balance
and those will be reviewed again and the company will re-file
its tax return for 2006 in the near term. Within that return,
interest will be included if it's a deduction that shouldn't
have been taken or there was a change in capital to operating
expense. To the extent that same thing occurs within a joint
interest audit, that will also be re-filed because there is no
desire to allow interest to continue to accrue on something that
might be found in an audit.
MR. HAJNY returned to the proposal to extend three to six years.
He explained that currently for the production tax there is a
three-year period to audit. In some of the other tax and
royalty areas there is a six-year provision. Traditionally, DOR
has been very good regarding keeping the audits up to date. To
the extent DOR isn't able to do so, the department requests an
extension that BP has traditionally given. In areas where there
is a six-year provision, the historic experience is that "we're
six and seven years back." With regard to aggregation of
information that will be published, Mr. Hajny said that BP has
the same concerns as Mr. Secours, specifically in regard to the
publication of the information. Although it may not be the
intent to determine which taxpayer's information it is, there
have been situations in which people have been able to glean
that it's BP's information. Additionally, information could be
published from which one could determine what information is
about Prudhoe Bay versus Kuparuk and the specific economic
standpoint within each unit.
11:09:00 AM
MR. HAJNY, in response to Co-Chair Gatto, said that he would
hope that the Tax Division tries to put themselves in the shoes
of a company prior to publishing information. He said that in
working with most of the staff within DOR, he believes that they
try to think it through before publishing information.
REPRESENTATIVE GUTTENBERG said that he hopes that in 30 years
people will look back and say this is the point at which the
state placed itself in a competitive relationship with the
industry. He mentioned that many of the consultants that have
been present recently have been amazed with regard to how little
information the state has regarding the behavior of the oil
patch. He then pointed out that there are many records from
which the public and industry can glean information that helps
them understand a competitor. In order for the [legislature] to
do the best job it can for the state, it must understand the
behavior of the industry. He said that of course, he expects
for there to be pushback from the industry.
11:11:43 AM
REPRESENTATIVE ROSES offered his understanding that Ms. Davis
has said that in order to aggregate this information, the
different sections must be separated in order to analyze. He
expressed hope that the administration isn't picking one region
to determine if what is being done today is the right model.
MS. DAVIS noted her agreement that one can't pick only one
sector to determine whether the plan is a failure or success.
She highlighted that when the goal is to incentivize
exploration, it's about the rocks. Therefore, despite the best
intentions and efforts to incentive exploration, the results
hoped for may not occur, which is simply the reality, she
opined. Clearly, the entire package must be reviewed to judge
overall success and acknowledge that any element may fail simply
due to bad rocks.
REPRESENTATIVE ROSES emphasized the need to view this proposal
in its totality rather than merely a snapshot at one time and
price.
11:14:17 AM
MS. DAVIS, noting that she is mindful of the value of the unit
accounting processes and how rigorously ExxonMobil would review
its operator billings, inquired as to the length of time that
ExxonMobil would have to challenge the audited items in a unit
process.
MR. HAJNY said that he wasn't sure whether there is specific
time or limit in which those can be challenged.
MS. DAVIS related her understanding that the length of time is
six years, which was a driving factor for the administration.
She then reviewed the timeline in which there is a March filing
with the state and then once the federal filing is complete, say
in November or December, an updated or restated state filing is
necessary. The aforementioned is approximately 9-10 months past
when the state's statute would begin to run in March. The
concern is that if there are remaining issues that an operator
has to deal with from owners, those can potentially be debated
for six years. Therefore, the state would still be waiting for
finalized or revised information. There is a level of
uncertainty at the unit level with the debate among owners that
affect what the filing is for the state. She then highlighted
that when the state requests an extension of the statute of
limitations, the company has the legal right to refuse to do so.
Therefore, to the extent the state can't count on receiving an
extension, the state has to perform a "blue sky audit." She
said that she doesn't like to be in the position of performing a
blue sky audit because it forces the state into an aggressive
hostile mode in which it has to over reach and challenge the
company with something from which it has to chisel back. Ms.
Davis said, "While I appreciate the desire to put the hammer on
the department to say, 'Here's your three years ... make or
break.' I also have heard ... this body say, 'For gosh sakes
don't come to us and ask us for any more help in hiring
auditors.'" Furthermore, there is also the complaint that
government is too large with the request for double the amount
of auditors.
11:18:26 AM
MR. RUGGIERO said he is surprised that the company
representatives don't know the terms of the joint operating
agreement (JOA) as it specifies the length of time a non-
operator would have to challenge the actions of the operator.
The JOA would also specify the date by which the operator has to
supply and/or respond to requests or inquiries.
REPRESENTATIVE FAIRCLOUGH asked whether the other regimes
publicize information [similar to what ACES requests] to the
general public.
MR. RUGGIERO informed the committee that the previous committee
was provided with a memorandum that reviewed a number of other
countries, with extensive detail provided mainly for the
European countries, which are very democratic-like in terms of
operations. Although Mr. Ruggiero agreed that price data
shouldn't be discussed, he questioned why production is
considered confidential taxpayer information. He then inquired
as to where the confidential nature of the capex and the
operating expenditures (opex) are when it's aggregated since the
state is participating through the deductions and tax breaks.
He indicated that the capex and opex can be obtained in many
other countries. Mr. Ruggiero highlighted that the country of
East Timor has signed the World Bank's transparency initiative.
If that were adopted in Alaska, the lease agreements and all of
its terms would be made public. Furthermore, sales agreements,
except for pricing information, would be made public as would
returns and total tax paid by individual. The World Bank is
really pushing such transparency initiatives, he remarked. Mr.
Ruggiero said that he remains aghast at the lack of data in
Alaska. He characterized the comments [from company
representatives] today to be a lot of rhetoric on the principle
taxpayer information. However, no one wants to have the tax
form made public. He suggested the need to review the
information being required and then make the call regarding what
is truly taxpayer information that should remain confidential
and what is merely operating information that is provided
elsewhere around the world.
11:22:42 AM
REPRESENTATIVE FAIRCLOUGH clarified that she merely wants to
know whether the information Alaska is requesting is published
in a similar manner as in other regimes.
MR. RUGGIERO replied yes.
MR. HAJNY, referring to the statute of limitations, pointed out
that when a re-filing occurs, the statute of limitations is
reset. To the extent that's necessary, then the department
would have additional time.
CO-CHAIR GATTO said he understood that the clock is reset when
an amended return is filed. However, he said he wasn't sure it
was reset when there is merely a number change of something that
is insignificant.
MR. HAJNY read the following portion of AS 43.05.260:
Sec. 43.05.260. Limitation on assessment.
(a) Except as provided in (c) of this section and
AS 43.20.200(b), the amount of a tax imposed by this
title must be assessed within three years after the
return was filed, whether or not a return was filed on
or after the date prescribed by law.
MR. HAJNY related that he would interpret the aforementioned to
include amended returns.
11:25:23 AM
CO-CHAIR JOHNSON offered his belief that the legislature is
present because there was a revenue shortfall, which he
attributed to expenses. He asked from where did those expenses
come. If those expenses are due to too many Alaskans being
hired, or too many wells being drilled, or too much capital
being invested, he said he may question why the legislature is
in session. He asked if this is a situation in which the state
shouldn't spend or develop any more or hire any more Alaskans
because the state will simply raise taxes if there continues to
be a revenue shortfall. He requested that the administration
comment on the aforementioned. He then asked [oil industry
representatives] to comment on what such a situation means in
terms of investment [in Alaska's oil].
11:28:28 AM
MS. DAVIS offered that Co-Chair Johnson's question highlights
how critical it is for DOR to obtain the information it is
requesting. She pointed out that a revenue shortfall doesn't
occur unless the forecast is wrong. Therefore, the better
information and cooperation from the industry, the more accurate
the department's updates are. In terms of whether that would
change the behavior of the companies, testimony from the
companies have related that investments are reviewed in terms of
the NPV and an investment choice is made with a long lead time.
Therefore, whether the state experiences a revenue shortfall
probably won't change the behavior of the companies, she opined.
In further response to Co-Chair Johnson, Ms. Davis said the
department's ability to specify from where the shortfall came
will depend on the department's ability to review the PPT
expenses as well as the companies' records for opex and capex.
She noted that the department is taking some measures to perform
some spot audits on PPT and two large operators have been
cooperative on that matter. She emphasized that the department
has limited resources, in terms of auditors, to get at the
answer to why there was a revenue shortfall.
CO-CHAIR JOHNSON said he knows the department doesn't have the
information. He questioned why the administration is proposing
fixing a system that may or may not be broken. Furthermore, if
it is broken, there's no knowledge as to why.
11:32:22 AM
MS. DAVIS pointed out that the department has as much
information as it did when this body met to debate PPT. In
fact, it has more information this time. The governor wanted to
have this special session, if for nothing else, to restore the
public trust, even if that means the legislature says that the
right thing is already in place. In response to why the
legislature is here today, Ms. Davis relayed that the governor
felt it was important for the public to see the legislature
either reaffirm the PPT [or make changes to it].
11:33:55 AM
CO-CHAIR GATTO pointed out that the state is dealing with all
the companies and a small staff and needs specific information
that companies may or may not want to reveal. In order for the
state to determine why there was a revenue shortfall, DOR must
obtain audited information, he opined.
11:36:30 AM
CO-CHAIR JOHNSON suggested that Co-Chair Gatto made his point,
that the legislature doesn't have the information to make these
decisions. He related his understanding that the revenue
shortfalls were based on expenses, which are jobs. He opined
that last year the legislature knew there would be problems,
which is why they included the 2011 revisit of the PPT. Co-
Chair Johnson stressed that he wants more information before he
tweaks the tax rate. He further stressed that if a dollar is
taken from someone, it's a dollar that he/she can't invest.
There are two ways to generate revenue: taxes and the economy,
he opined. He remarked that he's not willing to gamble his
children's future based on snapshots. He reiterated his earlier
statement regarding the need for more information.
11:39:18 AM
REPRESENTATIVE GUTTENBERG surmised that if the state was a
company that just negotiated a deal and suddenly its corporate
officers were sent to jail and the stocks plummeted, the
shareholders would come calling and suggest reviewing the deal.
He acknowledged that the numbers can be read in various ways.
He then said that the state is at a disadvantage from the
corporate world because of transparency. He commented that the
state as a sovereign needs to be able to do the business of the
state. Representative Guttenberg predicted that whatever tax
policy is adopted, the legislature will be back next year
tweaking it.
11:43:03 AM
REPRESENTATIVE WILSON recalled a comment that the goal last year
with the PPT was to raise so much money. However, she stressed
that wasn't her goal. She opined that the PPT was developed to
ensure that Alaska received its fair share of oil revenues as
the price of oil rises. Although there may not be any proof at
this point that anything is broken, the state has the
responsibility to review the tax.
REPRESENTATIVE ROSES, referring to Representative Guttenberg's
example of the state as a corporation, pointed out that the
state is the only entity that's able to renegotiate a contract
that it has already negotiated. That places the producers at a
disadvantage. Furthermore, this isn't a renegotiation but
rather is imposed on the producers.
11:48:09 AM
MR. RUGGIERO pointed out that the state doesn't have all the
information. Many have spoken about models, which is how this
industry evaluates its business. Furthermore, there has been
much use of snapshots, which is all DOR can do since it doesn't
have information. With regard to hypothetical situations, Mr.
Ruggiero clarified that the model being used is not hypothetical
and is based on the data [the oil industry] provided to the
state. Moreover, the model isn't a snapshot and is a full cash
flow model that runs a full 11 or 12 years. The model, he
emphasized, contains all the pieces of the tax and is very
nearly the type of model [the oil companies] would have. The
only shortcoming on that model is that it's limited to the
infill drilling or the drilling enhancement within the legacy
fields. The state then [under the model] begins to have the
perfect knowledge and real information. Now, the legislature
must do something with the information that's been presented to
it. Mr. Ruggiero suggested that as the committee deliberates,
it should think of placing the state in the position of being
able to negotiate when necessary or legislate when necessary and
doing so from a position of knowledge.
11:51:51 AM
REPRESENTATIVE EDGMON surmised that with ACES the state is
looking at incremental change not wholesale change as perhaps
has occurred during a complete change in political regime that
lead to a tripling of the tax. He requested that Mr. Ruggiero
provide the global perspective to the situation.
MR. RUGGIERO acknowledged that there has been much discussion
regarding benchmarking, which is a snapshot of where Alaska is
compared to other countries. He noted that when one compares
Alaska to other regimes, it can't be done by merely picking a
single item in a fiscal package. Overall, on a marginal take
basis, Alaska is below the world average. Although Alaska is
more expensive, Alaska has the rock. Drawing from his
negotiation skills, Mr. Ruggiero related that if the state goes
into negotiations only understanding the state's position and
what the state needs, the state may achieve it fairly quickly
and walk away happy. However, to be fair to Alaskans, the
position of all parties must be known as well. The
aforementioned is what this session is addressing. He recalled
that the last session on this issue was one in which what the
state needed was addressed without really reviewing the needs of
the companies. Therefore, this session the legislature is faced
with making the decision as to what is a fair share to the state
as well as the companies. Mr. Ruggiero noted that much is
changing outside of Alaska's control, such as the federal
government recently announcing increased royalties in the Gulf
of Mexico. He then remarked that the high take only comes when
[the oil companies] are making lots. He emphasized that $100
margin per barrel, after opex, capex, shipping costs, et cetera
is a significantly large number and it's prudent, he opined, for
the legislature to increase progressivity to take more at the
higher margin.
11:56:56 AM
REPRESENTATIVE EDGMON asked if what this proposal proposes is
more drastic than what occurred in Alberta.
MR. RUGGIERO said, "That becomes a tough one because if I
increase something from 7 to 14, it's 100 percent increase. If
I increase something from 68 to 69 percent, ... it's only a 3.2
percent increase."
11:57:37 AM
CO-CHAIR JOHNSON posed a scenario in which an entity wants to
buy an [oil] company such as BP and Gaffney, Cline and
Associates, Inc. is hired to consult. Will the model being
presented today by GCA be utilized in the aforementioned
scenario, he asked.
MR. RUGGIERO answered that a much more extensive model would be
used than what legislature began with because when buying a
company one must review the totality of the company's assets.
CO-CHAIR JOHNSON specified that in his scenario the entity is
buying the North Slope assets, and again asked if Mr. Ruggiero
would use the same model as presented today.
MR. RUGGIERO specified that he wouldn't use that model for such
a purchase because it isn't a model of the North Slope assets.
The model being used is a model of the infill drilling program,
an incremental model on top of the base. The aforementioned is
important, he opined, because the Alaska Oil and Gas Association
(AOGA), which said it has 100 percent consensus of all the
companies, has said that 70 percent of the near-term and medium-
term future of Alaska is in the infill drilling program. He
clarified that he understood AOGA to say that 70 percent of the
future was additional oil coming out of the legacy fields.
MS. FITZPATRICK said that she said that 70 percent of the
Department of Natural Resources' (DNR) production profile for
the next 20 years will come from Prudhoe Bay and Kuparuk. Ms.
Fitzpatrick emphasized that she didn't say that it would be from
"infield" drilling. That "infield" model does illustrate the
investment decisions BP made in the world of $20 [per barrel of
oil], which are still producing at $80 [per barrel of oil] and
are making more money for both the company and the state.
CO-CHAIR GATTO pointed out that Mr. Ruggiero was referring to a
statement made by AOGA, which provided the committee with a
booklet that the companies certified, authorized, and endorsed.
MS. FITZPATRICK said that she would review AOGA's testimony.
She then opined that the model is based off a slide that was
presented in BP's presentation. Ms. Fitzpatrick said, "I think
Mr. Ruggiero ... is correctly making sure that people understand
it is one portion, it is not what is 70 percent of the future."
12:02:18 PM
The committee took an at-ease from 12:02 p.m. to 12:28 p.m.
12:28:22 PM
MS. DAVIS clarified that she didn't want the public to have a
misimpression regarding the operating agreements, the complexity
around the accounting provisions, and the details. Each unit
has it's own set of rules and thus vary and differ from field to
field. The administration, she related, doesn't believe that
any [of the companies present] would know something and not
present it. She related her understanding that the operators
will provide a very clear statement unit-by-unit in regard to
the time period for audits.
12:30:10 PM
MR. MITCHELL, referring to the audit timing, offered his
understanding that Prudhoe Bay is a three-year window and
Kuparuk and Colville River are two-year windows. Historically,
to the extent that there are outstanding items from the joint
interest audits, DOR can also hold open [the audits] for those
areas. With regard to the topic of statute of limitations, the
primary concern of the industry is in regard to allowing for
extra time as it's taken. For example, typically audits are
completed in year three of the three-year window. He stated
that it's to everyone's benefit for the audits to be completed
in as timely a fashion as possible.
MR. SECOURS pointed out that there can be extensions after the
six years. He then related his belief that due to human nature
if six years is the timeframe, that's likely how long it will
take. With regard to the comments that the oil industry isn't
providing information to the department, he questioned what
information isn't being provided because already the companies
are providing their tax returns, which include all the costs,
deductible costs, capex, and opex. "We've always said we would
be willing to help them understand and forecast. So, if they're
looking for forward-looking data, absolutely, as long as they're
safeguards and reasonableness to it, we'd all be willing to give
it to them," he said. Mr. Secours clarified, "We give them
everything they've asked for."
CO-CHAIR GATTO remarked that it must take an enormous amount of
time to audit a tax return from an oil company. Still, the
state would need to acquire information for forecasts. Whatever
data is needed for a forecast is unknown because it's impossible
to accurately forecast. Therefore, it's hard to get enough
information for forecasting.
12:33:43 PM
MS. DAVIS informed the committee that the department was
unsuccessful in obtaining forecast information it sought from
the key players. She said she understood that the individuals
with the information have a duty and obligation to the owners
they represent, and therefore have a legal obligation to not
release that information unless it's legally required to do so.
Therefore, by setting a legal standard requiring that
information be provided to the state within certain boundaries,
it provides license for the individuals holding the information
to share it and do so without violating their duties or
obligations to their owners.
MS. DAVIS, in response to Co-Chair Johnson, clarified that it's
incorrect to say that the department can obtain all the
information it needs from filed tax returns. Although the
department may be able to determine a rough break between opex
and capex, the department has to derive certain understandings
from federal returns. She pointed out that the department
doesn't have uniformly all the federal returns filed that have
other detailed break outs on opex. Of the expenses the
department sees, the information doesn't provide any knowledge
as to how much of the expenses are jobs, drilling, or increases
in the price of goods.
12:36:33 PM
CO-CHAIR JOHNSON asked whether what is being proposed via the
legislation will provide the department with the information it
needs.
MS. DAVIS related her belief that this legislation will give the
department the ability to dissect and understand the costs, and
thus would be able to provide the legislature with the
information it needs to make decisions. However, she provided
one caveat in that the department is currently information poor
and doesn't know what it doesn't know.
CO-CHAIR JOHNSON indicated that he wants to ensure the
administration acquires the information it needs and doesn't
have to come back to the legislature. He suggested that the
department could meet with industry representatives to determine
what information is needed as that's the type of partnership he
would like to develop.
REPRESENTATIVE ROSES expressed concern with the language "or any
other data that we deem important." He inquired as to the
meaning of what is important.
[Following was a brief discussion regarding how the committee
would proceed.]
12:50:21 PM
MR. PORTER inquired as to what makes the most sense, from a
modeling standpoint, in regard to the relationship between the
best base tax and progressivity tax. Often the question is can
the industry stand an increased tax. However, he opined that in
his world the question is regarding what is the relationship
that makes the most effective investment climate for both
existing fields, puddles, exploration, and heavy oil. He said
that he sees the relationship between the base tax and the
progressivity such that there can be a lower stable base tax and
a higher progressivity.
MR. RUGGIERO recalled a prior meeting in which he presented five
goals. He explained that when GCA helps a country or entity it
listens to that entity and realizes the challenges that will
arise. Mr. Ruggiero related that the goal [of the legislature]
was that when prices are such that the margin is very high, then
the desire is to have a high tax rate. At the same time, the
state has to recognize that the very units that might produce
those high margins also are the units that have a lot of upside
potential. Therefore, the secondary goal of designing a system
that provides the right incentive for those investments comes
into play. The third [goal] relates to new investors in
relation to the combination of the credits that can be obtained
for operating losses and for investment. The fact that in
Alaska those with no revenue stream can right those off via
paper and turn that into dollars from the state makes Alaska one
of the best places to do that. That could be made better by
taking the base rate to zero for very little margin and continue
to offer the credits. However, he opined that what's being
discussed strikes a good balance between base rate incentives
and the ability to cash in on those. He noted that what's being
proposed to the various committees is predominantly meeting all
three key goals.
12:54:47 PM
REPRESENTATIVE ROSES, referring to the original legislation,
reminded everyone that there was a base rate of 25 percent with
a progressivity factor. He recalled that during several of the
presentations he heard several of the experts expressing the
need to craft a model by which the state obtains a larger
portion when the margin is higher and lower it when there is
greater risk and less profitability. Therefore, he questioned
whether the aforementioned would be accomplished if the base
rate was lowered or stayed the same and progressivity kicked in
earlier but at a smaller rate that ratcheted up at varying
levels. He then inquired as to the overall relational affect.
MR. RUGGIERO agreed that for those with projects that will only
exist at the low end of the net margin curve, lowering numbers
on the low end makes those projects look more attractive.
REPRESENTATIVE ROSES asked whether incremental increases to a
net progressivity piece would result in arrival at that 25
percent cap at a faster rate than if it was a steady factor.
MR. RUGGIERO said that if the steady factor is equal to or less
than the starting rate under the four different ratcheted
levels, one would arrive at the end point sooner. However, if
the initial progressivity rate was significantly above the
first, second, or third rate change, then the higher straight-
line progressivity would likely arrive [at the end point]
sooner. He opined, "So, it depends on what the one fixed rate
that you're comparing to in the relation to the numbers you've
got into the one where you've got, say, four changes to the
progressivity."
12:58:30 PM
REPRESENTATIVE ROSES surmised then that the faster the rate
arrives at the maximum level of 25 percent in the legislation
means that there is less profitability for the producers.
However, it also ensures that as prices rise, the producers know
that they have capped out on the amount they have to contribute.
He asked if that would change the attitude or the dynamic by
which an entity would make decisions regarding whether to invest
or not.
MR. PORTER indicated that it's a matter of how much cash flow
the state will give before it takes the progressivity as well as
the slope of the line. He confirmed that if the slope is pushed
up quicker, it will take more money out of the oil industry's
pocket than under the current law. However, pushing it back,
even at a higher sloped line, the NPV [of the oil companies] may
not be impacted as much. The key issues of progressivity are in
regard to where to start the trigger, the types of slopes, which
allows a delay in the front-end impact more and increases the
slope toward the end. Determining the desired start point and
the upper point at which the state will start to share [to 50-
50] provides the ability to create the slope.
1:01:02 PM
REPRESENTATIVE ROSES then turned to the cap on the credits.
Representative Roses said that the steeper the line, the steeper
the slope and the much greater the oil industry's required
investment must be to capitalize against the credits in order to
move them incrementally down the slope. "In other words, when
you make those incremental increases, it greatly enhances the
amount of investment they would have to make in order to slide
back down that slope to a lesser tax level; is that not
correct," he asked.
MR. RUGGIERO said that he would have to work through the model
to be sure. However, he related his belief that the conclusion
is actually opposite of the scenario Representative Roses
proffered. The steeper the progressivity curve means that for a
small change in margin one would go from a very high production
tax to a very lower production tax. Therefore, it wouldn't take
much investment to make a significant change in the taxable cash
flow as well as a significant change in the progressivity
factor. The oil industry will receive maximum impact for not
that large of an investment relative to cash flow. It's
actually on the shallower part of the progressivity curve that
the ability to make any major movement to change the rate of tax
paid would have to be a significant change in the margin per
barrel. Therefore, a significant investment, an estimated 20-30
percent of cash flow, would have to be reinvested on the low
part [of the progressivity curve] in order to obtain the same
change on the steep part.
1:03:45 PM
CO-CHAIR JOHNSON offered his understanding that in the year
2000, GCA had a contract with Australia for a liquefied natural
gas (LNG) project in which GCA suggested that taxes might need
to be lowered in order to ensure that the project was viable.
He asked for an explanation of the difference in recommendations
between the project in Australia and Alaska's project. He
acknowledged that the two projects aren't an apples-to-apples
comparison.
MR. RUGGIERO informed the committee that he started working with
GCA in 2001, and therefore would have to speak with others
regarding the project. However, from his personal experience
working on the Trinidad LNG project, he recalled speaking to
that government about a fiscal package to help forward the
project. He further recalled that he discussed a model not too
dissimilar to what is being discussed for Alaska. He explained
that as the internal price deck is run, there are estimates on
construction costs and an idea of what types of arrangements
that have to or can be made with regard to partnerships.
Therefore, the entire package of what the future is believed to
look like [is reviewed]. At the point when the decision to
invest was made in Trinidad, he recalled that it was $1.80 Henry
Hub and expecting $2.40 or so in Boston and Spain. In that
situation, the NPV and internal rate of return (IRR) were below
what the corporate executives needed before making a positive
project election. The government of Trinidad was told that if
it could see its way through the tax breaks in the first
project, it would likely build upon itself and become a catalyst
for the country to move forward. At the time, tax
considerations were obtained. He noted that as the market and
prices got better, there have been several reactions to the
multi-year tax holidays. He also noted that the government of
Trinidad was brought in as a 10 percent equity partner and thus
is receiving its fair share in the upside. That project has
expanded greatly and has brought much development and income to
Trinidad.
1:09:32 PM
CO-CHAIR JOHNSON surmised then that lower taxes resulted in more
projects. He further surmised that raising taxes potentially
stops projects. Co-Chair Johnson reiterated his earlier
statement that he would trade jobs and employment for money in
the treasury because he doesn't believe the state wants more
money to be spent.
MS. FITZPATRICK suggested thinking about the issue in terms of
more than just a project. Although companies invest in
projects, the company is actually running a business.
Therefore, the company reviews the totality of the project and
the business, which includes the cash flow as well as
profitability.
1:12:21 PM
MR. RUGGIERO said that there is evidence of entities investing
in an even higher tax environment. He then commented that the
Australia project in 2000 would be a very narrow snapshot, for
which the consultants have been criticized. Furthermore, it
depends on the circumstances at the time as to what
recommendations would be made. He related his belief that [in
Alaska] most of the decisions being made are point-forward
decisions and thus it comes down to where Alaska's tax policy
fits into the future decision-making of the companies
represented today, as to whether or not they will choose to
invest in Alaska.
CO-CHAIR GATTO remarked that [the state] is trying to influence
the companies and vice versa. Co-Chair Gatto referred to the
situation as one of partnership otherwise there is a winner and
a loser.
MS. FITZPATRICK indicated her agreement with regard to
partnership, adding that she doesn't believe [BP] is in a
position of trying to influence the state but rather attempting
to share information and the company's perspective.
CO-CHAIR GATTO inquired as to why BP is spending money on
advertising in Alaska since BP doesn't sell gas in the state.
MS. FITZPATRICK answered that [the advertising] is about
providing information to the public. In further response to Co-
Chair Gatto, Ms. Fitzpatrick related her belief that the
advertising is about investing today for Alaska's tomorrow.
CO-CHAIR GATTO said, "I could go along with that if ... I
thought you actually thought that was necessary to tell us that.
But, we know the pipe is two-thirds empty, ...."
MS. FITZPATRICK said she can only comment on BP's advertising.
REPRESENTATIVE ROSES, drawing from his experience running a
business, opined that often advertising doesn't have anything to
do with the information but rather is to protect an image or
improve [an image]. If the public has been keyed into the fact
that the legislature is present to discuss oil taxes because the
state hasn't been getting its fair share and the advertisement
were to say that it's not about taxes but rather about how much
oil is in the pipe, then it's an appropriate position to let the
public know. He opined that there are two sides to the
advertising piece. He further opined that [the oil industry]
was advertising for the general public rather than the
legislature. Representative Roses then turned to the issue of
influence and related that no lobbyist came to him to discuss
any of the positions, amendments, et cetera. "Any lobbyist or
oil company executives that I talked to did nothing more than
what the administration did when they came to my office, and
that's to give me information. Never once did they try to
leverage a position, persuade position, persuade about an
amendment, or to offer suggestions of what I should or should
not do. This has been completely out in the open" he related.
1:17:57 PM
REPRESENTATIVE ROSES, returning to the Trinidad situation
discussed earlier, asked whether, after negotiation of the lower
tax rate and the subsequent market increase, the country wanted
to raise the taxes.
MR. RUGGIERO said it would depend on the specific piece of the
deal being discussed because there's an upstream piece, a
pipeline across the island, an LNG plant, and a natural gas
liquids (NGL) plant.
REPRESENTATIVE ROSES asked then if the country of Trinidad
decided to restructure the taxes and increase them once prices
[increased].
MR. RUGGIERO replied no, but added that part of the upside
Trinidad would experience, if it came, is through the country's
ability to leverage a 10 percent ownership share. Therefore, if
the environment was better than anticipated, the country was
able to participate and gain that advantage through that equity
participation.
CO-CHAIR GATTO asked if that 10 percent ownership share was part
of the initial agreement.
1:19:24 PM
MS. FITZPATRICK offered her understanding that it was a 10
percent equity ownership in the same way as Anadarko may be 10
percent equity owner in one of the fields in the North Slope.
It's a very different structure, and furthermore the 10 percent
equity ownership was agreed upon prior to construction.
1:20:05 PM
The committee took a brief at-ease.
1:21:36 PM
REPRESENTATIVE SEATON mentioned that an amendment incorporated
into CSHB 2001(O&G) resulted in the Cook Inlet tax rate applying
to everything south of the Brooks Range. He asked whether any
[of the oil industry representatives] have any objection to a
restriction on that to be nonindustrial use such that it's not a
feed stock for industry at the lower tax rate, nor a GTL, or LNG
for export. "So, basically commercial and ... residential use
in the state of Alaska and having that tax rate, but not having
this thing come in and be some kind of marker for large gas
production," he said.
1:23:01 PM
MR. HANLEY said that gas needs to be addressed. He then noted
that Anadarko, a non-owner, doesn't have discovered gas in
Prudhoe Bay or Kuparuk and is drilling in the foothills.
Anadarko, he related, would like to see a level playing field in
regard to having the same types of tax rates as those in other
parts of the state that have gas that will compete with that
from Anadarko. How the state wants to restrict the rate set by
Cook Inlet through 2022 is a policy call on the part of the
legislature. Anadarko would prefer that rate to apply to as
much gas as it can in order to help the project to go forward,
he said.
REPRESENTATIVE SEATON pointed out that the legislature isn't
recommending a major gasline tax rate on gas. The amendment
[incorporated in CSHB 2001(O&G)] is intended to address
residential and commercial uses of gas produced in Alaska. He
asked if there is any problem restricting it to the non-
industrial, non-explorer use.
MR. HANLEY reiterated that it's a policy call. He then opined
that Anadarko's position would be that if the lower tax rate is
going to be applied to consumer use, then it should be applied
to all gas.
REPRESENTATIVE SEATON surmised then that Mr. Hanley is saying
that the geographical restriction is something that Anadarko
would like eliminated, but whether [to apply a lower tax rate]
for consumer use in the state remains a policy call.
MR. HANLEY confirmed that Anadarko views removing the
geographical restriction as a benefit because Anadarko may then
choose to bring its foothills gas to a local market. He opined
that Anadarko would like to compete on the same level as a
company with gas in Bristol Bay, the Nenana Basin, or the Copper
River Basin. He pointed out that, for instance, those in the
Nenana Basin will have a competitive advantage over Anadarko in
the foothills because Anadarko is located farther from the
markets.
REPRESENTATIVE SEATON asked if there is general agreement with
regard to Anadarko's position on the aforementioned.
MS. FITZPATRICK responded, generally yes. However, she offered
to review any amendment on that and inform the committee of any
potential unintended consequences.
[Following was a brief discussion regarding how the committee
would proceed.]
1:32:25 PM
REPRESENTATIVE ROSES relayed his appreciation for the
information that's been presented and the education he has
received on this topic.
MS. DAVIS concurred with Representative Roses' comments and
related her pride with regard to the hard work being done by
members and staff. She then remarked that she is pleased to be
part of the process that is designed to improve Alaska's
standing as a partner and get up to speed in a net world. This
is truly a significant step in moving toward a more dynamic
understanding of industry and making the state more nimble and
better able to spot opportunities and secure the future.
1:35:16 PM
MR. HANLEY relayed that his goal in testifying is to give
members an idea of his company's perspective. He highlighted
the need for members to keep in mind during the amendment
process that changes result in different impacts on different
players. Mr. Hanley agreed with the administration's original
proposal that the net operating loss should be equivalent to the
tax rate as it's a fairness issue. With regard to EIC credits,
he related his impression that the issues he raised can be
worked out.
1:39:02 PM
MR. SECOURS echoed the comments of Mr. Hanley. He then reminded
the committee that snapshots can sometimes paint the wrong
picture. He then highlighted that in order to achieve some of
the margins that have been discussed, the oil price would have
to be very high as would the base tax rate, which would tax all
the underlying investments necessary to get to that level.
Therefore, one must question whether in the long term that will
lead to the additional investments desired in this mature
region. He then recalled that Ken Thompson has said that this
can be reviewed in 3- to 5-year segments and be satisfied with
the outcome at that time. However, oil and gas investments take
5-7 years, not only to make the decision, but to move from
drilling to production. Therefore, what's decided with ACES
could impact those additional investments.
1:40:59 PM
MR. MITCHELL said he has been encouraged with the level of open
dialogue and genuine desire to understand the issues. He noted
that he has been a strong proponent of the net tax structure and
it seems there is general support for that. He opined that
staying with the net structure both at the top and bottom end of
the range will drive the correct result and be a more
sustainable tax structure than a structure that includes
elements of gross tax. Mr. Mitchell further opined that the
right net structure will be the most sustainable for the state
and industry while ensuring ongoing development.
1:42:33 PM
MR. RUGGIERO thanked the committee for the opportunity to be
part of the process, and expressed the hope that his information
has helped in this process.
1:43:43 PM
MS. FITZPATRICK related her understanding that the [legislature]
wants to design something that's flexibility in order to avoid
the need to revisit it while achieving the desired investment in
the barrels and the revenue sought. She acknowledged that as
the process moves toward making a net tax structure work, there
is the need for forecast information. However, she reminded the
committee that a forecast isn't a promise and hoped the
legislators keep that in mind with regard to the state's
forecasts.
1:45:34 PM
CO-CHAIR GATTO echoed earlier comments that this has been a
great education and very valuable, which he appreciated.
The committee took an at-ease from 1:47:00 PM to 1:55:22 PM.
CHAIR GATTO announced that the committee would be in recess
until 3:00 p.m. The committee reconvened at 3:17:03 PM.
3:17:32 PM
REPRESENTATIVE SEATON moved that the committee adopt Amendment
2, labeled 25-GH0014\L.42, Bullard/Bullock, 11/3/07, which read:
Page 13, lines 8 - 22:
Delete all material and insert:
"(o) In addition to the tax levied under (e) of
this section, for each month for which the producer's
average monthly production tax value of the taxable
oil and gas exceeds $30 for each BTU equivalent
barrel, there is levied on the producer of oil or gas
a tax for all oil and gas produced that month from
each lease or property in the state, less any oil and
gas the ownership or right to which is exempt from
taxation or constitutes a landowner's royalty
interest. Except as otherwise provided under (j) and
(k) of this section, the tax levied under this
subsection is equal to the sum over all months of the
calendar year of the amount calculated under this
subsection. For each month for which this subsection
applies and for which the average monthly production
tax value of the taxable oil and gas is
(1) not more than $40 for each BTU
equivalent barrel, the tax is equal to 0.2 percent of
the gross value at the point of production of the
taxable oil and gas for that month multiplied by the
number that represents the difference between the
average production tax value for each BTU equivalent
barrel of the taxable oil and gas for that month and
$30; or
(2) more than $40 but not more than $50 for
each BTU equivalent barrel, the tax is equal to two
percent of the gross value at the point of production
of the taxable oil and gas for that month plus 0.3
percent of the gross value at the point of production
of the taxable oil and gas for that month multiplied
by the number that represents the difference between
the average production tax value for each BTU
equivalent barrel of the taxable oil and gas for that
month and $40;
(3) more than $50 but not more than $60 for
each BTU equivalent barrel, the tax is equal to five
percent of the gross value at the point of production
of the taxable oil and gas for that month plus 0.4
percent of the gross value at the point of production
of the taxable oil and gas for that month multiplied
by the number that represents the difference between
the average production tax value for each BTU
equivalent barrel of the taxable oil and gas for that
month and $50;
(4) more than $60 for each BTU equivalent
barrel, the tax is equal to nine percent of the gross
value at the point of production of the taxable oil
and gas for that month plus 0.5 percent of the gross
value at the point of production of the taxable oil
and gas for that month multiplied by the number that
represents the difference between the average
production tax value for each BTU equivalent barrel of
the taxable oil and gas for that month and $60."
CO-CHAIR JOHNSON objected.
3:17:44 PM
REPRESENTATIVE SEATON explained that Amendment 2 addresses
progressivity with a net trigger that's calculated on the
wellhead value. He further explained Amendment 2 utilizes the
governor's proposed $30 net profit and proceeds in four steps.
The first step at $30 net profit is .002, which is what's
included in ACES. At $40 net profit it goes to .3, at $50 net
profit it rises to .4, and at $60 net profit it rises to .5.
The reasoning behind the aforementioned is that at lower net
profit margins, the slope is lower and thus there is less impact
when less money is in company's hands. Still, the increasing
slope obtains the state's equal share rate at $116. This is
calculated on the current production rate used for ACES and PPT,
which is 754,300 barrels per day. Although a preliminary
[report] has come out with 723,000 barrels per day, the
relationship would remain the same such that they would move
down with that production amount.
3:20:05 PM
REPRESENTATIVE ROSES related his understanding that Amendment 2
doesn't address the base rate on net.
REPRESENTATIVE SEATON responded that's correct. He recalled
that the companies testified that their decisions are impacted
by high costs because a progressivity tied specifically to a
price would be very unpredictable when inflation and cost
increases occur.
3:21:14 PM
REPRESENTATIVE ROSES stated that whether he can support
Amendment 2 is dependent upon the base rate. If the base rate
changes substantially from what is currently in the PPT, he said
he may want to revisit Amendment 2.
CO-CHAIR GATTO reminded the committee that any amendment can be
amended.
3:22:04 PM
REPRESENTATIVE WILSON surmised then that Amendment 2 takes care
of the problem of gold plating and that the state isn't in over
its head with regard to the risk it's taking.
REPRESENTATIVE SEATON answered that's correct. Under Amendment
2 the progressivity is treated separately and no tax deduction
is received for the progressivity. However, the tax deduction
remains for the specified base amount and the tax credits are
still received. He added that Amendment 2 also addresses the
situation in which the state contribution is added at the high
prices and isn't calculated into the sanctioning of projects.
3:23:04 PM
REPRESENTATIVE GUTTENBERG inquired as to the equivalent number
of .002 at $30 of the net at the gross.
REPRESENTATIVE SEATON clarified that the .002 is a calculation
on the gross. The trigger point is the $30, and therefore it
would be $30 plus the cost and results in about $48 if the
$18.65 in the latest model by Mr. Dickinson is used. He
highlighted that the lines come together at basically the same
place as it's exactly the same takeoff as ACES. The only
difference is that if it were keyed to a $50 gross, then over
time that would change due to inflation and it doesn't
compensate for development with high cost versus infill drilling
with low cost. Therefore, triggering it on the net self-adjusts
and addresses the problems that have been identified by the
producers. He noted that the calculation isn't on the wellhead
or the gross value.
3:25:29 PM
REPRESENTATIVE WILSON surmised then that Amendment 2 will allow
the state to capture more of its fair share than under PPT or
ACES.
REPRESENTATIVE SEATON replied yes, adding that the breakpoint is
the 25 percent equal share point at $116.
3:26:59 PM
CO-CHAIR JOHNSON removed his objection to Amendment 2.
3:27:22 PM
REPRESENTATIVE ROSES recalled hearing expert testimony that a
model that will withstand the test of time should be on
progressivity of the margin, which is fairly interchangeable
with net in this discussion. He further recalled testimony that
such a model should be designed that when profits or margins are
at the greatest, the state should be able to take its greatest
share and place it in a savings account to use when it happens
to fall. He asked if the model [proposed in Amendment 2]
captures the state's largest share when the profits are at a
higher margin.
REPRESENTATIVE SEATON replied yes, but noted that the model
could be designed such that the equal share, 25 percent, isn't
captured until much later. However, that's well beyond the
point at which companies are making decisions to sanction
projects to go forward. This amendment is meant to obtain the
state's money as soon as possible without impacting investment
decisions.
REPRESENTATIVE ROSES further recalled hearing testimony that the
state should share in the responsibility when it's lower without
eliminating its ability to receive revenue and should share in
opportunities for encouraging exploration also. He asked if
Amendment 2 achieves the aforementioned.
REPRESENTATIVE SEATON answered that he believes so because the
progressivity is smaller at the $30-$40 range and as each barrel
becomes more profitable, the rate increases. Therefore, he
opined that it's much more inducive for the industry to sanction
projects and move forward with them.
3:30:34 PM
REPRESENTATIVE SEATON, in response to Representative Edgmon,
confirmed that Amendment 2 doesn't change the base rate and only
addresses the progressivity by treating it as a separate tax not
an additional portion to the base rate. He explained that it's
based on a calculation times wellhead value not on the base
rate. In further response to Representative Edgmon, the 25
percent on the spreadsheet wasn't used in any of the
calculations. The yellow boxes are the ones that can trigger or
change.
3:31:48 PM
REPRESENTATIVE SEATON, in response to Co-Chair Gatto, confirmed
that this model could be done in several ways, and the document
specifies what can be modified. He remarked that this
illustration is much easier to understand.
3:32:49 PM
CO-CHAIR JOHNSON renewed his objection to Amendment 2. He
inquired as to the tax increase the state will be imposing on
the industry, at today's prices, as opposed to PPT and ACES. He
suggested using $90 as the price.
REPRESENTATIVE SEATON said that he included the tables in order
to directly compare at any price wish. For instance, at $55
ACES would be $18 while the PPT wouldn't have kicked in until
another $5 and this model creates $23. At $90, ACES results in
$1,264,000, PPT results in $1,141,000, and the progressivity in
[Amendment 2] would result in $2,399,000. He reminded the
committee that the model he used is based on 754,300 barrels per
day, although the current preliminary is that production will be
at 720,000 barrels. Therefore, that would result in a decrease
of about $100 million. He noted that this is the annual tax in
which the price stays the same throughout the year.
3:35:26 PM
CO-CHAIR JOHNSON surmised then at today's price, then this is a
tax increase of just south of $1 billion.
REPRESENTATIVE SEATON replied yes.
3:35:50 PM
A roll call vote was taken. Representatives Wilson, Seaton,
Roses, Guttenberg, Edgmon, Kawasaki, and Gatto voted in favor of
Amendment 2. Representatives Fairclough and Johnson voted
against it. Therefore, Amendment 2 was adopted by a vote of 7-
2.
3:37:15 PM
REPRESENTATIVE WILSON moved that the committee adopt Amendment
6, labeled 25-GH0014\L.65, Bullard/Bullock, 11/3/07, which read:
Page 18, following line 25:
Insert new bill sections to read:
"* Sec. 26. AS 43.55.025(a) is amended to read:
(a) Subject to the terms and conditions of this
section, a credit against the production tax levied by
[DUE UNDER] AS 43.55.011(e) [OR (f)] is allowed for
exploration expenditures that qualify under (b) of
this section in an amount equal to one of the
following:
(1) 20 percent of the total exploration
expenditures that qualify only under (b) and (c) of
this section;
(2) 20 percent of the total exploration
expenditures [FOR WORK PERFORMED BEFORE JULY 1, 2007,
AND] that qualify only under (b) and (d) of this
section;
(3) 40 percent of the total exploration
expenditures that qualify under (b), (c), and (d) of
this section; or
(4) 40 percent of the total exploration
expenditures that qualify only under (b) and (e) of
this section.
* Sec. 27. AS 43.55.025(b) is amended to read:
(b) To qualify for the production tax credit
under (a) of this section, an exploration expenditure
must be incurred for work performed [ON OR] after
December 31, 2007 [JULY 1, 2003], and before July 1,
2016, [EXCEPT THAT AN EXPLORATION EXPENDITURE FOR A
COOK INLET PROSPECT MUST BE INCURRED FOR WORK
PERFORMED ON OR AFTER JULY 1, 2005,] and
(1) may be for seismic or other geophysical
exploration costs not connected with a specific well;
(2) if for an exploration well,
(A) must be incurred by an explorer that
holds an interest in the exploration well for which
the production tax credit is claimed;
(B) may be for either a [AN OIL OR GAS
DISCOVERY] well that encounters an oil or gas deposit
or a dry hole; [AND]
(C) must be for a well that has been
completed or abandoned at the time the explorer claims
the tax credit under (f) of this section; and
(D) must be for goods, services, or rentals
of personal property reasonably required for the
surface preparation, drilling, casing, cementing, and
logging of an exploration well, and, in the case of a
dry hole, for the expenses required for abandonment if
the well is abandoned within 18 months after the date
the well was spudded;
(3) may not be for testing, stimulation, or
completion costs; administration, supervision,
engineering, or lease operating costs; geological or
management costs; community relations or environmental
costs; bonuses, taxes, or other payments to
governments related to the well; costs arising from
gross negligence or violation of health, safety, or
environmental statutes or regulations; or other costs
that are generally recognized as indirect costs or
financing costs; and
(4) may not be incurred for an exploration
well or seismic exploration that is included in a plan
of exploration or a plan of development for any unit
on May 13, 2003.
* Sec. 28. AS 43.55.025(c) is repealed and
reenacted to read:
(c) To be eligible for the 20 percent production
tax credit authorized by (a)(1) of this section or the
40 percent production tax credit authorized by (a)(3)
of this section, exploration expenditures must
(1) qualify under (b) of this section; and
(2) be for an exploration well, subject to
the following:
(A) before spudding the well, (i) the
explorer shall submit to the commissioner of natural
resources the information necessary to determine
whether the geological objective of the well is a
potential oil or gas trap that is distinctly separate
from any trap that has been tested by a preexisting
well; and (ii) the commissioner of natural resources
must make an affirmative determination on that
question; the commissioner of natural resources shall
decide whether to make that determination within 60
days after receiving all the necessary information
from the explorer and based on the information
received and on other information the commissioner of
natural resources may consider relevant;
(B) for an exploration well other than a
well to explore a Cook Inlet prospect, the well must
be located and drilled in such a manner that the
bottom hole is located not less than three miles away
from the bottom hole of a preexisting well drilled for
oil or gas, irrespective of whether the preexisting
well has been completed, suspended, or abandoned;
(C) after completion or abandonment of the
exploration well, the commissioner of natural
resources must determine that the well adequately
achieved the explorer's stated geological objective.
* Sec. 29. AS 43.55.025(f) is amended to read:
(f) For a production tax credit under this
section,
(1) an explorer shall, in a form prescribed
by the department and, except for a credit under (l)
of this section, within six months of the completion
of the exploration activity, claim the credit and
submit information sufficient to demonstrate to the
department's satisfaction that the claimed exploration
expenditures qualify under this section;
(2) an explorer shall agree, in writing,
(A) to notify the Department of Natural
Resources, within 30 days after completion of seismic
or geophysical data processing, completion of [A] well
drilling, or filing of a claim for credit, whichever
is the latest, for which exploration costs are
claimed, of the date of completion and submit a report
to that department describing the processing sequence
and providing a list of data sets available; [IF,
UNDER (c)(2)(B) OF THIS SECTION, AN EXPLORER SUBMITS A
CLAIM FOR A CREDIT FOR EXPENDITURES FOR AN EXPLORATION
WELL THAT IS LOCATED WITHIN THREE MILES OF A WELL
ALREADY DRILLED FOR OIL AND GAS, IN ADDITION TO THE
SUBMISSIONS REQUIRED UNDER (1) OF THIS SUBSECTION, THE
EXPLORER SHALL SUBMIT THE INFORMATION NECESSARY FOR
THE COMMISSIONER OF NATURAL RESOURCES TO EVALUATE THE
VALIDITY OF THE EXPLORER'S CLAIM THAT THE WELL IS
DIRECTED AT A DISTINCTLY SEPARATE EXPLORATION TARGET,
AND THE COMMISSIONER OF NATURAL RESOURCES SHALL, UPON
RECEIPT OF ALL EVIDENCE SUFFICIENT FOR THE
COMMISSIONER TO EVALUATE THE EXPLORER'S CLAIM, MAKE
THAT DETERMINATION WITHIN 60 DAYS;]
(B) to provide to the Department of Natural
Resources, within 30 days after the date of a request,
unless a longer period is provided by the Department
of Natural Resources, specific data sets, ancillary
data, and reports identified in (A) of this paragraph;
in this subparagraph,
(i) a seismic or geophysical data set
includes the data for an entire seismic survey,
irrespective of whether the survey area covers
nonstate land in addition to state land or land in a
unit in addition to land outside a unit;
(ii) well data include all derivative
products, results, and copies of data collected and
data analyses for the well; well logs; sample
analyses; geophysical and velocity data including
vertical seismic profiles and check shot surveys; and
tangible material including, for each whole core
collected, a lengthwise cut slab that is at least 1/3
of the whole core volume, and representative samples,
as specified by the Department of Natural Resources,
of other gaseous, liquid, or solid material collected
from drilling or testing the well;
(C) that, notwithstanding any provision of
AS 38, information provided under this paragraph will
be held confidential by the Department of Natural
Resources
(i) in the case of well data, until the
expiration of the 24-month period of confidentiality
described in AS 31.05.035(c), without extension, after
which the Department of Natural Resources [FOR 10
YEARS FOLLOWING THE COMPLETION DATE, AT WHICH TIME
THAT DEPARTMENT] will release the information after 30
days' public notice;
(ii) in the case of seismic or other
geophysical data, other than seismic data acquired by
seismic exploration subject to (l) of this section,
for 10 years following the completion date, at which
time the Department of Natural Resources will release
the information after 30 days' public notice;
(iii) in the case of seismic data obtained
by seismic exploration subject to (l) of this section,
only until the expiration of 30 days' public notice
issued on or after the date the production tax credit
certificates are issued under (5) of this subsection;
and
(D) that, in the case of well data, the
explorer will not make a request under AS 31.05.035(c)
that the commissioner of natural resources keep the
data confidential for longer than the 24-month period
of confidentiality described in AS 31.05.035(c);
(3) if more than one explorer holds an
interest in a well or seismic exploration,
(A) each explorer may claim an amount of
credit that is proportional to the explorer's cost
incurred;
(B) in the case of a well, each explorer
holding an interest in the well shall agree, in
writing, that the explorer will not make the request
described in (2)(D) of this subsection;
(4) the department may exercise the full
extent of its powers as though the explorer were a
taxpayer under this title, in order to verify that the
claimed expenditures are qualified exploration
expenditures under this section; and
(5) if the department is satisfied that the
explorer's claimed expenditures are qualified under
this section and that all data required to be
submitted under this section have been submitted, the
department shall issue to the explorer a production
tax credit certificate for the amount of credit to be
allowed against production taxes levied by
AS 43.55.011(e); the credit is available for immediate
use; notwithstanding any contrary provision of AS 38,
AS 40.25.100, or AS 43.05.230, the following
information is not confidential:
(A) the explorer's name;
(B) the date of the application;
(C) the location of the well or seismic
exploration;
(D) the date of the department's issuance
of the certificate; and
(E) the date on which the information
required to be submitted under this section will be
released [DUE UNDER AS 43.55.011(e) OR (f)].
* Sec. 30. AS 43.55.025(g) is amended to read:
(g) An explorer, other than an entity that is
exempt from taxation under this chapter, may transfer,
convey, or sell its production tax credit certificate
to any person, and any person who receives a
production tax credit certificate may also transfer,
convey, or sell the certificate.
* Sec. 31. AS 43.55.025(h) is amended to read:
(h) A producer that purchases a production tax
credit certificate may apply the credits against its
production tax liability under AS 43.55.011(e) [OR
(f)]. Regardless of the price the producer paid for
the certificate, the producer may receive a credit
against its production tax liability for the full
amount of the credit, but for not more than the amount
for which the certificate is issued. A production tax
credit allowed under this section may not be applied
more than once.
* Sec. 32. AS 43.55.025(i) is repealed and
reenacted to read:
(i) For a production tax credit under this
section,
(1) a credit may not be applied to reduce a
taxpayer's tax liability under AS 43.55.011(e) below
zero for a calendar year; and
(2) an amount of the production tax credit
in excess of the amount that may be applied for a
calendar year under this subsection may be carried
forward and applied against the taxpayer's tax
liability under AS 43.55.011(e) in one or more later
calendar years.
* Sec. 33. AS 43.55.025(k) is amended by adding a
new paragraph to read:
(4) "preexisting well" means a well that
was spudded more than 540 days but less than 35 years
before the date on which the exploration well to which
it is compared is spudded.
* Sec. 34. AS 43.55.025 is amended by adding a new
subsection to read:
(l) Subject to the terms and conditions of this
section, if a claim is filed under (f)(1) of this
section before January 1, 2016, a credit against the
production tax levied by AS 43.55.011(e) is allowed in
an amount equal to five percent of an eligible
expenditure under this subsection incurred for seismic
exploration performed before July 1, 2003. To be
eligible under this subsection, an expenditure must
(1) have been for seismic exploration that
(A) obtained data that the commissioner of
natural resources considers to be in the best interest
of the state to acquire for public distribution; and
(B) was conducted outside the boundaries of
a production unit; however, the amount of the
expenditure that is otherwise eligible under this
section is reduced proportionately by the portion of
the seismic exploration activity that crossed into a
production unit; and
(2) qualify under (b)(3) of this section."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "32 - 34, and 37"
Insert "41 - 43, and 46"
Page 31, line 27:
Delete "31, and 38"
Insert "31, 32, 34, 40, and 47"
Page 31, line 29:
Delete "Sections 26 and 27"
Insert "Sections 35 and 36"
Page 31, line 30:
Delete "sec. 26"
Insert "sec. 35"
Page 31, line 31:
Delete "sec. 27"
Insert "sec. 36"
Page 31, following line 31:
Insert a new subsection to read:
"(d) Sections 26 - 29 and 33 of this Act apply
to exploration expenditures incurred for work
performed after December 31, 2007, that are the basis
of tax credits that may be claimed against taxes
levied for oil and gas produced after December 31,
2007."
Reletter the following subsection accordingly.
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 38"
Page 32, line 3:
Delete "29"
Insert "38"
Page 32, line 31:
Delete "32 - 34, and 37"
Insert "41 - 43, and 46"
Page 33, line 2:
Delete "26, 27, 31, and 38"
Insert "26 - 29, 31 - 34, 35, 36, 40, and 47"
Page 33, line 19, following ".":
Insert "(a) Section 30 of this Act is
retroactive to July 1, 2003.
(b)"
Page 33, line 20:
Delete "32 - 34, and 37"
Insert "41 - 43, and 46"
Page 33, line 21:
Delete "26, 27, 31, and 38"
Insert "26 - 29, 31 - 34, 35, 36, 40, and 47"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 53"
[End of Amendment 6.]
REPRESENTATIVE FAIRCLOUGH objected for purposes of discussion.
3:37:26 PM
REPRESENTATIVE WILSON explained that basically Amendment 6
reinserts the incentive credits. Currently, a claim for credit
from a producer can only be submitted after the survey and well
are done. At that point there is a decision between the
department and the producer as to whether it can be used as a
credit. Amendment 6 provides that the aforementioned request is
done ahead of time and thus the producer can have the knowledge
beforehand. She opined that it makes it a bit easier for the
department and the producer to be partners. Currently, only the
seismic data gathered after July 1, 2003, is available for
credit and that data is held confidential for 10 years.
Amendment 6 proposes a 5 percent credit for any seismic data
collected outside of current units and deemed of value by the
commissioner of DNR. This data would become immediately
available to the public. She suggested that this data could be
useful for companies as higher prices may make a project
formerly deemed uneconomic economic.
3:41:38 PM
REPRESENTATIVE EDGMON requested the administration's view on
Amendment 6.
The committee took an at-ease from 3:45 p.m. to 4:02 p.m.
4:02:11 PM
REPRESENTATIVE WILSON, noting that there is an error in
Amendment 6, withdrew her motion to adopt Amendment 6, labeled
25-GH0014\L.65, Bullard/Bullock, 11/3/07, at this time.
4:03:26 PM
REPRESENTATIVE SEATON moved that the committee Amendment 3,
labeled 25-GH0014\L.14, Bullock, 11/1/07, which read:
Page 17, following line 3:
Insert a new bill section to read:
"* Sec. 23. AS 43.55.023(b) is amended to read:
(b) A producer or explorer may elect to take a
tax credit in the amount of the [20 PERCENT OF A]
carried-forward annual loss multiplied by the nominal
tax rate in AS 43.55.011(e). A credit under this
subsection may be applied against a tax due under
AS 43.55.011(e). For purposes of this subsection,
(1) a carried-forward annual loss is the
amount of a producer's or explorer's adjusted lease
expenditures under AS 43.55.165 and 43.55.170 for a
previous calendar year that was not deductible for
that calendar year under AS 43.55.160(b) and (e); and
(2) "nominal tax rate" means the tax rate
stated in AS 43.55.011(e) that is not the tax
determined at the minimum tax rate that may be
applicable under AS 43.55.011(f)."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 23, 25, 26, 33 - 35, and 38"
Page 31, line 27:
Delete "31, and 38"
Insert "32, and 39"
Page 31, line 29:
Delete "Sections 26 and 27"
Insert "Sections 27 and 28"
Page 31, line 30:
Delete "sec. 26"
Insert "sec. 27"
Page 31, line 31:
Delete "sec. 27"
Insert "sec. 28"
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 30"
Page 32, line 3:
Delete "29"
Insert "30"
Page 32, line 31:
Delete "secs. 24, 25, 32 - 34, and 37"
Insert "secs. 23, 25, 26, 33 - 35, and 38"
Page 33, line 2:
Delete "26, 27, 31, and 38"
Insert "27, 28, 32, and 39"
Page 33, lines 19 - 20:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 23, 25, 26, 33 - 35, and 38"
Page 33, line 21:
Delete "26, 27, 31, and 38"
Insert "27, 28, 32, and 39"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 45"
CO-CHAIR JOHNSON objected for the purposes of discussion.
4:03:38 PM
REPRESENTATIVE SEATON stated that Amendment 3 addresses the net
operating loss carry-forward credits. Currently, those credits
are at a 20 percent rate rather than a 22.5 percent rate that's
deductible for expenses for people that have production.
Amendment 3 identifies the tax rate for the net operating loss
credit to be the same as for the nominal tax rate, which is the
base rate under the production tax credit. Therefore, under
Amendment 3 the net operating loss carry-forward credit will be
the same as the base rate.
4:04:52 PM
CO-CHAIR JOHNSON withdrew his objection.
There being no further objection, Amendment 3 was adopted.
4:05:14 PM
REPRESENTATIVE SEATON moved that the committee adopt Amendment
4, labeled GH0014\L.15, Bullock, 11/1/07, which read:
Page 1, line 4, following "latitude;":
Insert "providing a penalty for the underpayment
of an installment payment of the production tax on oil
and gas;"
Page 17, following line 3:
Insert a new bill section to read:
"* Sec. 23. AS 43.55.020 is amended by adding a new
subsection to read:
(i) A civil penalty shall be added to the amount
of an installment payment required under (a)(1) - (4)
of this section if the full amount of the payment is
not paid by the date the payment is due. The penalty
is equal to five percent of the difference between the
amount of the installment payment that was made timely
and the amount of the installment payment required
under (a)(1) - (4) of this section. If no part of the
required installment payment was made timely, the
penalty is equal to five percent of the installment
payment required under (a)(1) - (4) of this section.
The penalty is in addition to the interest imposed
under (g) of this section and a penalty added under
AS 43.05.220, if any."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 25, 26, 33 - 35, and 38"
Page 31, line 27:
Delete "31, and 38"
Insert "32, and 39"
Page 31, line 29:
Delete "Sections 26 and 27"
Insert "Sections 27 and 28"
Page 31, line 30:
Delete "sec. 26"
Insert "sec. 27"
Page 31, line 31:
Delete "sec. 27"
Insert "sec. 28"
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 30"
Page 32, line 3:
Delete "29"
Insert "30"
Page 32, line 31:
Delete "secs. 24, 25, 32 - 34, and 37"
Insert "secs. 25, 26, 33 - 35, and 38"
Page 33, line 2:
Delete "26, 27, 31, and 38"
Insert "27, 28, 32, and 39"
Page 33, lines 19 - 20:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 25, 26, 33 - 35, and 38"
Page 33, line 21:
Delete "26, 27, 31, and 38"
Insert "27, 28, 32, and 39"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 45"
REPRESENTATIVE ROSES and GUTTENBERG objected.
4:05:27 PM
REPRESENTATIVE SEATON explained that Amendment 4 reinstates a 5
percent penalty for underpayment of more than 10 percent of a
monthly estimated tax. He recalled numerous discussions
relating that the state wasn't receiving the correct amount of
tax due to costs and underreporting.
4:06:06 PM
CO-CHAIR GATTO asked if a penalty is different than interest.
REPRESENTATIVE SEATON responded yes.
CO-CHAIR GATTO asked if the 5 percent penalty is in addition to
the interest owed.
REPRESENTATIVE SEATON replied yes, adding that the penalties on
the monthly estimated tax is done by an IRS calculation. He
noted that the penalty is implemented for an overpayment as well
as an underpayment. Therefore, if there is an overpayment, the
state would owe the IRS interest.
4:07:20 PM
REPRESENTATIVE GUTTENBERG noted that he has a similar amendment,
although it has more sections. He then removed his objection.
REPRESENTATIVE ROSES removed his objection.
There being no further objection, Amendment 4 was adopted.
4:08:22 PM
REPRESENTATIVE SEATON moved that the committee adopt Amendment
5, labeled 25-GH0014\L.4, Chenoweth/Bullock, 11/1/07, which
read:
Page 1, lines 3 - 4:
Delete "and south of 68 degrees North latitude"
Page 13, following line 20:
Insert a new subsection to read:
"(q) For a calendar year before 2022, the tax
levied by (e) and (o) of this section for gas produced
from a lease or property that is outside of the Cook
Inlet sedimentary basin that is sold and processed
into liquefied natural gas in the state at a facility
with a maximum processing capacity that does not
exceed 10,000,000,000 cubic feet a year may not exceed
the product of the amount of taxable gas produced
during the calendar year from the lease or property,
multiplied by the average rate of tax imposed under
this chapter for taxable gas produced from all leases
or properties in the Cook Inlet sedimentary basin,
multiplied by the average prevailing value for gas
delivered in the Cook Inlet area for the 12-month
period ending March 31, 2006, as determined by the
department under AS 43.55.020(f). This subsection
applies only to gas produced from a lease or property
after December 31, 2007."
Page 14, line 27, following "production":
Insert ";
(6) notwithstanding (1) of this subsection,
that part of the installment payment determined by (2)
and (3) of this subsection that is attributable to the
production of gas that is subject to the limitations
under AS 43.55.011(p) or (q) is the result obtained by
multiplying the volume of gas produced during the
month by the average rate of tax imposed under this
chapter for taxable gas produced from all leases or
properties in the Cook Inlet sedimentary basin,
multiplied by the average prevailing value for gas
delivered in the Cook Inlet area for the 12-month
period ending March 31, 2006, as determined by the
department under (f) of this section"
REPRESENTATIVE GUTTENBERG objected.
4:08:35 PM
REPRESENTATIVE SEATON explained that Amendment 5 addresses an
alternative mechanism for transferable credits to be purchased.
If the legislature provides the Alaska Retirement Management
Board (ARM Board) the statutory authority to acquire credits,
Amendment 5 would allow them to sell [the credits] to DOR.
Therefore, the legislature wouldn't have to open up the tax
statute to do so. He pointed out that in order for this to be
applicable, the legislature would have to modify the ARM Board's
statutes.
CO-CHAIR GATTO asked if Amendment 5 would provide the ARM Board
with a guaranteed rate of return.
REPRESENTATIVE SEATON clarified that the rate of return is
established in another section of legislation yet to be
considered by the legislature. Amendment 5 is simply the
authorizing language to allow the ARM Board to act as a producer
with a tax liability. Under Amendment 5 the ARM Board could
purchase tax credits for an amount established in other
legislation and DOR can reimburse the ARM Board. The notion
behind Amendment 5 is to simplify and streamline a mechanism for
the explorers with transferable credits to be able to be
reimbursed. He mentioned a letter specifying that about 12
explorers support this procedure allowing another mechanism for
redeeming the transferable credits.
4:11:22 PM
REPRESENTATIVE GUTTENBERG asked if the ARM Board has been
contacted regarding whether it would be likely to use these
credits. He also asked if Representative Seaton has obtained an
opinion regarding [whether this falls under] the call.
CO-CHAIR GATTO interjected that [Amendment 5] is related to
taxes.
REPRESENTATIVE SEATON related that Legislative Legal and
Research Services didn't raise any concern with regard to
Amendment 5 not falling under the call. He reiterated that
Amendment 5 doesn't modify the ARM Board statutes, which would
be necessary to modify, but simply allows this mechanism to act
as an oil company in purchasing credits. He recalled that when
this was reviewed in the House there was communication from the
ARM Board in support of this proposal as well as a letter of
support from DOR. The authorizing sections, not included in HB
2001, require that the commissioner of DOR give prior approval.
4:13:47 PM
REPRESENTATIVE GUTTENBERG posed a scenario in which Amendment 5
is adopted, and asked if the severability clause "would take
this out if it's ... over that line?"
MS. DAVIS related that DOL said that pursuant to state law a
severability clause is implied in all legislation that's passed,
and therefore it was deemed unnecessary.
4:14:46 PM
REPRESENTATIVE GUTTENBERG removed his objection.
CO-CHAIR JOHNSON objected.
4:14:56 PM
CO-CHAIR JOHNSON inquired as to where the legislation
establishing the $.92 on dollar is in the legislative process.
REPRESENTATIVE SEATON said that it passed the House and is
sitting in the final committee of review in the Senate.
CO-CHAIR JOHNSON then inquired as to the repercussions of
passage of Amendment 5. He then posed a scenario in which
[Amendment 5] is incorporated into statute, but the authorizing
legislation isn't adopted. In such a scenario, could the ARM
Board reduce the floor to $.50 on the dollar and purchase the
tax credits at a fire sale from a producer, he asked.
REPRESENTATIVE SEATON reiterated that this provision doesn't
allow the ARM Board to do anything as the other legislation will
have to pass to authorize the ARM Board. This provision merely
allows the establishment of credits, and the current ARM Board
statutes don't allow it to sell the credits.
4:17:19 PM
CO-CHAIR JOHNSON asked, "Are you sure? ... In what of the
statute is the ARM Board not allowed to that this would not
override and supersede?"
REPRESENTATIVE SEATON specified that the language in Amendment 5
modifies the sections of law relating to oil taxes and credits.
However, the ARM Board has its own constraints in other
statutes, and therefore the other statutes have to be modified
to authorize the ARM Board to [sell the credits]. The provision
in Amendment 5 authorizes the oil tax statute portion only and
the ARM Board doesn't have statutory authority to engage in this
practice without the passage of the other pending legislation.
4:18:48 PM
CO-CHAIR GATTO highlighted the following proposed language in
subsection (l), "Subject to appropriations made by law, if and
to the extent that purchase of transferable tax credits by the
Alaska Retirement Management Board is authorized by law ...."
He echoed the earlier comments that the authorizing legislation
hasn't yet passed.
4:19:19 PM
REPRESENTATIVE ROSES, drawing upon his experience as a member of
the ARM Board, opined that the ARM Board works very hard to
balance the portfolio. Furthermore, it holds a certain amount
of money in reserve in the event a good opportunity arises. He
assured the committee that the ARM Board would jump on this
opportunity and use it as often as it's able to do so.
4:20:16 PM
CO-CHAIR JOHNSON removed his objection.
There being no further objection, Amendment 5 was adopted.
4:20:40 PM
REPRESENTATIVE ROSES moved that the committee adopt Amendment 7,
labeled 25-GH0014\L.25, Chenoweth\Bullock, 11/2/07, which read:
Page 19, following line 26:
Insert a new bill section to read:
"* Sec. 27. AS 43.55.030(d) is amended to read:
(d) Reports required under this section [BY OR
ON BEHALF OF THE PRODUCER] are delinquent the first
day following the day the report is due. The person
required to file the report is liable for a penalty,
as determined by the department under standards
adopted in regulation by the department, of not more
than $1,000 for each day the person fails to file the
report at the time required. The penalty is in
addition to the penalties in AS 43.05.220 and
43.05.290 and is assessed, collected, and paid in the
same manner as a tax deficiency under this title. In
this subsection, "report" includes a statement."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "32 - 34, and 37"
Insert "33 - 35, and 38"
Page 31, line 27:
Delete "31, and 38"
Insert "32, and 39"
Page 31, line 29:
Delete "27"
Insert "28"
Page 31, line 31:
Delete "sec. 27"
Insert "sec. 28"
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 30"
Page 32, line 3:
Delete "29"
Insert "30"
Page 32, line 31:
Delete "32 - 34, and 37"
Insert "33 - 35, and 38"
Page 33, line 2:
Delete "27, 31, and 38"
Insert "28, 32, and 39"
Page 33, line 20:
Delete "32 - 34, and 37"
Insert "33 - 35, and 38"
Page 33, line 21:
Delete "27, 31, and 38"
Insert "28, 32, and 39"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 45"
REPRESENTATIVE KAWASAKI objected.
CO-CHAIR GATTO mentioned his understanding that Amendment 7 must
pass in order for Amendment 8 to be considered.
4:21:09 PM
REPRESENTATIVE ROSES related his agreement. He then explained
that Amendment 7 reinserts the penalty phase for lack of
reporting that was in ACES and removed.
4:21:42 PM
REPRESENTATIVE KAWASAKI withdrew his objection.
There being no further objection, Amendment 7 was adopted.
4:21:58 PM
REPRESENTATIVE FAIRCLOUGH moved that the committee adopt
Amendment 8, labeled 25-GH0014\L.26, Kurtz/Bullock, 11/2/07,
which read:
Page 21, line 30, following "matters":
Insert ";
(6) assess against a person required under
this section to file a report, statement, or other
document a penalty, as determined by the department
under standards adopted in regulation by the
department, of not more than $1,000 for each day the
person fails to file the report, statement, or other
document at the time required; the penalty is in
addition to any penalties under AS 43.05.220 and
43.05.290 and is assessed, collected, and paid in the
same manner as a tax deficiency under this title; the
penalty shall bear interest at the rate specified
under AS 43.05.225(1); notwithstanding authority
granted under AS 43.05.070 to compromise a penalty,
the department may not under that section compromise a
penalty under this paragraph by agreeing to accept
less than 50 percent of the penalty originally
assessed by the department"
CO-CHAIR JOHNSON objected for discussion purposes.
4:22:07 PM
REPRESENTATIVE FAIRCLOUGH relayed her understanding that
penalties often result in negotiations in which it's in the
benefit of the taxpayer to wait versus paying anything on the
settlement. She expressed interest in the administration's
comments. Line 13 of Amendment 8 removes some bargaining power,
which could result in litigation.
4:23:33 PM
MS. DAVIS relayed her belief that Mr. Iversen, Tax Division, has
provided the committee with information as to how the state has
approached the resolution of various tax matters in the past.
Ms. Davis expressed slight concern with choosing a single amount
and having it apply to small and large players. However, she
said she took some comfort with the language proposed "of not
more than $1,000". Therefore, she said she understood that once
the penalty is established, this language intends to address the
ability to negotiate it down. So long as this language doesn't
impair the initial assessment of the penalty, she opined that
the limitation is okay.
4:25:09 PM
REPRESENTATIVE FAIRCLOUGH stated that Amendment 8 is intended to
signal that when the state has something due, it won't negotiate
down to zero. The hope is to provide the administration teeth
in regard to not negotiating down further.
4:25:28 PM
REPRESENTATIVE ROSES commented that he will reluctantly support
Amendment 8 as it's in best interest of the state.
4:26:17 PM
CO-CHAIR JOHNSON removed his objection.
There being no further objection, Amendment 8 was adopted.
4:26:34 PM
REPRESENTATIVE SEATON withdrew Amendment 9, for the moment.
4:27:07 PM
REPRESENTATIVE SEATON moved that the committee adopt Amendment
10, labeled 25-GH0014\L.13, Bullock, 11/1/07, which read:
Page 26, line 14:
Following "negligence,":
Insert "criminal negligence,"
Following "law,":
Insert "including a violation of 33 U.S.C.
1319(c)(1) or 1321(b)(3) (Clean Water Act),"
Page 28, line 6, through page 29, line 1:
Delete all material.
Renumber the following paragraph accordingly.
4:27:13 PM
REPRESENTATIVE GUTTENBERG objected.
4:27:28 PM
REPRESENTATIVE SEATON pointed out that Amendment 10 looks at
qualified lease expenditures. Currently, the legislation
specifies that lease expenditures don't include violation of
law. Amendment 10 adds that lease expenditures don't include
criminal negligence, including criminal negligence as a
violation of 33 USC 1319(c)(1), the Clean Water Act. Amendment
10 also deletes Section 19, regarding unscheduled disruptions.
He opined that Amendment 10 puts all companies on notice that if
they do something found to be criminally negligent, the
resulting costs are nondeductible as a lease expense.
4:30:29 PM
CO-CHAIR GATTO asked if there is a value to lines 5 and 6 as
numbered on Amendment 10 as they are probably already included
whether specified or not.
REPRESENTATIVE SEATON answered that could be, but pointed out
that without that it could be left to the interpretation of the
courts. Specifying the particular types of violations covered
is definitive.
4:31:51 PM
REPRESENTATIVE ROSES expressed concern with regard to changing
laws retroactively, but said that he will address that with the
effective date when the legislation is before the House.
4:32:44 PM
REPRESENTATIVE GUTTENBERG related his understanding that by
adding criminal negligence, the bar is being raised.
REPRESENTATIVE SEATON said that the language basically cites
the standard recently used in the court. He said he isn't
trying to propose language that would result in a simple error
making all costs nondeductible.
4:33:52 PM
REPRESENTATIVE FAIRCLOUGH announced that she will support
Amendment 10. She highlighted that Amendment 10 will remove the
need for legislation in the other body, and therefore finalizes
a concern of Alaskans regarding companies that don't fully
maintain equipment. She reminded the committee that two
producers in a joint agreement with a producer who had a recent
spill told the committee that they haven't received any cost
allocations for the spill nor cleanup to date, although she
acknowledged that it can take up to a year to audit those.
4:35:08 PM
REPRESENTATIVE SEATON said that's his understanding as well, but
there is a letter from the producer stating its intention to
charge those costs as lease expenditures. More than once this
producer has stated publicly that it will charge those costs as
lease expenditures, he stated. This matter can be addressed by
two routes, including a guilty plea or the language in paragraph
(19) of Section 33. He highlighted the difficulty in defining
the standard "due care or foresight".
4:37:03 PM
REPRESENTATIVE GUTTENBERG removed his objection.
There being no further objection, Amendment 10 was adopted.
4:37:23 PM
REPRESENTATIVE SEATON moved that the committee adopt Amendment
11, labeled 25-GH0014\L.12, Bullard/Bullock, 11/1/07, which
read:
Page 26, following line 2:
Insert new bill sections to read:
"* Sec. 33. AS 43.55.165(b) is amended to read:
(b) For purposes of (a) of this section,
(1) direct costs include
(A) an expenditure, when incurred, to
acquire an item if the acquisition cost is otherwise a
direct cost, notwithstanding that the expenditure may
be required to be capitalized rather than treated as
an expense for financial accounting or federal income
tax purposes;
(B) payments of or in lieu of property
taxes, sales and use taxes, motor fuel taxes, and
excise taxes;
(C) a reasonable allowance, as determined
under regulations adopted by the department, for
overhead expenses directly related to exploring for,
developing, and producing oil or gas deposits located
within leases or properties or other land in the
state;
(2) an activity must be physically located
in the state [DOES NOT NEED TO BE PHYSICALLY LOCATED
ON, NEAR, OR WITHIN THE PREMISES OF THE LEASE OR
PROPERTY WITHIN WHICH AN OIL OR GAS DEPOSIT BEING
EXPLORED FOR, DEVELOPED, OR PRODUCED IS LOCATED] in
order for the cost of the activity to be a cost
upstream of the point of production of the oil or gas.
* Sec. 34. AS 43.55.165(b), as amended by sec. 33
of this Act, is amended to read:
(b) For purposes of (a) of this section,
(1) direct costs include
(A) an expenditure, when incurred, to
acquire an item if the acquisition cost is otherwise a
direct cost, notwithstanding that the expenditure may
be required to be capitalized rather than treated as
an expense for financial accounting or federal income
tax purposes;
(B) payments of or in lieu of property
taxes, sales and use taxes, motor fuel taxes, and
excise taxes;
(C) a reasonable allowance, as determined
under regulations adopted by the department, for
overhead expenses directly related to exploring for,
developing, and producing oil or gas deposits located
within leases or properties or other land in the
state;
(2) an activity must be physically located
on the premises of the lease or property from which
oil or gas is recovered [IN THE STATE] in order for
the cost of the activity to be a cost upstream of the
point of production of the oil or gas."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "32 - 34, and 37"
Insert "32, 33, 35, 36, and 39"
Page 31, line 27:
Delete "38"
Insert "40"
Page 32, line 31:
Delete "32 - 34, and 37"
Insert "32, 33, 35, 36, and 39"
Page 33, line 2:
Delete "38"
Insert "40"
Page 33, line 20:
Delete "32 - 34, and 37"
Insert "32, 33, 35, 36, and 39"
Page 33, following line 20:
Insert new bill sections to read:
"* Sec. 46. The uncodified law of the State of
Alaska is amended by adding a new section to read:
CONTINGENT EFFECT. Section 34 of this Act takes
effect only if a court of competent jurisdiction
enters a final judgment on the merits, the final
judgment is no longer subject to appeal, and the final
judgment nullifies the effect of AS 43.55.165(b), as
amended by sec. 33 of this Act.
* Sec. 47. If sec. 34 of this Act takes effect, it
takes effect on the day after the last day on which
the final judgment described in sec. 46 of this Act is
no longer subject to appeal."
Renumber the following bill sections accordingly.
Page 33, line 21:
Delete "38"
Insert "40"
Page 33, line 22:
Delete "sec. 44"
Insert "secs. 47 and 48"
CO-CHAIR JOHNSON objected for discussion purposes.
4:37:38 PM
REPRESENTATIVE SEATON recalled testimony by some of the
producers that there were deductions taken for things not in
Alaska and for items that may or may not arrive in Alaska in a
timely fashion. Amendment 11 specifies that capital deductions
occur when an item arrives in Alaska and allows for a full
credit and deduction when the item arrives. He related that his
intention with Amendment 11 is to constrain gaming of the net
tax for capital expenditures. The amendment also includes a
fallback provision, a contingent effect [in proposed Section
46], and therefore the state doesn't have to worry about a
lawsuit due to the Commerce Clause.
4:40:03 PM
REPRESENTATIVE FAIRCLOUGH emphasized that she wants jobs for
Alaskans. She then expressed concern that although the state is
trying to encourage exploration and development, this presents
another hoop and may have the unintended result of discouraging
exploration and investment in Alaska.
4:41:26 PM
REPRESENTATIVE ROSES commented that he may want to remove his
name from Amendment 11 as it doesn't capture his intent. He
specified that his intent was to give credits for manufactured
equipment that arrives in Alaska. "That doesn't mean to say
that I didn't want them to get credits to start the
construction, but I certainly think the state ought to be able
to go back and recapture those credits back from the producer
if, in fact, that equipment does not arrive on our shore," he
said.
4:42:20 PM
CO-CHAIR JOHNSON said he shares Representative Roses' concern
with regard to the intended intent of Amendment 11, and
therefore announced that he will remove his name from Amendment
11 as he doesn't intend to support it. He said he didn't want
the state to be in a position in which the credits can't be
captured if it takes three years to build the equipment. He,
too, said he doesn't want to discourage investment and
exploration in Alaska.
4:43:11 PM
REPRESENTATIVE FAIRCLOUGH said that she supports the equipment
coming to Alaska and understands the concern of gaming. She
related her understanding that the concern with gaming is that
if a developer, producer, or explorer contracts a rig for
Alaska, but the environmental or taxing climate changes and
causes the developer, producer, or explorer to take the drilling
operation from which credits were received to Venezuela and
Alaska's project is put on hold. She then suggested that the
committee could take a brief at-ease in order to develop
language that better gets to the intent of Amendment 11.
CO-CHAIR GATTO announced that he would entertain an at-ease if
that's the will of the sponsor of Amendment 11.
REPRESENTATIVE SEATON said it would be fine to take an at-ease.
However, he highlighted that modules are being built in
Anchorage, albeit they're more expensive to build in Anchorage,
Alaska, than in Louisiana. If the desire is to take tax money
and give credits to those building modules in Louisiana, then do
as the law currently says. On the other hand, if the desire is
to stimulate jobs in Alaska for such, Amendment 11 does so.
4:45:56 PM
REPRESENTATIVE ROSES asked if the administration has the ability
to track these credits to determine whether the equipment for
which a credit was given actually arrives in Alaska.
4:46:31 PM
PATRICK GALVIN, Commissioner, Department of Revenue, said that
if a provision required that equipment deducted as a cost has to
arrive in Alaska at some point during its use, it would become
an audit issue such that it would be tracked. He related the
administration's belief that it could be tracked and could
ensure compliance with the law.
4:47:21 PM
REPRESENTATIVE ROSES recalled the testimony from the producers
regarding the amount of time to get something online and set up.
He said he didn't want restrictions to build equipment or have
equipment in Alaska to result in the loss of the opportunity for
wells to be built.
4:48:20 PM
CO-CHAIR GATTO posed a scenario in which a module is built in
Argentina, shipped to Tacoma, and is intended to go to the North
Slope. However, something happens on the North Slope that
results in the module not arriving in Alaska. In the
aforementioned scenario, the credit money would be tied up until
some activity occurs that results in the module entering
[Alaska's] waters. He suggested that it's in the same realm as
a penalty in interest. He opined that the entity that builds
the equipment should have something at risk as they have an
advantage in regard to deciding whether the equipment will
actually arrive in Alaska. Although he acknowledged that things
can change and folks certainly have to adapt to changes, he said
he hesitates to tie up credits.
4:50:33 PM
REPRESENTATIVE ROSES, recalling conversations with producers,
related that he was lead to believe that the rigs built for
Alaska are vastly different than those for elsewhere.
Therefore, the likelihood of a rig built for Alaska being used
elsewhere is low.
CO-CHAIR GATTO recalled testimony that Arctic drilling rigs are
being built. However, he commented that there's other equipment
besides such specialized equipment.
4:51:36 PM
REPRESENTATIVE GUTTENBERG asked if it's just the activity of
building a module or is it the entire cost of building the
module. He then pointed out that steel, valves, and stems
aren't manufactured in Alaska. "If what we're talking about is
the expense of physically putting it together, that makes a lot
more sense. I ... think if we say the entire activity and all
the costs going into it, then we're going into the contingent
effect of taking it out. If you want to amend it to say that
the expense of actually putting it together and transporting it
from here to there. Perhaps, we can talk about that," he said
4:52:52 PM
CO-CHAIR GATTO clarified that he has no objection to the credit
when everything happens as planned. However, he indicated that
[it's problematic] when the credit has been given, but there's
been no activity in Alaska as a result of the credit.
4:53:17 PM
REPRESENTATIVE EDGMON suggested that the committee's time might
be better served by placing Amendment 11 at the bottom of the
pile unless there's a quick fix.
4:53:43 PM
REPRESENTATIVE SEATON withdrew his motion to adopt Amendment 11.
4:54:04 PM
REPRESENTATIVE FAIRCLOUGH moved Amendment 12, labeled 25-
GH0014\L.22, Cook\Bullock, 11/2/07, which read:
Page 13, line 22, following ".":
Insert "All money received by the state as a
result of the application of this subsection shall be
deposited by the department into a separate account in
the general fund known as the progressivity savings
account."
REPRESENTATIVE KAWASAKI objected.
REPRESENTATIVE FAIRCLOUGH recalled that when ACES was introduced
to Alaskans, the governor discussed that now is the time to save
money. However, there has been testimony specifying that
there's no language specific to saving that money. Amendment 12
intends to place a line in the general fund to take all the
money generated from the progressivity taxation with the intent
of it being available for use in years when revenue falls short.
4:55:10 PM
REPRESENTATIVE WILSON requested that her name be added to
Amendment 12.
4:55:19 PM
CO-CHAIR JOHNSON reminded the committee that a previous
amendment raised the taxes on oil companies through the
progressivity [that amounts] to about $1.5 billion. He opined
that if the taxes are being raised that much, the state should
save it.
4:55:48 PM
REPRESENTATIVE EDGMON said that although he supports the intent
of Amendment 12, he opposes the amendment overall because it
proposes fairly sweeping action, which should be considered in
the House Finance Committee.
REPRESENTATIVE FAIRCLOUGH pointed out that this money would
still come back before the legislature in a budget. Amendment
12 merely sweeps a lot of money, if oil taxes remain high, into
an account. Should anyone in the legislature want to touch that
account, there's an opportunity for Alaskans to speak out about
it. These funds could be used to bridge funding for education
and power cost equalization. "The governor said let's save the
money. And I don't think that I can get it into the permanent
fund ... the CBR [capital budget reserve fund], but I do think
that Alaskans deserve to be able to see it in the budgeting
process and see if people are going to try to access it," she
said.
4:58:11 PM
CO-CHAIR JOHNSON said that although he appreciates the intent,
the legislature will have access to the account with a simple
vote. With that in mind, Co-Chair Johnson offered an amendment
to Amendment 12 such that raising the taxes should be done in
conjunction with a long-range fiscal plan. Although he
applauded Representative Fairclough for proposing to save the
fund, he opined that there are no political consequences to
funds placed in an account. He further opined that if the
legislature is truly serious about saving this money, it should
be placed in the permanent fund as it requires a 50 percent vote
to withdraw those funds. Furthermore, there are serious
political consequences to withdrawing funds from the permanent
fund.
5:00:07 PM
CO-CHAIR JOHNSON moved that the committee adopt a conceptual
amendment to Amendment 12 such that the account in the general
fund to which these funds should be deposited be specified as
the permanent fund.
CO-CHAIR GATTO objected to the conceptual amendment to Amendment
12. He highlighted that a substantial amount of money is
already owed to the CBR as previous withdrawals are expected to
be replaced. He related his belief that no less than half of
[the funds received as a result of the application], if not all
of them, should be placed in the CBR since that's an obligation.
"This is a great idea, but I think we need to satisfy our debts
before we establish a brand new account," he opined.
5:01:17 PM
CO-CHAIR JOHNSON remarked that he doesn't disagree with the
saving part. However, he pointed out that withdrawals from the
CBR requires a three-quarter vote. He indicated that oftentimes
the capital budget grows as the legislature attempts to complete
its work on time. Co-Chair Johnson said that he objected to
placing the funds in the CBR as it's a license to spend.
CO-CHAIR GATTO pointed out that as proposed in Amendment 12,
only a simple majority is required to spend the funds while it
takes a 75 percent majority to spend funds from the CBR.
5:02:27 PM
REPRESENTATIVE FAIRCLOUGH stated that she supports these funds
going into the permanent fund or the CBR, although she said she
wasn't sure she could muster support. Therefore, she requested
heeding the initial request to take the governor seriously in
regard to finding a way to bridge the fiscal gap in lean years.
She clarified that she didn't ask the attorneys to set up legal
hurdles with regard to the legislature's access to the funds
because she felt that the greater conversation would occur in
the House Finance Committee. However, she opined that it would
be important for this committee to take seriously its duty to
save the money as this committee knows that production is down.
5:04:15 PM
CO-CHAIR JOHNSON suggested that in the long-term it will be less
expensive to take the three-quarter vote out of the CBR than the
50 percent out of the permanent fund dividend. He emphasized
that if he ever casts a vote [to withdraw funds] from the
permanent fund dividend, it will require justification.
5:04:55 PM
REPRESENTATIVE ROSES remarked that he agrees with the concept of
savings, which is why his name is on Amendment 12. However,
withdrawing funds from the permanent fund requires a lot of
political will. Trying to withdraw funds from the CBR is also
difficult. With regard to earlier comments that Amendment 12
should have a fiscal plan connected to it, Representative Roses
assured the committee that both sponsors of Amendment 12 would
be "on board with that." He highlighted that four members of
the House Resources Standing Committee sit on the House Special
Committee on Ways and Means in which there have been discussions
[regarding a long-term fiscal plan]. However, that would be
considered outside of this call, he related.
5:06:20 PM
CO-CHAIR GATTO opined that it's difficult to deposit a
significant amount of money into the permanent fund and have it
show up as a significant addition. He, again, reminded the
committee that the legislature owes money to the CBR. Although
a three-quarter vote from each body is an enormous hurdle, he
opined that it will occur when the state is in trouble. He
related his hope that this amendment survives.
5:07:38 PM
CO-CHAIR JOHNSON clarified that conceptual amendment to
Amendment 12 would read: "That the money saved shall be
deposited into the permanent fund."
5:08:47 PM
REPRESENTATIVE SEATON objected to conceptual amendment to
Amendment 12.
5:08:54 PM
REPRESENTATIVE EDGMON commented that conceptual amendment to
Amendment 12 further illustrates the complexity of the issue and
why this needs to be a stand-alone item deserving further and
broader discussion in the House Finance Committee. He related
his opposition to both the conceptual amendment to Amendment 12
as well as Amendment 12.
5:09:41 PM
REPRESENTATIVE WILSON stated her opposition to conceptual
amendment to Amendment 12. She recalled seven years ago when
the state was facing fiscal difficulties that resulted in
cutting budgets and borrowing from the CBR. She said that more
was borrowed from the CBR than necessary, which she attributed
to the three-quarter vote. She highlighted that with a simple
majority vote funds could've been withdrawn from the earnings
reserve fund, but that never occurred.
5:10:44 PM
CO-CHAIR JOHNSON related his belief that if there's the desire
to spend the money, it requires extreme fortitude. He
reiterated that when the state raises taxes on oil companies,
the resulting money needs to be part of some difficult to get or
long-range planning fund. He said that Representative Wilson
made his case because she pointed out that it was much easier to
tackle the three-quarter vote and buy some votes rather than to
face the political consequences of a [simple majority vote].
Co-Chair Johnson then called the question.
5:12:04 PM
A roll call vote was taken. Representative Johnson voted in
favor of conceptual amendment to Amendment 12. Representatives
Wilson, Seaton, Roses, Guttenberg, Edgmon, Kawasaki, Fairclough,
and Gatto voted against it. Therefore, conceptual amendment to
Amendment 12 failed to be adopted by a vote of 1-8.
5:12:36 PM
REPRESENTATIVE FAIRCLOUGH commented that by including the
language proposed in Amendment 12, it will be addressed by the
House Finance Committee as it's the next committee of referral.
5:14:02 PM
REPRESENTATIVE SEATON announced that he isn't going to support
Amendment 12 because he has seen what happens with special
accounts. He noted his agreement with Representative Wilson's
comments. He then commented that the state has a general fund
and the state has been saving. Therefore, he questioned how
people come to the opinion that the state hasn't been saving
money. In fact, $1 billion has been placed in the education
fund and $200 million in the Alaska Housing Finance Corporation
(AHFC). Although the money has been put forward, it hasn't been
tied up in ways that make it inaccessible.
5:16:28 PM
REPRESENTATIVE GUTTENBERG noted his agreement with
Representative Seaton because even if the funds are deposited
into the proposed account, it would still be general funds.
However, he said he also agrees with the amendment's sponsor
that it's the obligation of this committee to make all
recommendations to other committees regardless of the line item.
He then announced that at this point he doesn't support
Amendment 12.
5:17:04 PM
CO-CHAIR JOHNSON highlighted the large amounts owed to the CBR,
the Public Employees' Retirement System (PERS), and Teachers'
Retirement System (TRS) liability. He opined that with the $1
billion at today's prices, much of the aforementioned could be
paid off. Therefore, he noted his disagreement with the notion
that the state has been frugal. Although he agreed that the
state should save money, he opined that Amendment 12 merely
creates an account that the public won't know about five years
from now.
5:18:56 PM
CO-CHAIR GATTO related his belief that this proposal should be
vetted through the normal committee process rather than being
attached to this legislation.
5:19:24 PM
REPRESENTATIVE FAIRCLOUGH echoed earlier comments that
regardless this money will fall into the general fund. To not
support the proposed savings account moves the money into the
same place proposed [in Amendment 12] with the same
restrictions. "There is no reason that you should vote not to
support saving the progressivity," she emphasized. In fact, the
committee just voted to raise $1.5 billion with no feed back
from the producers or modeling. She expressed amazement that
the committee wouldn't save this money for Alaskans.
Representative Fairclough noted her agreement that the House
Finance Committee should ring fence this fund, but this
committee should make a recommendation regarding a nonrenewable
resource to save it and allow Alaskans to benefit from it over
and over.
5:20:56 PM
REPRESENTATIVE ROSES informed the committee that he agreed to
sponsor Amendment 12 because the governor has asked the
legislature to save the money, and establishing a savings
account for the progressivity makes it easier to know how much
money the progressivity model generated.
5:21:55 PM
REPRESENTATIVE WILSON said that she added her name to Amendment
12 because legislators have a responsibility to the citizens of
Alaska to know the outlook for the next 10 years. She
questioned what happens if oil prices decline.
5:22:45 PM
A roll call vote was taken. Representatives Roses, Fairclough,
Wilson, and Johnson voted in favor of Amendment 12.
Representatives Seaton, Guttenberg, Edgmon, Kawasaki, and Gatto
voted against it. Therefore, Amendment 12 failed to be adopted
by a vote of 4-5.
5:24:09 PM
REPRESENTATIVE FAIRCLOUGH moved that the committee adopt
Amendment 13, labeled 25-GH0014\L.27, Chenoweth\Bullock,
11/2/07, which read [with handwritten changes]:
Page 22, line 3:
Delete "six"
Insert "three"
CO-CHAIR JOHNSON objected for discussion purposes.
5:24:21 PM
REPRESENTATIVE FAIRCLOUGH opined that it's bothersome to hear
that an expansion of time to perform the auditing is necessary
because good business practice [supports] getting business done
sooner rather than later. If the audit division believes it
needs six years, then perhaps more auditors are needed to
actually accomplish the task. She pointed out that taxpayers
are already liable under penalties and procedures for an
enormous amount of money that they carry forward on their books.
Representative Fairclough recognized that there's a new auditing
system and the need for time, and recalled that approximately 85
percent of the large-end audits require additional time. She
then pointed out that the PPT system really hasn't been audited
and expressed hope that the ACES proposal will provide clearer
transparency with the cost factors, which should help in the
preparation of the audits as well as moving them along in a
timely fashion. If the aforementioned doesn't occur, additional
auditors can be hired through the budgeting process. With that
in mind, Representative Fairclough encouraged support of
returning the timeframe back to three years.
5:28:28 PM
COMMISSIONER GALVIN characterized the proposal to extend the
auditing timeframe to six years as an acknowledgement of
reality. He confirmed that with the largest taxpayers, most
require more than three years. Furthermore, the state is
entering a more complex system. Although more auditors are
being added, he guaranteed that the burden will much greater
than can be met in three years. Without extending the statute
of limitations, he opined that it guarantees the auditors will
be up against the deadline on each audit and face either making
a claim and formalizing the process or requesting additional
time. He assured the committee that the statute of limitations
isn't used as a deadline because the auditors are working on
things daily to get them done as quickly as possible. The
request to go to six years is simply a reflection of reality and
an attempt to protect the state's interests.
5:30:19 PM
REPRESENTATIVE ROSES explained that initially he was very
supportive of six years, but retracted from that once he heard
that there is the ability to extend. He then recalled testimony
relating that as a matter of policy one of the taxpayers won't
grant extensions, no matter the location. Therefore, he asked
if the administration is writing policy to address the one
entity that doesn't wish to do extensions.
COMMISSIONER GALVIN answered that the administration believes
it's appropriate to set the statute of limitations within the
timeframe that it's believed the work can be done. Therefore,
he specified that the administration isn't seeking six years to
address the one entity that doesn't wish to do extensions.
MS. DAVIS explained that the auditors have to make requests of
large international corporations regarding transportation costs
and things that may or may not have occurred in the state. A
tremendous amount of information is required from the taxpayer
and the state has to either be hard-nosed with deadlines or
allow the company to comply by providing it additional time,
which would require the company to grant an extension to the
statute of limitations. The thought was that by extending the
statute of limitations to six years, it was a matter of
maintaining decent working relations, she said.
5:35:09 PM
REPRESENTATIVE FAIRCLOUGH recalled hearing earlier this
afternoon that issues with those complying with the extension
are typically resolved within six months. She inquired as to
the typical timeframe to complete a tax return when the auditors
are up against the three years.
COMMISSIONER GALVIN answered that Mr. Iversen, Tax Division,
DOR, testified that the extensions are typically six months.
REPRESENTATIVE FAIRCLOUGH opined that there's a reasonable
expectation to not have liabilities that lag into the future for
incredible lengths of time. Therefore, she requested
consideration of a shorter time period in relation to what
taxpayers have to do, especially since three years gets results
from most of the taxpayers.
5:37:48 PM
CO-CHAIR GATTO highlighted that six years is permissive, and
therefore the audit could be completed in less than six years.
He expressed concern that up against the deadline, an additional
action will have to be taken to request an extension and gather
the data to determine how much can be done within the deadline.
He said that he wants the auditors to have six years in order to
avoid facing the aforementioned.
5:38:43 PM
COMMISSIONER GALVIN explained that the representation provided
with regard to how it works within the three years is a
representation of the prioritization that already occurs. That
prioritization results in most issues being cleared out with
only a few complicated audits pushing up against the limit. The
commitment to the legislature and the taxpayer, he related, is
to complete the audits in as diligent a timeframe as possible,
regardless of the statute of limitations. The question is in
regard to how often the auditors will be placed in the position
of seeking an extension or an alternative track if the extension
isn't granted. He informed the committee that the auditors have
advised the administration that six years is the appropriate
timeframe to manage the task before them with this new tax and
complete the bulk of the audits.
CO-CHAIR GATTO expressed hope that with a new cadre of auditors,
the division finds itself ahead of schedule. He said that he is
perfectly willing to support the proposed six years.
5:40:27 PM
REPRESENTATIVE KAWASAKI inquired as to the number of accountants
and auditors utilized under the economic limit factor (ELF) as
opposed to how many there are now.
COMMISSIONER GALVIN specified that when the PPT was passed there
were 10 auditors. Seven additional positions have been
authorized, although they haven't all been filled. At this
point, the total number of auditors remains at 17. He commented
that doubling the number of auditors doesn't necessarily mean
that the timeline can be cut in half as the timeline is based on
factors beyond the auditors doing the work. "We believe we can
manage the work within the number that we've requested and
within the parameters that we requested in the bill," he opined.
REPRESENTATIVE KAWASAKI maintained his objection.
5:42:28 PM
REPRESENTATIVE WILSON recalled testimony that the state requires
tax returns from the oil companies to be provided by March.
However, the oil companies' year isn't complete and they don't
have to do their tax returns for the company until October after
which the true-ups for the partners are completed. The true-ups
can take up to six months. Therefore, she surmised that before
the auditors can even start looking at the true data, it's
almost two years into the situation.
COMMISSIONER GALVIN clarified that the oil companies provide the
state with their initial statement by April 1st. Generally, the
oil companies run their primary accounting, internal auditing,
and joint interest billing between partners on a schedule that's
associated with the federal tax return deadline, which is in the
fall. Another level of accounting, analysis, and auditing
occurs in preparation for the federal tax return. At that
point, the state can obtain a more detailed picture, although
some outstanding issues between the partners may remain.
Depending upon the outstanding issues, there may be the need to
wait until the state goes further. He noted that an audit
strategy for a particular year with a particular taxpayer can be
developed. The two years is what the state expects to be the
timeline for its process from that point forward. The
aforementioned, he clarified, isn't a result of their processes
taking longer.
REPRESENTATIVE WILSON said that she wanted to get on the record
that the timeframes don't gel and thus can easily be extended
beyond two years, outside of the department's control. She then
asked if the thoroughness of the audits will be impacted if the
extension to six years isn't achieved.
COMMISSIONER GALVIN responded that without the requested six
years, the department will be more often forced into a situation
in which it would make claim or request an extension. If the
department is forced to make claim, it would be based on an
incomplete audit, and therefore the claim would be made on the
maximum expected for the potential liability. Basically, it's a
less ideal conflict resolution process or way of arriving at a
conclusion to the audit. The department is trying to avoid
placing the state in the aforementioned position.
REPRESENTATIVE WILSON opined that it's very important to get as
much as possible while checking credits, the auditors should be
given the flexibility necessary to perform correct audits.
Therefore, she opined that she would likely not support
Amendment 13.
5:46:53 PM
REPRESENTATIVE ROSES related his understanding that once the
joint interest billings are filed, the companies provide the
department with an amended return.
COMMISSIONER GALVIN explained that the oil companies will
complete their federal tax return. If that federal tax return
requires them to make an amendment to the department, they would
do so.
MS. DAVIS said that an answer to such a question would require
an audit of every year by taxpayer. From an operator and
working interest operator standpoint, the battles within the
unit are ruthless and lengthy. The aforementioned process can
take a long period of time. In fact, although the process is
lodged within three years, the process can take up to six years.
In fact, she said she's seen it take 10 years. Even once it's
resolved, the department would still need to audit to confirm
that the lower costs turned into an amended return to the
department. However, the problem is that the aforementioned
will happen outside of three years.
5:48:54 PM
REPRESENTATIVE ROSES related his understanding that once an
amended return is submitted, the statute of limitations begins.
MS. DAVIS noted her agreement.
REPRESENTATIVE ROSES asked then if it's conceivable that if the
statute of limitations was extended to six years, an amended
audit could potentially result [in the audit process taking] 12
years.
MS. DAVIS confirmed that there would be an additional period on
that issue.
COMMISSIONER GALVIN highlighted that the additional time period
would be only on the issues of the amended return.
REPRESENTATIVE ROSES commented that he tends to want to give the
department the tools it needs to perform the best job it can.
However, he said that he wanted to ensure that the other parties
involved aren't allowed to use the time to play the system.
5:50:14 PM
REPRESENTATIVE FAIRCLOUGH posed a scenario in which the statute
of limitations is six years and a taxpayer has underreported its
tax return. She asked whether liability would be calculated on
the entire six years.
COMMISSIONER GALVIN answered that the tax issues are isolated to
the tax year in question.
REPRESENTATIVE FAIRCLOUGH related her understanding that the
interest and the penalty is calculated on the six years if the
true-up doesn't occur until six years.
COMMISSIONER GALVIN noted his agreement.
REPRESENTATIVE FAIRCLOUGH pointed out that business is placed at
risk for six years. Furthermore, earlier statements that
without an extension to the six years the state would forego
future joint agreement liabilities are untrue because when a new
federal return is filed, it provides a new opening for the state
to collect the difference.
COMMISSIONER GALVIN clarified that would be the case only if the
oil company filed a new state tax return. The filing of a new
federal return doesn't change the state's statute of
limitations. The oil company would only have to true-up with
the state after filing an amended federal return if it chose to
do so and report it to the state.
REPRESENTATIVE FAIRCLOUGH inquired then as to how the six years
helps the department.
COMMISSIONER GALVIN responded that it gives the department
longer to find changes in a federal tax return.
REPRESENTATIVE FAIRCLOUGH surmised then that the department
doesn't have a system by which it checks to determine if the oil
companies have amended their federal tax returns.
MS. DAVIS pointed out that the state doesn't receive the federal
tax returns as a matter of course.
5:52:06 PM
REPRESENTATIVE FAIRCLOUGH opined that while extending the
statute of limitations to six years provides the administration
flexibility, the business interest is on the hook. Furthermore,
she recalled testimony that these audits are resolved within six
months after the completion deadline.
COMMISSIONER GALVIN clarified that those [audits] that have
reached the statute of limitations generally result in an
extension of six months, sometimes a year or longer.
REPRESENTATIVE FAIRCLOUGH reminded the committee that it was
told that those [audits requiring an extension beyond the
current statute of limitations] amounts to 85 percent of large
taxpayers. "Again, we're penalizing an entire system of people
that are contributing to our economy by keeping a liability out
there when we only have very few people, by your comments ...,
that actually cross the three-and-a-half year period," she
opined.
5:53:46 PM
COMMISSIONER GALVIN said he took exception to Representative
Fairclough's indication that an extension of the statute of
limitations penalizes the companies. As Ms. Davis mentioned
earlier, much of the time has to do with the exchange between
the parties. It's a bit of a mischaracterization to say that
changing the statute of limitations from three years to six
years is penalizing the taxpayers, rather it's a matter of
recognizing that the three-year statute of limitations will
force both the department and the company against that deadline
more often than thus far. The desire, he opined, is to have a
deadline commensurate with the workload.
5:54:57 PM
REPRESENTATIVE FAIRCLOUGH moved that the committee adopt an
amendment to Amendment 13 such that it would read as follows:
Page 22, line 3:
Delete "six"
Insert "four"
REPRESENTATIVE KAWASAKI objected.
5:55:35 PM
CO-CHAIR JOHNSON inquired as to how joint interest billings work
as he said he understands that they are no longer a starting
point for auditing.
COMMISSIONER GALVIN clarified that joint interest billings will
be used as a starting point for auditing, which is why its
specified in ACES. Existing law made the use of joint interest
billings mandatory in certain cases and permissive in others.
The administration, he related, wanted a general statement
specifying that the department could use the industry standards
as well as the joint interest billings as a way of
characterizing whether costs are "in or not." He said that [the
general statement] provides the department with the discretion
to use the joint interest billings.
5:56:54 PM
CO-CHAIR JOHNSON inquired as to why not mandate that the audits
start with the joint interest billings as that may shorten the
period of time.
COMMISSIONER GALVIN explained that the joint interest billings
represent an agreement between the entities with regard to the
costs agreed upon amongst companies that are appropriate to be
billed to a particular unit. Those costs don't necessarily
match what the state classifies as an allowable expense. The
department doesn't want to be bound by what the companies agreed
upon but rather believes it's appropriate for the state to
identify what to deduct from its tax code. Therefore, the
language should be permissive to use the joint interest billing
in instances when it's useful, but not mandate it as it may not
represent what would be useful [under the state's definitions].
5:58:03 PM
REPRESENTATIVE KAWASAKI related that he maintained his objection
to the amendment to Amendment 13.
A roll call vote was taken. Representatives Fairclough and
Johnson voted in favor of the amendment to Amendment 13.
Representatives Roses, Guttenberg, Edgmon, Kawasaki, Wilson,
Seaton, and Gatto voted against it. Therefore, the amendment to
Amendment 13 failed to be adopted by a vote of 2-7.
5:58:48 PM
A roll call vote was taken. Representatives Fairclough, Roses,
and Johnson voted in favor of Amendment 13. Representatives
Guttenberg, Edgmon, Kawasaki, Wilson, Seaton, and Gatto voted
against it. Therefore, Amendment 13 failed to be adopted by a
vote of 3-6.
The committee took an at-ease from 5:59 p.m. to 6:41 p.m.
6:42:22 PM
REPRESENTATIVE SEATON moved that the committee adopt Amendment
26, labeled 25-GH0014\L.62, Wayne/Bullock, 11/3/07, which read:
Page 1, lines 4 - 5:
Delete "and south of 68 degrees North latitude"
Page 13, line 25:
Delete "and no part of which is north of 68
degrees North latitude"
Page 13, line 31, through page 14, line 2:
Delete "produced from a lease or property for
which the start of regular deliveries of marketable
gas is after December 31, 2007"
Insert
"(1) produced from a lease or property for
which the start of regular deliveries of marketable
gas is after December 31, 2007; and
(2) not supplied for
(A) consumption as petrochemical feedstock
for a manufacturing process;
(B) processing into liquefied natural gas
for export from the state; or
(C) conversion to a liquid"
REPRESENTATIVE KAWASAKI objected.
6:42:33 PM
REPRESENTATIVE SEATON explained that the purpose of Amendment 26
is to equalize opportunities for commercialization of natural
gas across Alaska for consumer use. He further explained that
Amendment 26 deletes the language specifying that the gas
receiving the Cook Inlet gas credit has to be south of 68
degrees North Latitude and replaces it with language specifying
that the gas receiving the preferential tax treatment can't be
used for industrial purposes as defined in subparagraphs (A)-(C)
of Amendment 26. The purpose is to allow a tax break, the lower
tax, to go to gas supplied to Alaska residents and to commercial
entities and for power generation throughout the state, no
matter the source.
6:44:36 PM
REPRESENTATIVE KAWASAKI withdrew his objection.
6:44:45 PM
REPRESENTATIVE SEATON stated that Amendment 26 doesn't set the
gas rate for industrial use from the North Slope or elsewhere in
the state. Amendment 26 specifically excludes LNG, industrial
use out of state, or conversion of a liquid such as GTL. He
reiterated that this [tax break] is only meant for residential
and commercial power generation in the state and doesn't set a
tax rate for a gasline for LNG exports.
6:45:44 PM
REPRESENTATIVE WILSON objected for discussion purposes. She
inquired as to how Amendment 26 would impact Fairbanks natural
gas.
REPRESENTATIVE SEATON pointed out that Amendment 26 specifies in
subparagraph (B) that it doesn't include processing into
liquefied natural gas for export from the state. Therefore, if
there was LNG or propane that was servicing within the state, it
would receive the preferential tax. However, if it's exported
or used in a manufacturing process, it wouldn't receive the
preferential tax.
REPRESENTATIVE WILSON withdrew her objection.
6:46:50 PM
CO-CHAIR JOHNSON objected for discussion purposes.
REPRESENTATIVE GUTTENBERG expressed the need to hear from the
administration regarding Amendment 26.
6:47:15 PM
COMMISSIONER GALVIN opined that Amendment 26 may have some
unintended consequences. He explained, "If you read it as is,
if there is a pipeline from the North Slope that goes across
land into Canada and the gas is used for whatever purposes
there, for residential purposes, we would be giving them the
Cook Inlet favorable tax treatment." It isn't exclusive to in-
state use, but is simply exclusive to industrial purposes. He
informed the committee that the administration has drafted an
amendment that basically accomplishes the same thing by stating
that if there's gas produced within the state, outside of Cook
Inlet, that will be used in the state, it will receive the Cook
Inlet tax treatment. The administration's amendment doesn't
distinguish between whether the gas is used for feed stock or
otherwise, as the administration doesn't view that as an issue.
He relayed that the administration believes it's appropriate for
gas produced in Cook Inlet that will be used in the state to say
that it's going to receive the Cook Inlet tax treatment.
6:49:08 PM
REPRESENTATIVE SEATON related his view that the aforementioned
is problematic if there's a GTL plant on the North Slope that
coverts the gas to oil and it's used in the state. Without an
exclusion, the Cook Inlet preferential tax treatment would be
given for a commercial process. He indicated that he would be
willing to withdraw Amendment 26 and entertain combining it
[with the administration's amendment].
6:49:55 PM
CO-CHAIR JOHNSON recalled that there is a mine located north of
68 degrees North latitude with gas deposits that it could use to
generate electricity. He asked if the adoption of Amendment 26
would create restrictions on [a project] on state lands. He
also asked if the plant in Kenai won't be able to take the tax
credit because it's exporting LNG.
COMMISSIONER GALVIN pointed out that it's in a separate section,
and therefore would only apply to gas produced outside of Cook
Inlet that's liquefied and shipped. The primary concern with
Amendment 26 is that it's overly broad. He opined that there's
the possibility of what the administration desires in addition
to a definition that limits the in-state use to exclude
conversion into liquid, which would be a simple solution that
also satisfies Co-Chair Johnson's concern. Commissioner Galvin
said that for basically in-state uses of the gas there is an
advantage in ensuring that they aren't disparately treated in
comparison to Cook Inlet. Therefore, he recommended reviewing
the more comprehensive amendment and adding a clarification to
avoid the situation mentioned by Representative Seaton.
6:52:52 PM
CO-CHAIR JOHNSON asked if the committee has the administration's
amendment.
COMMISSIONER GALVIN informed the committee that the amendment is
currently being converted into the proper form by Legislative
Legal and Research Services. The amendment should be included
in the next batch of amendments.
6:53:59 PM
REPRESENTATIVE GUTTENBERG reminded the committee that companies
obtained their lease with certain assumptions. However,
Amendment 26 would create a restriction. He asked whether
that's an issue.
COMMISSIONER GALVIN clarified that [the amendment] isn't
restricting the company's use, rather it's defining the tax
treatment that will be applied for a particular use. Therefore,
if the gas will be used for in-state consumption, there will be
a specific tax treatment whereas gas that's exported out of the
state would receive a different tax treatment.
6:54:59 PM
REPRESENTATIVE GUTTENBERG turned to the restrictions of the
trade.
COMMISSIONER GALVIN informed the committee that the language in
the administration's amendment is structured differently.
6:55:58 PM
REPRESENTATIVE SEATON withdrew Amendment 26.
6:56:20 PM
REPRESENTATIVE ROSES suggested that the reference to page 1,
lines 4-5 of Amendment 26 should refer to page 1, lines 3-4.
[Following was discussion regarding committee procedure with
regard to the amendments.]
7:03:01 PM
REPRESENTATIVE SEATON moved that the committee adopt Amendment
11, labeled 25-GH0014\L.12, Bullard/Bullock, 11/1/07, [text
provided previously].
REPRESENTATIVE FAIRCLOUGH objected.
7:03:44 PM
REPRESENTATIVE SEATON reminded the committee that Amendment 11
was held earlier in order to determine if there was language to
accomplish the reporting of capital credits and capital
expenditures by the industry when [the item/equipment] reaches
the state. Language to that end wasn't found, he said.
Therefore, Amendment 11 is before the committee as it was when
it was first before the committee. He reminded the committee
that Amendment 11 specifies that capital expenditures and
capital credits will be declared as lease expenditures by the
oil companies when [the item/equipment] reaches the state. One
of the benefits of the aforementioned is that it provides one of
the few incentives for stimulating jobs in Alaska. He then drew
attention to the contingent effect on page 3 of the amendment.
That provision would come into play if the final judgment of a
challenge that Alaska had an advantage over another state
nullified the effects, then Section 47 would take effect and
thus the capex would be culled and credited when the items reach
the leasehold. He opined that the aforementioned addresses the
earlier question regarding the Commerce Clause.
7:06:02 PM
REPRESENTATIVE FAIRCLOUGH announced her intent to oppose
Amendment 11. She restated her belief that Amendment 11 will
deter investment in Alaska. Although the amendment may increase
jobs in Alaska, the smaller explorers won't be able to take
credits until the items are in state. She pointed out that the
language on line 16 of Amendment 11 doesn't read well.
REPRESENTATIVE SEATON noted that it's the language of the
drafting attorney, but said that it could be checked if the
amendment is adopted.
7:07:31 PM
REPRESENTATIVE ROSES announced that he wanted to remove his name
from Amendment 11.
CO-CHAIR GATTO announced that Representatives Johnson and Wilson
also wanted to remove their names from Amendment 11.
7:08:00 PM
A roll call vote was taken. Representatives Edgmon, Kawasaki,
Seaton, Guttenberg, and Gatto voted in favor of Amendment 11.
Representatives Fairclough, Roses, Johnson, and Wilson voted
against it. Therefore, Amendment 11 was adopted by a vote of 5-
4.
7:09:46 PM
REPRESENTATIVE SEATON withdrew Amendment 9.
7:10:12 PM
CO-CHAIR JOHNSON moved that the committee adopt Amendment 14,
labeled 25-GH0014\L.35, Cook/Bullock, 11/3/07, which read:
Page 2, line 29, following "imposed":
Delete "tax information, records, and files
received from the Department of Revenue under
AS 43.05.230 shall be kept confidential in accordance
with that section;"
Page 10, line 7, following "provided in":
Insert "(j) of this section and"
Page 10, following line 10:
Insert a new bill section to read:
"* Sec. 12. AS 43.05.230(f) is amended to read:
(f) A wilful or reckless violation of the
provisions of this section or of a condition imposed
under AS 43.55.040(1)(B) is punishable by a fine of
not more than $25,000, or by imprisonment for not more
than five years, or both. A violation of the
provisions of this section or of a condition imposed
under AS 43.55.040(1)(B) because of gross negligence
is punishable by a fine of not more than $5,000, or by
imprisonment for not more than two years, or by both."
Renumber the following bill sections accordingly.
Page 10, line 12:
Delete "The"
Insert "Except as provided in (j) of this
section, the [THE]"
Page 10, line 18, following "subsection.":
Insert "All materials and information furnished
to the Department of Natural Resources must be clearly
stamped, marked, or otherwise designated, on each
page, as being tax materials or information that is
required to be kept confidential under this section."
Page 10, following line 18:
Insert a new bill section to read:
"* Sec. 14. AS 43.05.230 is amended by adding new
subsections to read:
(j) Notwithstanding any provision of AS 38.05 or
AS 41.09, the commissioner may not furnish to the
Department of Natural Resources any information or
materials obtained by the department under AS 43.55
that disclose a person's
(1) budget or plans, or lack of a budget or
plan, for bidding in any oil and gas lease sale to be
held, or planned or scheduled to be held, by the
Department of Natural Resources under AS 38.05;
(2) budget or plans, or lack of a budget or
plan, for bidding to purchase, making an offer to
purchase, or soliciting a proposal from the Department
of Natural Resources to sell under AS 38.05.183 and
AS 38.06, state royalty oil or gas, or both, taken in
kind under AS 38.05.182;
(3) operating and capital budgets for the
current and following calendar years for a lease or
property producing oil or gas, or both, including any
assumptions in those budgets regarding market prices
or conditions for oil and gas, unless the Department
of Natural Resources certifies in writing to the
department that it has no plan to offer for sale or
bid under AS 38.05.183 and AS 38.06, during the
current and following two calendar years, state
royalty oil or gas taken in kind under AS 39.05.182
other than to renew or extend an existing contract to
sell state royalty oil or gas taken in kind; or
(4) planned operating and capital budgets
for either or both of the second and third calendar
years after the current year for a lease or property
producing oil or gas, or both, including any
assumptions in those planned budgets regarding market
prices or conditions for oil and gas, unless the
Department of Natural Resources certifies in writing
to the department that it has no plan to offer for
sale or bid under AS 38.05.183 and AS 38.06, during
the current and following two calendar years, state
royalty oil or gas taken in kind.
(k) If the department becomes aware that any
material or information that is confidential under
this section has been unlawfully disclosed or is about
to be unlawfully disclosed in violation of this
section, or has probable cause to believe that the
information has been or is about to be disclosed, the
department shall, within 72 hours of first gaining the
awareness or having probable cause, notify each person
whose confidential material or information is or may
be included in that actual, apparent, or threatened
disclosure. The department shall cooperate to the
fullest extent permitted by law with each person it
notifies under this subsection to prevent the
disclosure, if possible, and, if the disclosure has
occurred or appears to have occurred, to recover as
quickly as possible all material or information and to
minimize its further disclosure and dissemination.
When the department believes that an unlawful
disclosure has occurred, it shall report the crime as
quickly as practicable to the division in the
Department of Public Safety responsible for the Alaska
state troopers.
(l) Each other state agency that receives
confidential material or information under this
section shall, with respect to an actual, apparent, or
impending unlawful disclosure of that information,
have the same duty and authority to respond to the
situation that the department has under (k) of this
section.
(m) In this section, "oil" and "gas" have the
meanings given in AS 43.55.900."
Renumber the following bill sections accordingly.
Page 30, line 17:
Delete "Notwithstanding"
Insert "(a) Subject to (b) of this section and
notwithstanding"
Page 30, line 22:
Delete "lease or property, unit, or"
Page 31, following line 4:
Insert a new subsection to read:
"(b) The department may not select a group of
producers or explorers for purposes of publishing a
category of aggregated information for them if the
amount in that category of information for one of the
group accounts for more than 40 percent of the group's
total for that category."
Renumber internal references to bill sections in
accordance with this amendment in a way that makes
sections 12 and 14, added by this amendment, effective
immediately and omits them from the applicability and
retroactive sections. Below are all internal bill
section references in this bill:
Page 31, lines 25, 27, 29, 30, and 31
Page 32, lines 1, 3, 13, 16, 19, and 31
Page 33, lines 2, 19 - 20, 21, and 22
[End of Amendment 14.]
CO-CHAIR GATTO objected.
7:10:43 PM
CO-CHAIR JOHNSON pointed out that Amendment 14 calls for more
penalties for violations and requires the department to clearly
mark and identify all the confidential information, which
strengthens the confidentiality of the department. He related
that Co-Chair Gatto has assured him that once the amendment is
cleaned up [with respect to narrowing its focus to the call], it
will be presented to the House Finance Committee. At this time,
Co-Chair Johnson withdrew Amendment 14.
7:12:03 PM
CO-CHAIR JOHNSON moved that the committee adopt Amendment 15,
which read:
Page 10, line 19 - Page 33, line 23
Delete: Sec. 13 through Sec. 45
CO-CHAIR GATTO objected.
7:12:29 PM
CO-CHAIR JOHNSON explained that Amendment 15 provides the
administration with the desire to have the administrative fixes
to provide the necessary information to the legislature.
Without enough information on the first sections of the
legislation, he questioned why the committee is making a
decision on the remainder of the legislation. He emphasized
that the committee doesn't have enough information to make the
decisions it's being asked to make. Furthermore, the business
community across the state is shuddering.
7:14:22 PM
A roll call vote was taken. Representative Johnson voted in
favor of Amendment 15. Representatives Seaton, Roses,
Guttenberg, Edgmon, Kawasaki, Fairclough, Wilson, and Gatto
voted against it. Therefore, Amendment 15 failed to be adopted
by a vote of 1-8.
7:15:18 PM
REPRESENTATIVE GUTTENBERG moved that the committee adopt
Amendment 16, labeled 25-GH0014\L.16, Wayne/Bullock, 11/3/07,
which read:
Page 1, line 8, following "supervisors":
Insert "and to allow them to participate in the
public employees' retirement system defined benefit
plan"
Page 9, following line 15:
Insert new bill sections to read:
"* Sec. 10. AS 39.35.095 is amended to read:
Sec. 39.35.095. Applicability of AS 39.35.095 -
39.35.680. The [FOLLOWING] provisions of AS 39.35.095
- 39.35.680 [THIS CHAPTER] apply only to members first
hired before July 1, 2006, or members who are eligible
under AS 39.35.159 to elect the defined benefit plan
[: AS 39.35.095 - 39.35.680].
* Sec. 11. AS 39.35 is amended by adding a new
section to article 3 to read:
Sec. 39.35.159. Election of retirement benefits
by oil and gas auditors. Notwithstanding any contrary
provision of this chapter, an oil and gas auditor
under AS 39.25.110(42) may, within 30 days after
commencing employment or within 30 days after the
effective date of this section, whichever occurs
later, elect to participate in the defined benefit
plan established in AS 39.35.095 - 39.35.680 in lieu
of participating in the defined contribution
retirement plan established under AS 39.35.700 -
39.35.990. A person making an election under this
section may not change the election more than 30 days
after commencing employment. The board shall establish
transfer procedures by regulation."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 26, 27, 34 - 36, and 39"
Page 31, line 27:
Delete "Sections 14 - 20, 31, and 38"
Insert "Sections 16 - 22, 33, and 40"
Page 31, line 29:
Delete "Sections 26 and 27"
Insert "Sections 28 and 29"
Page 31, line 30:
Delete "sec. 26"
Insert "sec. 28"
Page 31, line 31:
Delete "sec. 27"
Insert "sec. 29"
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 31"
Page 32, line 3:
Delete "secs. 13 and 29"
Insert "secs. 15 and 31"
Page 32, line 31:
Delete "secs. 24, 25, 32 - 34, and 37"
Insert "secs. 26, 27, 34 - 36, and 39"
Page 33, line 2:
Delete "secs. 14 - 20, 26, 27, 31, and 38"
Insert "secs. 16 - 22, 28, 29, 33, and 40"
Page 33, lines 19 - 20:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 26, 27, 34 - 36, and 39"
Page 33, line 21:
Delete "Sections 14 - 20, 26, 27, 31, and 38"
Insert "Sections 16 - 22, 28, 29, 33, and 40"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 46"
CO-CHAIR JOHNSON objected.
7:15:28 PM
REPRESENTATIVE GUTTENBERG explained that Amendment 16 allows the
new oil and gas auditors the ability to have the option of
entering the state's defined benefit plan or the defined
contribution plan. This will help address the difficulties in
recruiting and retaining these individuals.
[Following was discussion regarding how the committee would
proceed.]
7:30:27 PM
REPRESENTATIVE FAIRCLOUGH inquired as to the administration's
view of Amendment 16.
COMMISSIONER GALVIN stated that the administration doesn't
support Amendment 16.
7:30:51 PM
REPRESENTATIVE WILSON opined that it's not fair for new entrants
to be able to pick which benefit package, and therefore she said
she wouldn't support Amendment 16.
7:31:23 PM
REPRESENTATIVE ROSES opined that Amendment 16 isn't the best way
to handle the issue, although it does need to be addressed. He
echoed Representative Wilson's comment with regard to fairness.
He mentioned the unfunded liability of PERS and TRS and the need
to permanently address PERS and TRS.
7:33:11 PM
REPRESENTATIVE SEATON related his belief that reopening the
class and establishing a new class won't stand the test.
Therefore, he urged members to vote against Amendment 16.
7:33:45 PM
REPRESENTATIVE GUTTENBERG emphasized that the new oil and gas
auditors are being given high status, pay, and have even been
taken out of the classified category. The [unfunded] liability
of PERS and TRS is small compared to what the state will receive
by bringing in these exempt auditors. He highlighted that
Amendment 16 merely provides these new oil and gas auditors an
option.
7:35:01 PM
A roll call vote was taken. Representatives Kawasaki,
Guttenberg, and Edgmon voted in favor of Amendment 16.
Representatives Fairclough, Wilson, Seaton, Roses, Johnson, and
Gatto voted against it. Therefore, Amendment 16 failed to be
adopted by a vote of 3-6.
The committee took an at-ease from 7:36 p.m. to 8:16 p.m.
8:16:50 PM
CO-CHAIR GATTO reconvened the meeting.
8:17:01 PM
REPRESENTATIVE GUTTENBERG withdrew Amendment 17.
8:17:17 PM
REPRESENTATIVE EDGMON withdrew Amendment 18, but highlighted the
importance of providing a fund for energy assistance
particularly for those in rural Alaska.
8:18:27 PM
REPRESENTATIVE GUTTENBERG moved that the committee adopt
Amendment 19, labeled 25-GH0014\L.39, Bullard/Bullock, 11/3/07,
which read:
Page 10, following line 18:
Insert a new bill section to read:
"* Sec. 13. AS 43.05.241 is amended by adding a new
subsection to read:
(b) In an appeal under this section, an amount
due under AS 43.55 shall be paid within 30 days after
the date of the service of the informal conference
decision. In place of payment of the amount due, the
taxpayer may file a bond with the department or place
funds equal to the amount of the tax obligation in an
escrow account, under escrow instructions approved by
the department."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 25, 26, 33 - 35, and 38"
Page 31, line 27:
Delete "Sections 14 - 20, 31, and 38"
Insert "Sections 15 - 21, 32, and 39"
Page 31, line 29:
Delete "Sections 26 and 27"
Insert "Sections 27 and 28"
Page 31, line 30:
Delete "Section 26"
Insert "Section 27"
Page 31, line 31:
Delete "sec. 27"
Insert "sec. 28"
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 30"
Page 32, line 3:
Delete "secs. 13 and 29"
Insert "secs. 14 and 30"
Page 32, following line 3:
Insert a new subsection to read:
"(e) AS 43.05.241(b), added by sec. 13 of this
Act, applies to informal conference decisions under
AS 43.05.240(a) entered on or after the effective date
set out in sec. 45 of this Act."
Page 32, line 31:
Delete "secs. 24, 25, 32 - 34, and 37"
Insert "secs. 25, 26, 33 - 35, and 38"
Page 33, line 2:
Delete "secs. 14 - 20, 26, 27, 31, and 38"
Insert "secs. 15 - 21, 27, 28, 32, and 39"
Page 33, lines 19 - 20:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 25, 26, 33 - 35, and 38"
Page 33, line 21:
Delete "Sections 14 - 20, 26, 27, 31, and 38"
Insert "Sections 15 - 21, 27, 28, 32, and 39"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 45"
CO-CHAIR JOHNSON and REPRESENTATIVE ROSES objected.
8:18:51 PM
REPRESENTATIVE GUTTENBERG explained that if there's an informal
conference committee decision between a taxpayer and the state
and there's a dispute, then the amount due shall be paid to the
state either in bonds or funds in an escrow account. Basically,
Amendment 19 transfers the responsibility or pressure on who
wants to settle. He opined that the other side will be more
willing to come to the table and reach a resolution if the funds
are placed in an escrow account.
8:19:42 PM
REPRESENTATIVE SEATON inquired as to whether an informal
conference decision is an appropriate place for the liability to
occur for the deposit of funds.
COMMISSIONER GALVIN specified that the service of the informal
conference decision would be the beginning of the formal
administrative appeal process. "If there is a desire to ...
put the money up and we'll decide who's going to end up with the
disputed amount, that would be an appropriate timeframe to do
so," he said. In response to Co-Chair Johnson, Commissioner
Galvin stated that the administration doesn't object to
Amendment 19.
8:21:20 PM
REPRESENTATIVE ROSES reminded the committee that just a few
hours ago the committee substantially increased the revenue to
the state and has instituted fines, penalties, and requirements.
Now to require that the money be placed in a escrow account
seems to be over the edge, he opined. Therefore, Amendment 19
isn't an amendment he can support at this time, he stated.
8:22:20 PM
REPRESENTATIVE WILSON asked if Amendment 19 would be beneficial
to the administration in any way.
COMMISSIONER GALVIN noted his agreement with the sponsor that
Amendment 19 could change the taxpayer's perspective in regard
to drawing out the issue. However, there are other provisions,
such as the penalties and interest, that create that motivation
and thus it's a matter of striking a balance.
8:23:28 PM
REPRESENTATIVE FAIRCLOUGH asked if more management would be
required with the proposal in Amendment 19.
COMMISSIONER GALVIN responded no, in regard to the form of
additional personnel. However, additional administrative steps
would be required to manage it and thus there would be some
workload associated with the proposal in Amendment 19.
REPRESENTATIVE FAIRCLOUGH asked if the passage of HB 2001 [as
amended] today would [send the message] that Alaska is open for
business or are doors being closed as "we continue to weigh down
a proposal from the governor."
COMMISSIONER GALVIN, with regard to Amendment 19, noted his
agreement that the committee needs to balance the message being
sent to the industry and reflect upon whether that's being
achieved. He then said he shared the concern that adding more
penalties, oversight, and distrust does send a negative message.
8:26:01 PM
REPRESENTATIVE FAIRCLOUGH announced that once the amendment
process has concluded she may want to reconsideration the 50
percent penalty. She expressed concern with regard to the
message the amendments are sending.
8:26:38 PM
REPRESENTATIVE GUTTENBERG highlighted that Alaska is a resource
state. He opined that many of these issues are sovereign issues
and taking control of the state for the state is important.
8:28:31 PM
REPRESENTATIVE ROSES related his assumption that no more
personnel would not be needed, although additional time may be
spent on the matter. Therefore, he related his further
assumption that an additional fiscal note would be required.
COMMISSIONER GALVIN said that a fiscal note would only be
necessary in instances in which additional personnel is
necessary. If it's merely a matter of an additional loop with
no additional personnel, then there wouldn't be a fiscal impact.
8:29:24 PM
CO-CHAIR JOHNSON maintained his objection.
8:29:38 PM
A roll call vote was taken. Representatives Guttenberg, Edgmon,
and Kawasaki voted in favor of Amendment 19. Representatives
Fairclough, Wilson, Seaton, Roses, Johnson, and Gatto voted
against it. Therefore, Amendment 19 failed to be adopted by a
vote of 3-6.
8:30:29 PM
REPRESENTATIVE EDGMON moved that the committee adopt Amendment
20, labeled 25-GH0014\L.18, Bullard/Bullock, 11/2/07, which
read:
Page 17, following line 3:
Insert a new bill section to read:
"* Sec. 23. AS 43.55.023(a) is amended to read:
(a) A producer or explorer may take a tax credit
for a qualified capital expenditure as follows:
(1) Unless [NOTWITHSTANDING THAT A
QUALIFIED CAPITAL EXPENDITURE MAY BE A DEDUCTIBLE
LEASE EXPENDITURE FOR PURPOSES OF CALCULATING THE
PRODUCTION TAX VALUE OF OIL AND GAS UNDER
AS 43.55.160(a), UNLESS] a credit for an [THAT]
expenditure is taken under AS 38.05.180(i),
AS 41.09.010, AS 43.20.043, or AS 43.55.025, a
producer or explorer that incurs a qualified capital
expenditure may [ALSO] elect to take a tax credit
against a tax due under AS 43.55.011(e) in the amount
of 20 percent of that expenditure;
(2) a producer or explorer may take a
credit for a qualified capital expenditure incurred in
connection with geological or geophysical exploration
or in connection with an exploration well only if the
producer or explorer provides to the department, as
part of the statement required under AS 43.55.030(a)
for the calendar year for which the credit is sought
to be taken, the producer's or explorer's written
agreement
(A) to notify the Department of Natural
Resources, before the later of 30 days after
completion of the geological or geophysical data
processing or completion of the well, or 30 days after
the statement is filed, of the date of completion and
to submit a report to that department describing the
processing sequence and provide a list of data sets
available;
(B) to provide to the Department of Natural
Resources, within 30 days after the date of a request,
specific data sets, ancillary data, and reports
identified in (A) of this paragraph;
(C) that, notwithstanding any provision of
AS 38, the Department of Natural Resources shall hold
confidential the information provided to that
department under this paragraph for 10 years following
the completion date, after which the department shall
publicly release the information after 30 days' public
notice."
Renumber the following bill sections accordingly.
Page 18, following line 22:
Insert a new bill section to read:
"* Sec. 26. AS 43.55.023(k) is amended to read:
(k) In this section, "qualified capital
expenditure"
(1) means, except as otherwise provided in
(2) of this subsection, an expenditure that is a lease
expenditure under AS 43.55.165, that is not also a
lease expenditure deducted by a producer under
AS 43.55.160, and that is
(A) incurred for geological or geophysical
exploration; or
(B) treated as a capitalized expenditure
under 26 U.S.C. (Internal Revenue Code), as amended,
regardless of elections made under 26 U.S.C. 263(c)
(Internal Revenue Code), as amended, and is
(i) treated as a capitalized expenditure
for federal income tax reporting purposes by the
person incurring the expenditure; or
(ii) eligible to be deducted as an expense
under 26 U.S.C. 263(c) (Internal Revenue Code), as
amended;
(2) does not include an expenditure
incurred to acquire an asset (A) the cost of
previously acquiring which was a lease expenditure
under AS 43.55.165 or would have been a lease
expenditure under AS 43.55.165 if it had been incurred
after March 31, 2006; for purposes of this
subparagraph, "asset" includes geological,
geophysical, and well data and interpretations; or (B)
that has previously been placed in service in the
state; an expenditure to acquire an asset is not
excluded under this paragraph if not more than an
immaterial portion of the asset meets a description
under this paragraph."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 23, 25 - 27, 34 - 36, and 39"
Page 31, line 27:
Delete "31, and 38"
Insert "33, and 40"
Page 31, line 29:
Delete "Sections 26 and 27"
Insert "Sections 28 and 29"
Page 31, line 30:
Delete "sec. 26"
Insert "sec. 28"
Page 31, line 31:
Delete "sec. 27"
Insert "sec. 29"
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 31"
Page 32, line 3:
Delete "29"
Insert "31"
Page 32, line 31:
Delete "24, 25, 32 - 34, and 37"
Insert "23, 25 - 27, 34 - 36, and 39"
Page 33, line 2:
Delete "26, 27, 31, and 38"
Insert "28, 29, 33, and 40"
Page 33, lines 19 - 20:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 23, 25 - 27, 34 - 36, and 39"
Page 33, line 21:
Delete "26, 27, 31, and 38"
Insert "28, 29, 33, and 40"
Page 33, line 22:
Delete "44"
Insert "46"
[End of Amendment 20.]
CO-CHAIR JOHNSON objected.
8:30:51 PM
REPRESENTATIVE EDGMON explained that the intent of Amendment 20
is to not allow a taxpayer to utilize the deduction and the
credit, and thereby double dip.
8:31:35 PM
JOHN MESSENGER, Staff to Representative Kerttula, Alaska State
Legislature, began by informing the committee that he was the
deputy commissioner in DOR for a few years and was also in the
attorney general's office for a few years in which he
represented DOR. After leaving state service, Mr. Messenger
related that he was in private practice for 20 years during
which he worked with staff in DOR and Department of Law
regarding various matters defending the state's tax structure in
lawsuits raised by the oil industry. He noted that he also
worked in private practice defending tax audits in the severance
tax and the oil and gas corporate income tax area. He noted
that he is an attorney. In response to Representative Roses,
Mr. Messenger confirmed that during this special session he is
working for Representative Kerttula.
8:33:21 PM
CO-CHAIR JOHNSON asked if Mr. Messenger is staff or a hired
consultant.
MR. MESSENGER specified that he is staff.
8:33:45 PM
MR. MESSENGER explained that under the PPT if a capital
expenditure can be deducted under .160, .165 and also receive a
tax credit for that same capital expenditure under the proposed
legislation, a company can "double up" on the same expenditure.
During times of higher oil prices the combination of taking a
deduction and a credit as well as taking a federal income tax
deduction and deducting it for state income taxes can result in
the state and federal government paying close to 100 percent or
even more than 100 percent of the expenditure. Amendment 20
specifies that a company can't deduct and take a credit on the
same capital expenditure.
8:36:02 PM
REPRESENTATIVE ROSES, recalling past presentations, asked if it
would be fair to characterize Amendment 20 as a cap on the
credits.
MR. MESSENGER opined that Amendment 20 proposes a different
approach, such that a company that takes a deduction can't take
a credit and vice versa.
8:37:21 PM
COMMISSIONER GALVIN, in response to Representative Fairclough,
explained that the fundamental structure of the tax is the
concept that a deduction is received as well as a credit.
Accepting Amendment 20 would result in an alteration of all of
the economics provided and thus would change the entire tax
system.
8:38:22 PM
REPRESENTATIVE SEATON asked if there is any time at which the
value of the tax deduction would not exceed the tax credit. He
related his assumption that if there's 22.5 percent or 25
percent deductibility from the capex, under almost every
circumstance the deductibility will exceed the 20 percent
capital credit.
COMMISSIONER GALVIN noted his agreement with Representative
Seaton's assumption.
8:39:15 PM
REPRESENTATIVE SEATON surmised then that the effect of Amendment
20 is to cancel out the 20 percent tax credit entirely because
it will always be exceeded by the benefit of the deductibility
of the tax.
REPRESENTATIVE EDGMON replied yes.
8:39:48 PM
REPRESENTATIVE ROSES reminded the committee of the problems with
the cap, and then announced that he will oppose Amendment 20.
8:40:48 PM
REPRESENTATIVE FAIRCLOUGH inquired as to the "tax consequence"
this places on the industry.
REPRESENTATIVE EDGMON said that he has brought Amendment 20
forward to discuss it and have the committee determine whether
it's too aggressive.
8:41:29 PM
REPRESENTATIVE FAIRCLOUGH opined that this characterization that
these credits are double dipping is a new concept as she has
understood them to provide an incentive and encourage
development. She expressed the need to know the fiscal impact
of reducing the credit by almost 50 percent of what the industry
currently receives.
COMMISSIONER GALVIN pointed out that the net effect of Amendment
20 would be to make the 20 percent credit moot. Given that
capital expenditures are projected to be in the neighborhood of
$2 billion this year, the effect of Amendment 20 would be to add
an extra $400 million tax burden.
8:43:12 PM
REPRESENTATIVE WILSON opined that a balance between fairness and
production is being sought. She expressed concern that
Amendment 20 eliminates the state sharing in some of the risks,
and questioned the impacts that will have on a company's
decision to invest in the state. She related that she is in
opposition to Amendment 20.
8:44:42 PM
REPRESENTATIVE SEATON reminded everyone that with the
progressivity the credits aren't allowed to be deductible
because the investments are at very high margins. Therefore,
the state didn't need to contribute those funds through
deductibility because it's beyond the level at which people will
be making investment decisions. The capital credits and the
deductibility under the base are designed to stimulate decisions
for investment. The non-deductibility of the progressivity is
what keeps the gold plating from going forward, and therefore
there isn't concern with regard to the cap.
8:46:17 PM
REPRESENTATIVE GUTTENBERG inquired as to the effect the
progressivity chart, previously adopted [through an amendment],
have on investment credits. He then inquired as to the maximum
deductions available to be taken with this one off the table.
8:46:53 PM
COMMISSIONER GALVIN, regarding the progressivity, said the
credit remains 20 percent. Commissioner Galvin said:
The nature of the question goes to: Have we over
contributed to a capital investment? What
Representative Seaton was alluding to is: Does the
structure of the progressivity that you provided was
based upon a calculation on the gross value. And so,
you don't get the ... the multiplying affect of the
impact being felt on allowing the base to affect the
deduction and having the progressivity calculated
against it, a deducted amount, and then the credit on
the top of that. But, there still is going to be an
effect because your rate's going to continue to go up,
and your investment is going to bring down your
margin, which will bring down your progressivity which
will bring down your calculated amount. So, I think
in the end the actual percentage that we end up having
... is probably still going to be in the range of, at
the maximum level, probably 70-80 percent -
calculating including federal and all the others. ...
the slides that you may be referring to were the
models that were looking at the marginal effect of one
extra dollar being .... I think with the
progressivity that you adopted, you're still going to
hit that point at some point, it just will be further
up the scale.
8:49:35 PM
MR. PORTER said that Commissioner Galvin provided a fair
representation of the impact of taking out the 20 capex as
proposed under Amendment 20. The relationship between impacts
to legacy fields versus more expensive fields wasn't necessarily
evaluated because the more expensive fields have a higher
lifting cost and thus would've received a higher percentage of
the capex. Therefore, they would receive a disproportionate hit
[under Amendment 20]. To fully understand Amendment 20 and its
impacts, the tax models would need to be remodeled under this
proposal.
8:51:10 PM
REPRESENTATIVE ROSES asked if Mr. Porter would recommend whether
Amendment 20 should be supported.
MR. PORTER indicated that it's difficult to respond to such a
large change, a $400 million shift, without more review. In
response to Co-Chair Johnson, Mr. Porter affirmed that he is a
legislative consultant and his work product is public and
available to any member of the legislature.
8:53:34 PM
REPRESENTATIVE FAIRCLOUGH related her belief that although
Representative Edgmon's proposal is worth considering, it's late
in the process. Therefore, she said that she would not support
Amendment 20, but look to the House Finance Committee to model
the impacts of the amendments passed and the impact Amendment 20
will have.
8:55:36 PM
CO-CHAIR JOHNSON asked if the administration supports Amendment
20.
COMMISSIONER GALVIN replied no.
8:55:54 PM
REPRESENTATIVE EDGMON opined that he has at least accomplished
the goal of initiating discussion, and acknowledged that it's a
bit beyond the scope of where the committee is. Therefore, he
withdrew Amendment 20.
8:56:23 PM
CO-CHAIR GATTO suggested that Amendment 20 be introduced to the
House Finance Committee early on.
8:56:39 PM
[A discussion ensued regarding how to proceed with the
amendments remaining. HB 2001 was held over.]
9:00:03 PM
ADJOURNMENT
The House Judiciary Standing Committee meeting was recessed at
9:00 p.m., to be continued at 10 a.m. November 4, 2007. [The
meeting reconvened November 4, 2007.]
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