Legislature(2005 - 2006)CAPITOL 124

03/03/2006 12:30 PM RESOURCES


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12:37:57 PM Start
12:38:32 PM HB488
03:28:13 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Location Change --
+= HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
Testimony by the Administration
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         March 3, 2006                                                                                          
                           12:37 p.m.                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Jay Ramras, Co-Chair                                                                                             
Representative Ralph Samuels, Co-Chair                                                                                          
Representative Jim Elkins                                                                                                       
Representative Carl Gatto                                                                                                       
Representative Gabrielle LeDoux                                                                                                 
Representative Kurt Olson                                                                                                       
Representative Paul Seaton                                                                                                      
Representative Harry Crawford                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Mary Kapsner                                                                                                     
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative Eric Croft                                                                                                       
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Beth Kerttula                                                                                                    
Representative Vic Kohring (via teleconference)                                                                                 
Representative Mark Neuman                                                                                                      
Representative Norman Rokeberg                                                                                                  
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 488                                                                                                              
"An Act repealing  the oil production tax and  gas production tax                                                               
and providing  for a production tax  on the net value  of oil and                                                               
gas; relating to the relationship  of the production tax to other                                                               
taxes; relating to the dates  tax payments and surcharges are due                                                               
under AS  43.55; relating  to interest  on overpayments  under AS                                                               
43.55; relating  to the treatment  of oil and gas  production tax                                                               
in a  producer's settlement with  the royalty owner;  relating to                                                               
flared gas, and to  oil and gas used in the  operation of a lease                                                               
or property, under AS 43.55;  relating to the prevailing value of                                                               
oil or gas under AS 43.55;  providing for tax credits against the                                                               
tax  due under  AS 43.55  for certain  expenditures, losses,  and                                                               
surcharges; relating to statements  or other information required                                                               
to be filed  with or furnished to the Department  of Revenue, and                                                               
relating  to the  penalty for  failure to  file certain  reports,                                                               
under  AS 43.55;  relating to  the  powers of  the Department  of                                                               
Revenue, and  to the disclosure  of certain  information required                                                               
to be  furnished to  the Department of  Revenue, under  AS 43.55;                                                               
relating   to  criminal   penalties   for  violating   conditions                                                               
governing access to and use  of confidential information relating                                                               
to the  oil and gas  production tax;  relating to the  deposit of                                                               
money  collected by  the Department  of Revenue  under AS  43.55;                                                               
relating to  the calculation of the  gross value at the  point of                                                               
production of  oil or gas;  relating to the determination  of the                                                               
net value  of taxable oil  and gas  for purposes of  a production                                                               
tax on the net value of  oil and gas; relating to the definitions                                                               
of  'gas,' 'oil,'  and certain  other  terms for  purposes of  AS                                                               
43.55;  making  conforming  amendments;   and  providing  for  an                                                               
effective date."                                                                                                                
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 488                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
02/21/06       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/21/06       (H)       RES, FIN                                                                                               
02/22/06       (H)       RES AT 12:30 AM HOUSE FINANCE 519                                                                      
02/22/06       (H)       Heard & Held                                                                                           
02/22/06       (H)       MINUTE(RES)                                                                                            
02/23/06       (H)       RES AT 12:30 AM HOUSE FINANCE 519                                                                      
02/23/06       (H)       Heard & Held                                                                                           
02/23/06       (H)       MINUTE(RES)                                                                                            
02/24/06       (H)       RES AT 12:30 AM HOUSE FINANCE 519                                                                      
02/24/06       (H)       Heard & Held                                                                                           
02/24/06       (H)       MINUTE(RES)                                                                                            
02/25/06       (H)       RES AT 10:00 AM SENATE FINANCE 532                                                                     
02/25/06       (H)       Joint with Senate Resources                                                                            
02/27/06       (H)       RES AT 12:30 AM CAPITOL 124                                                                            
02/27/06       (H)       Heard & Held                                                                                           
02/27/06       (H)       MINUTE(RES)                                                                                            
02/28/06       (H)       RES AT 12:30 AM CAPITOL 124                                                                            
02/28/06       (H)       Heard & Held                                                                                           
02/28/06       (H)       MINUTE(RES)                                                                                            
03/01/06       (H)       RES AT 12:30 AM CAPITOL 124                                                                            
03/01/06       (H)       Heard & Held                                                                                           
03/01/06       (H)       MINUTE(RES)                                                                                            
03/02/06       (H)       RES AT 12:00 AM CAPITOL 124                                                                            
03/02/06       (H)       Heard & Held                                                                                           
03/02/06       (H)       MINUTE(RES)                                                                                            
03/03/06       (H)       RES AT 12:30 AM CAPITOL 124                                                                            
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
ROBYNN WILSON, Director                                                                                                         
Anchorage Office                                                                                                                
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Presented HB 488.                                                                                           
                                                                                                                                
CHERIE NIENHUIS, Petroleum Economist                                                                                            
Tax Division                                                                                                                    
Juneau Office                                                                                                                   
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Presented HB 488.                                                                                           
                                                                                                                                
DAN DICKINSON, CPA, Consultant                                                                                                  
to the Office of the Governor                                                                                                   
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Presented HB 488.                                                                                           
                                                                                                                                
ROBERT MINTZ, Assistant Attorney General                                                                                        
Oil, Gas & Mining Section                                                                                                       
Department of Law (DOL)                                                                                                         
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Presented HB 488.                                                                                           
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CO-CHAIR  RALPH  SAMUELS  called  the  House  Resources  Standing                                                             
Committee  meeting  to order  at  12:37:57  PM.   Representatives                                                             
Ramras, Samuels,  Gatto, LeDoux,  Olson, and Seaton  were present                                                               
at  the  call to  order.    Representatives Elkins  and  Crawford                                                               
arrived as the meeting was in  progress.  Also in attendance were                                                               
Representatives Croft,  Gara, Guttenberg, Kerttula,  Kohring (via                                                               
teleconference), Neuman, and Rokeberg.                                                                                          
                                                                                                                                
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
                                                                                                                                
12:38:32 PM                                                                                                                   
                                                                                                                                
CO-CHAIR SAMUELS announced that the  only order of business would                                                               
be HOUSE BILL  NO. 488, "An Act repealing the  oil production tax                                                               
and gas production tax and providing  for a production tax on the                                                               
net value  of oil and  gas; relating  to the relationship  of the                                                               
production  tax  to  other  taxes;  relating  to  the  dates  tax                                                               
payments  and surcharges  are  due under  AS  43.55; relating  to                                                               
interest  on  overpayments  under   AS  43.55;  relating  to  the                                                               
treatment  of  oil  and  gas   production  tax  in  a  producer's                                                               
settlement with  the royalty owner;  relating to flared  gas, and                                                               
to oil  and gas  used in  the operation of  a lease  or property,                                                               
under AS  43.55; relating to the  prevailing value of oil  or gas                                                               
under AS  43.55; providing  for tax credits  against the  tax due                                                               
under AS 43.55 for certain  expenditures, losses, and surcharges;                                                               
relating to statements or other  information required to be filed                                                               
with or furnished  to the Department of Revenue,  and relating to                                                               
the penalty for failure to  file certain reports, under AS 43.55;                                                               
relating to the  powers of the Department of Revenue,  and to the                                                               
disclosure  of certain  information required  to be  furnished to                                                               
the Department of  Revenue, under AS 43.55;  relating to criminal                                                               
penalties for  violating conditions  governing access to  and use                                                               
of  confidential   information  relating  to  the   oil  and  gas                                                               
production tax;  relating to  the deposit  of money  collected by                                                               
the  Department  of  Revenue  under AS  43.55;  relating  to  the                                                               
calculation of the gross value at  the point of production of oil                                                               
or  gas;  relating to  the  determination  of  the net  value  of                                                               
taxable oil and  gas for purposes of a production  tax on the net                                                               
value  of oil  and gas;  relating  to the  definitions of  'gas,'                                                               
'oil,' and certain  other terms for purposes of  AS 43.55; making                                                               
conforming amendments; and providing for an effective date."                                                                    
                                                                                                                                
12:39:14 PM                                                                                                                   
                                                                                                                                
ROBYNN   WILSON,  Director,   Anchorage  Office,   Tax  Division,                                                               
Department of Revenue (DOR) introduced speakers.                                                                                
                                                                                                                                
12:40:17 PM                                                                                                                   
                                                                                                                                
CHERIE  NIENHUIS, Petroleum  Economist, Tax  Division, Department                                                               
of Revenue  (DOR), said she  was asked to present  charts showing                                                               
the  difference  between   the  proposed  profit-based  petroleum                                                               
production tax  (PPT) for  different tax  and credit  levels with                                                               
the status  quo under different  oil prices.   She said  she used                                                               
the  same assumptions  that Roger  Marks used  in his  testimony.                                                               
She noted  that there  has been a  low-volume scenario,  with 5.5                                                               
billion  barrels  [per year]  and  a  high-volume scenario,  with                                                               
about twice as much barrels being produced.                                                                                     
                                                                                                                                
CO-CHAIR   SAMUELS  asked   if  her   volume  scenarios   include                                                               
development of the Arctic National Wildlife Refuge.                                                                             
                                                                                                                                
MS. NIENHUIS said the high-volume  scenario does.  She said there                                                               
is no  gas line assumed in  these revenues.  The  numbers are not                                                               
inflated;  they  are in  today's  dollars,  and she  referred  to                                                               
charts  handed  to  the committee,  including  documents  on  the                                                               
average  effective tax  rates in  these scenarios  and cumulative                                                               
severance tax revenues.                                                                                                         
                                                                                                                                
12:42:59 PM                                                                                                                   
                                                                                                                                
MS.  NIENHUIS said  today's PPT  charts  will compare  tax/credit                                                               
ratios of 25/20, 30/20, and 30/15  at oil prices of $20, $40, and                                                               
$60  per barrel.   She  noted that  at 25/20  the average  annual                                                               
state revenues are  $80 million less than the status  quo and $20                                                               
million more than the proposed 20/20 ratio [in HB 488].                                                                         
                                                                                                                                
REPRESENTATIVE GARA  noted that  those numbers are  the long-term                                                               
average,  but just  for next  year the  state will  receive about                                                               
$300  million less  than  the status  quo under  HB  488.   Under                                                               
25/20, the  state will receive  about $200 million less  than the                                                               
status quo.                                                                                                                     
                                                                                                                                
MS. NIENHUIS confirmed that her  numbers are averaged out over 24                                                               
years.   She then showed  the outcome for  oil at $40  per barrel                                                               
under a 25/20  regime.  The average annual revenues  will be $565                                                               
million  more than  the status  quo, and  $220 million  more than                                                               
under HB 488.  She said the severance tax amounts change.                                                                       
                                                                                                                                
12:44:44 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARA clarified  that  Ms.  Nienhuis is  reporting                                                               
additional amount of  severance tax the state will  raise, but it                                                               
is before  the deduction on the  corporate income tax.   "I would                                                               
personally  find it  most useful  to  know how  much extra  state                                                               
revenue  we're going  to receive,  not how  much severance  we'll                                                               
receive before we lose it on the corporate income tax side."                                                                    
                                                                                                                                
CO-CHAIR SAMUELS asked how much the corporate income tax drops.                                                                 
                                                                                                                                
MS. WILSON  said the net decrease  would be about 3  percent, but                                                               
she has not seen the modeling.                                                                                                  
                                                                                                                                
REPRESENTATIVE SEATON  asked if  that is based  on a  9.4 percent                                                               
corporate tax.                                                                                                                  
                                                                                                                                
MS. WILSON said it is based on  9.4 percent, but it is also based                                                               
on a  apportionment factor that  is taxpayer specific.   She said                                                               
one  company  may have  a  20  percent apportionment  factor  and                                                               
another may have 5 percent.                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked, "It  is 3 percent  of what?   The                                                               
amount of corporate tax dollars or percentage made, or what?"                                                                   
                                                                                                                                
MS. WILSON  said in the fiscal  note is production tax  only, and                                                               
if the  corporate income  tax is factored  in, the  numbers could                                                               
change by as much as 3 percent, "or so."                                                                                        
                                                                                                                                
12:46:35 PM                                                                                                                   
                                                                                                                                
CO-CHAIR SAMUELS  said, "So  in the  net to  the state  you could                                                               
take 3  percent off  of these numbers  and that  incorporates the                                                               
decrease in the corporate income tax  they would pay to the state                                                               
by writing off this increased tax."                                                                                             
                                                                                                                                
REPRESENTATIVE ROKEBERG asked  if the 20/20 scenario  for $40 oil                                                               
price, shows a $16 million increase, or what?                                                                                   
                                                                                                                                
MS. NIENHUIS  said, "That  is the  cumulative revenues  under the                                                               
severance tax at the different  rates, and what that would be-the                                                               
$16 million--would be  the amount that is cumulative  over the 30                                                               
years  presented here.    So to  figure out  what  that would  be                                                               
different  from  the  other  numbers  presented  here,  you  just                                                               
subtract the  other numbers from  that number.   So I  don't have                                                               
the deltas there."                                                                                                              
                                                                                                                                
REPRESENTATIVE ROKEBERG asked if it's $16 billion over 30 years.                                                                
                                                                                                                                
MS. NIENHUIS said yes.                                                                                                          
                                                                                                                                
REPRESENTATIVE  ROKEBERG stated  that it  is not  like a  typical                                                               
fiscal note showing impacts for each year.                                                                                      
                                                                                                                                
12:48:43 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  LEDOUX  noted  that  Ms. Nienhuis  is  saying  30                                                               
years, but the graph is only showing from 2005 to 2030.                                                                         
                                                                                                                                
MS. NIENHUIS  said she meant  24 years,  not 30, for  the figures                                                               
she is speaking about and the graph.                                                                                            
                                                                                                                                
12:50:03 PM                                                                                                                   
                                                                                                                                
CO-CHAIR SAMUELS said,  "Without the gas line  scenarios, are you                                                               
picturing that in 20/30 the [oil] pipeline shuts down?"                                                                         
                                                                                                                                
MS. NIENHUIS said  in the low-volume scenario,  the pipeline will                                                               
shut down  at any price.   Projections  are started in  2007, she                                                               
clarified, so between then and 2030 is 24 years.                                                                                
                                                                                                                                
12:50:51 PM                                                                                                                   
                                                                                                                                
MS. NIENHUIS  said at a  25/20 PPT and  a $60 price,  the average                                                               
annual revenues over  the 24-year period would  $1.3 billion more                                                               
than  the status  quo and  $400 million  more than  HB 488.   She                                                               
referred to  another page with  effective tax rates,  which might                                                               
be more meaningful "than what's up here in total revenue."                                                                      
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked her  to explain the  effective tax                                                               
rate.                                                                                                                           
                                                                                                                                
12:53:23 PM                                                                                                                   
                                                                                                                                
MS. NIENHUIS explained that the  effective tax rate is "the gross                                                               
revenues  minus  the royalties,  so  in  other words,  the  gross                                                               
wellhead value.   So it's the severance tax as  a function of the                                                               
gross wellhead  value."  She  said, "Under these  scenarios, they                                                               
do vary, but this is the average over the 24 years."                                                                            
                                                                                                                                
REPRESENTATIVE  GARA  asked  if  the  effective  tax  rate  is  a                                                               
percentage   of   profit  or   a   percentage   of  gross   minus                                                               
transportation costs.                                                                                                           
                                                                                                                                
MS. NIENHUIS said the slide  is a representation of the severance                                                               
tax as  a percentage of  the gross  wellhead value.   "The amount                                                               
that we assess at the wellhead minus the royalty."                                                                              
                                                                                                                                
REPRESENTATIVE  GARA said,  "On  one hand  we're considering  the                                                               
percentage  of profits  in the  PPT,  but here  you're having  us                                                               
consider    the    percentage    of    something    that's    not                                                               
[indecipherable].  I don't know how to use these numbers."                                                                      
                                                                                                                                
MS.  WILSON  said she  thinks  there  was  some interest  in  the                                                               
effective  tax rates.   This  was done  in order  to compare  the                                                               
status quo,  which is a tax  based on gross value,  with a system                                                               
based on net value.  She  is presenting what this would look like                                                               
if it was based on gross.                                                                                                       
                                                                                                                                
CO-CHAIR SAMUELS said  the public thinks the 20  percent tax rate                                                               
is a  wash with  the 20  percent credit.   He  asked to  show the                                                               
effective tax  rate.  He said  he wanted the public  to know that                                                               
the legislature  is tripling  the tax rate  under HB  488's 20/20                                                               
ratio with  the price of oil  at $60 per  barrel.  He said  it is                                                               
important to know the overall  government take, which he believes                                                               
is  somewhere between  five and  ten  percent.   He said  "Saying                                                               
20/20 didn't mean anything to a  lot of the people who testified,                                                               
which is  why we wanted to  get the discussion based  more around                                                               
the effective tax rate."                                                                                                        
                                                                                                                                
12:57:35 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROKEBERG  said  part  of  the  confusion  is  the                                                               
requests  for  tax rates  against  the  fiscal note  that  showed                                                               
dollars.  "But this is not that."                                                                                               
                                                                                                                                
CO-CHAIR SAMUELS said he wanted to  show what the state is really                                                               
doing to the industry's tax rate  at various price scenarios.  He                                                               
said this is a number that can be compared worldwide.                                                                           
                                                                                                                                
12:58:54 PM                                                                                                                   
                                                                                                                                
CO-CHAIR  SAMUELS said  the  committee has  been  advised by  its                                                               
consultants,  the   administration's  economists,  and   the  oil                                                               
companies to look at all the statistics in context.                                                                             
                                                                                                                                
1:01:38 PM                                                                                                                    
                                                                                                                                
MS. NIENHUIS  said the next analysis  is the 30/20 ratio,  and at                                                               
$20  per barrel,  the two  PPT models  go to  zero rapidly.   The                                                               
average  annual revenues  are $55  million less  than the  status                                                               
quo, but  $45 million more than  HB 488.  At  $40, they're spread                                                               
out a little  more; the average annual revenues  are $790 million                                                               
more than the status  quo and $440 more than HB 488.   At $60 per                                                               
barrel the  differences are $1.7  billion and $820 million.   The                                                               
last scenario  analyzed is the 30/15  ratio.  At $20  per barrel,                                                               
it  crosses  the status  quo  line  with slightly  more  revenues                                                               
earlier.   It  goes  to zero  at  2019, and  overall,  it is  $70                                                               
million more  than HB 488.   At $40, it  is a similar  trend, but                                                               
higher.  At $60 per barrel,  it produces $1.8 billon dollars more                                                               
in revenue  than the  status quo  and $870  million more  than HB
488.  She said the last graph  shows that the 30/20 and 30/15 are                                                               
fairly close  to each other.   Both are above the  25/20, and all                                                               
are above HB 488 and the status quo.                                                                                            
                                                                                                                                
1:03:42 PM                                                                                                                    
                                                                                                                                
CO-CHAIR RAMRAS said "very close" is  a dangerous term.  It's not                                                               
an accurate  representation, because there is  an enormous amount                                                               
of  money at  stake.    His school  district  is  looking for  $3                                                               
million more  this year, and  the values Ms. Nienhuis  is showing                                                               
are separated  by hundreds of millions  of dollars per year.   He                                                               
said to be  mindful of the enormous amount of  money between, for                                                               
example, 20/20  and 21/20.   It  is easy to  get calloused  as if                                                               
$50-$100   million  annually   is   not   exceptional,  but   the                                                               
legislature   gets  groups   testifying  week   after  week   for                                                               
incremental budget increases.                                                                                                   
                                                                                                                                
1:06:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARA recommended looking  at the impact on company                                                               
profit margins under these various  scenarios.  The Department of                                                               
Revenue (DOR) projects that information,  and between $20 and $60                                                               
dollars per  barrel, those  profit margins  are in  the 20  to 45                                                               
percent  range.   "Under  these  scenarios...we're still  leaving                                                               
profit margins of  30/20 in the 30 percent  range, roughly across                                                               
those prices,  and upwards of  35 and 40  percent at 20/20."   He                                                               
said he  would like  that information  from the  DOR, "so  we can                                                               
figure out the impact on the companies that invest."                                                                            
                                                                                                                                
REPRESENTATIVE ROKEBERG  said using statistics is  a deadly game.                                                               
He said he would like them verified.                                                                                            
                                                                                                                                
REPRESENTATIVE GARA said that is what he is asking for.                                                                         
                                                                                                                                
1:08:07 PM                                                                                                                    
                                                                                                                                
MS. NIENHUIS said she is glad to take on more modeling requests.                                                                
                                                                                                                                
CO-CHAIR SAMUELS  asked at what high  price does the life  of the                                                               
pipeline  get extended.    At  a certain  level,  the price  will                                                               
dictate the life of the pipeline, he opined.                                                                                    
                                                                                                                                
1:09:54 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON, Consultant to the  Office of the Governor, said he                                                               
did not  do that  modeling.   The four scenarios  did not  try to                                                               
build  in assumptions  on behavior.    "If, as  we approach  that                                                               
date, prices are high, you will  see the pipeline will stay open,                                                               
if they are low, it will close  down."  He said the figures shown                                                               
are averages, and "we don't expect  it to be that price, and it's                                                               
very hard to  hone in and say  30 years from now we  expect it to                                                               
be at the high end or the low end of this average."                                                                             
                                                                                                                                
CO-CHAIR RAMRAS noted that the  average effective tax rate in the                                                               
low-volume scenario  without the gas  line for the status  quo at                                                               
all prices  is in  the range  of 4.1  to 4.4  percent.   "Is that                                                               
correct?"  He said the  three major producers believe the current                                                               
effective rate is 6 percent to 11.2 percent.                                                                                    
                                                                                                                                
MR. DICKINSON said  producers have wildly different  tax rates on                                                               
the  North Slope.   For  example, Anadarko  Petroleum Corporation                                                               
only  has  production  in  one  field and  has  the  highest  ELF                                                               
[economic limit  factor].  He  said ExxonMobil Corporation  has a                                                               
significant interest in Prudhoe Bay,  but only minor interests in                                                               
other fields.   At the other extreme, a  corporation like Unocal,                                                               
before it was merged with Chevron, had an ELF of zero.                                                                          
                                                                                                                                
1:14:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS said  he quoted  Mr. Dickinson's  severance tax                                                               
rate  of being  between  4 and  5  percent.   And  the big  three                                                               
producers gave rates of between 5 percent and 12 percent.                                                                       
                                                                                                                                
MR.  DICKINSON said  he didn't  pick up  on that  point, "but  at                                                               
least one  of them  was stating what  their effective  rates that                                                               
year was."   The  4 and  5 percent figures  provided by  him were                                                               
from a 20-year average.  "You  just need to be careful about what                                                               
the numbers represent."                                                                                                         
                                                                                                                                
REPRESENTATIVE ROKEBERG asked if he means 24-year averages.                                                                     
                                                                                                                                
MS.  NIENHUIS   explained,  "What  we're  looking   at  here  are                                                               
projections for 24 years out, as  opposed to what you were asking                                                               
the companies [which was] what  they have had historically."  She                                                               
referred to  page 17 of  the committee packet with  effective tax                                                               
rates  on  the North  Slope  by  field,  which  is the  ELF  rate                                                               
multiplied by the severance tax rate for fiscal years 1986-2005.                                                                
                                                                                                                                
1:16:58 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON said those are  the individual rates for each year;                                                               
however, within  each year, they  are the average for  that year.                                                               
For the Northstar Unit or  Alpine that started midway through the                                                               
year, the  first year's effective tax  rate is about half  of the                                                               
next year's  because of the six  months with a zero  rate.  After                                                               
aggregation,  the  numbers  might  reflect  five  months  at  the                                                               
aggregated rate and seven months at the non-aggregated rate.                                                                    
                                                                                                                                
1:18:21 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS said  he will try to track  down the information                                                               
from the big three companies.                                                                                                   
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked for the current  snapshot rate for                                                               
each company.                                                                                                                   
                                                                                                                                
MR. DICKINSON  noted that  the division  has an  internal monthly                                                               
report,  with each  field and  each  company's amalgamated  rate,                                                               
which is confidential.                                                                                                          
                                                                                                                                
1:20:13 PM                                                                                                                    
                                                                                                                                
MS. WILSON  said there was a  request to identify the  values and                                                               
amounts for the look back [or  claw back] provision per year, and                                                               
"we've  used  $1 billion  per  year  for  capital costs  for  the                                                               
transition  period.   So  that  would total  $5  billion for  the                                                               
companies, and  the annual costs  are based on  historical data."                                                               
She said she only put public information on her handout.                                                                        
                                                                                                                                
CO-CHAIR RAMRAS  asked for the amount  per year.  He  said if the                                                               
committee opts to  limit that provision, he wants  a better sense                                                               
of what part of that 5 billion will be captured.                                                                                
                                                                                                                                
MS. WILSON  said that in  2001, it was  $1.7 billion, and  HB 488                                                               
would be  looking at half of  that year, and then  it is averaged                                                               
at $1 billion for each of the other years.                                                                                      
                                                                                                                                
CO-CHAIR RAMRAS asked for the information on an annual basis.                                                                   
                                                                                                                                
MS.  WILSON  said  it is  by  year.    She  will also  provide  a                                                               
breakdown between exploration costs versus development [costs].                                                                 
                                                                                                                                
1:23:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG said, "There is  a twist in there because                                                               
it calculates  those credits back  monthly on  a 1/72 basis.   If                                                               
you  drag it  backwards  and  you wish  to,  as  a committee  for                                                               
example, and make  any kind of adjustment to that,  then you have                                                               
to  confront  the  issue  of  how much  the  payback  period  is.                                                               
Because this is a five-year look back with a six-year forward."                                                                 
                                                                                                                                
MS.  WILSON   referred  to  a   question  on   how  mobilization,                                                               
demobilization, and abandonment costs  are treated.  Mobilization                                                               
costs  are capitalized  for federal  tax  purposes as  intangible                                                               
drilling costs  and are  available both as  a deduction  under HB
488  and as  a capital  credit.   Demobilization and  abandonment                                                               
expenditures are expensed as incurred,  and so they're deductible                                                               
but are not  subject to the credit.   She said she  does not have                                                               
any  information  on quantifying  political  risks.   Moving  the                                                               
effective date  from January  1, 2006 to  July 1,  2006 decreases                                                               
state revenues by  $400 million under the 20/20  scenario, and it                                                               
would be $770 million under a 25/20 ratio.                                                                                      
                                                                                                                                
1:26:33 PM                                                                                                                    
                                                                                                                                
MS. WILSON said she was  asked about private royalties in Section                                                               
9, and what amount is involved.   She said a very small amount is                                                               
affected, no more than 1 percent  of total state revenue from oil                                                               
and gas.   It is limited  to three areas: Alpine  and satellites,                                                               
National Petroleum Reserve-Alaska, and Cook Inlet.                                                                              
                                                                                                                                
REPRESENTATIVE SEATON asked  if the 1 percent  includes the total                                                               
tax or just the severance tax.                                                                                                  
                                                                                                                                
MR. DICKINSON  said, "The  1 percent  was sort of  a feeling.   I                                                               
think it's actually quite a bit  less than that."  There would be                                                               
no  royalties  involved,  and  he   supposed  there  would  be  a                                                               
proportional effect on income and property taxes.                                                                               
                                                                                                                                
1:28:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  LEDOUX  asked  if  there  is  any  constitutional                                                               
problem with moving the effective date back to January 1.                                                                       
                                                                                                                                
MS. WILSON said no, but taxpayers  like to know what their tax is                                                               
going to be so it is problematic from a policy standpoint.                                                                      
                                                                                                                                
ROBERT  MINTZ,  Assistant Attorney  General,  Oil,  Gas &  Mining                                                               
Section, Department of  Law (DOL), said courts  have been lenient                                                               
for brief periods of retroactivity,  and January 1, 2006 would be                                                               
considered a brief time frame.   Most of the situations where tax                                                               
dollars were  changed retroactively, they  have gone back  to the                                                               
beginning  of the  calendar  year.   He  said  he could  research                                                               
attempts to go back two to three years.                                                                                         
                                                                                                                                
1:31:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO asked  if the  date  could go  back to  the                                                               
first meeting when negotiations began.                                                                                          
                                                                                                                                
MR. MINTZ  said courts have  acknowledged the time  when affected                                                               
persons have been on notice of the likelihood of a tax change.                                                                  
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  if compelling  state interest  is                                                               
required by the courts for retrospective legislation.                                                                           
                                                                                                                                
1:33:40 PM                                                                                                                    
                                                                                                                                
MR.  MINTZ spoke  about a  retroactive change  in the  law, which                                                               
essentially  resulted in  giving  back money  that taxpayers  had                                                               
paid.   In the bill  review, the Attorney General  addressed that                                                               
and  indicated that  the law  was strict  in terms  of justifying                                                               
giving  back  money.   He  said  he is  not  aware  that kind  of                                                               
strictness is applied to other changes  in the tax law.  In fact,                                                               
the cases  he is familiar with,  it is a question  of meeting due                                                               
process,  but a  relatively  brief period  of retroactivity  need                                                               
only be justified by rationality.                                                                                               
                                                                                                                                
1:35:29 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS asked  why HB 488 wasn't treated  like any piece                                                               
of legislation that becomes law 15 days after it passes.                                                                        
                                                                                                                                
MR. DICKINSON  said he  pleaded with  the administration  to make                                                               
the effective date relevant to a quarterly calendar.                                                                            
                                                                                                                                
1:36:14 PM                                                                                                                    
                                                                                                                                
MS.  WILSON said  she was  asked  if there  was consideration  of                                                               
phasing out  the $73 million  deduction over a certain  period of                                                               
time.   She  said that  was not  considered.   She said  the next                                                               
question  asks: Of  the  current 13  producers  in Alaska,  which                                                               
would  pay  a severance  tax  after  employing the  proposed  $73                                                               
million   standard   deduction?       She   answered   that   BP,                                                               
ConocoPhillips Alaska, Inc., and  ExxonMobil Corporation will all                                                               
pay  severance  taxes  at  most price  levels  after  using  that                                                               
deduction based on  her cost assumptions.  She  said she believes                                                               
that  Anadarko  Petroleum  Corporation,  Marathon,  and  Chevron-                                                               
Unocal will pay severance tax at high oil prices.                                                                               
                                                                                                                                
1:37:18 PM                                                                                                                    
                                                                                                                                
MS. WILSON  said question 9  deals with how many  private royalty                                                               
owners are in Alaska, and she  does not have that information for                                                               
non-state lands.   She was asked  to provide a graph  showing the                                                               
status quo, the PTT, and the  gas line contract terms, "and those                                                               
terms are not public information."                                                                                              
                                                                                                                                
REPRESENTATIVE  CROFT  surmised  that  the state  knows  who  the                                                               
private royalty  owners are  because there  are other  taxes that                                                               
apply to them.                                                                                                                  
                                                                                                                                
MS. WILSON  said producers are  liable for the severance  tax, so                                                               
it is a contractual relationship.                                                                                               
                                                                                                                                
MR. DICKINSON said  the answer of how much  production comes from                                                               
those can be "nailed down a little easier."                                                                                     
                                                                                                                                
REPRESENTATIVE CROFT  stated that  the principle  private royalty                                                               
owners are Native corporations.                                                                                                 
                                                                                                                                
1:40:02 PM                                                                                                                    
                                                                                                                                
MS. WILSON said  question 11 "asks for information  on the effect                                                               
of previous  incentives-that is  the costs--and  claimed expenses                                                               
under SB  185, which  is currently in  the statute  at 43.55.025,                                                               
totaled  $104.8 million  generated  credits,  claimed credits  of                                                               
$33.6  million.   This answer  references a  table which  will be                                                               
provided."  Those numbers include a recent credit claim.                                                                        
                                                                                                                                
CO-CHAIR SAMUELS asked if that is exploration only.                                                                             
                                                                                                                                
MS. WILSON said yes.                                                                                                            
                                                                                                                                
CO-CHAIR  SAMUELS   asked  if  there   are  other   programs  for                                                               
development credits.                                                                                                            
                                                                                                                                
MR. DICKINSON  said, "There are  several in 38.05 in  the royalty                                                               
where the  commissioner can  grant certain credits.   There  is a                                                               
specific one limited to the  Kenai Peninsula, which, a 10 percent                                                               
income  tax  credit that  is  tied  to  the  full range  of  both                                                               
exploration,  actually successful  exploration, development,  and                                                               
production."                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  spoke of concern regarding  the state refunding                                                               
the credits "by  the little guys that want to  explore because it                                                               
is possible that the big three may  run out of room under your 25                                                               
percent cap."  The big three would then leverage the price down.                                                                
                                                                                                                                
1:43:02 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON said there is a  fear that the three producers will                                                               
run out  of room to  buy the credits.   He  said he will  show at                                                               
what  price there  will  be  enough room  to  absorb  all of  the                                                               
credits and at what price there  won't.  Currently, the market is                                                               
not saturated so there are sales in the 90 percent range.                                                                       
                                                                                                                                
REPRESENTATIVE  ROKEBERG  said  there  is  a  gas  infrastructure                                                               
credit too.                                                                                                                     
                                                                                                                                
CO-CHAIR SAMUELS asked if there is another layer for gas.                                                                       
                                                                                                                                
MR. DICKINSON  said the credits  are for any type  of hydrocarbon                                                               
exploration.  The Kenai credit is focused on gas production.                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG said there is one for infrastructure.                                                                   
                                                                                                                                
MR. DICKINSON  said there is  one for the  Kenai, and the  SB 185                                                               
credits  were extended  in  the Cook  Inlet  with less  stringent                                                               
requirements because it has been heavily explored.                                                                              
                                                                                                                                
REPRESENTATIVE  ROKEBERG said  that at  various times  there have                                                               
been special  exceptions for the Cook  Inlet region.  In  the use                                                               
of  royalty reductions,  "they've  actually specified  particular                                                               
pools of oil and gas that  may be available, I think specifically                                                               
oil,  were they  to be  explored, they  would be  limited to  a 5                                                               
percent  royalty  vis-à-vis  a  12.5  percent,  or  whatever  the                                                               
standard royalty rate was in the existing leases."                                                                              
                                                                                                                                
1:46:31 PM                                                                                                                    
                                                                                                                                
MS. WILSON referred to question  12, which asks the rationale for                                                               
offering the  same amount  of credits  for non-state  lease lands                                                               
where the  state receives no  royalty tax benefits, and  if there                                                               
was discussion of a reduction in  the credit to offset this.  She                                                               
answered  that   incentives  have   the  potential   to  increase                                                               
severance taxes that  are assessed on any oil  and gas production                                                               
within Alaska.   Given the overall economic  benefit of increased                                                               
production, especially in  Cook Inlet with lots  of private land,                                                               
even  paying no  taxes makes  sense, she  opined.   She was  also                                                               
asked why Point Thomson should  be incentivized, and she believes                                                               
that  the development  of Pt.  Thomson  may be  critical for  the                                                               
development  of the  gas line,  "and, accordingly,  incentivizing                                                               
Pt.  Thompson may  well incentivize  the gas  line."   She stated                                                               
that Pt.  Thompson is  particularly problematic  because it  is a                                                               
high-cost field,  and "we  do need the  gas reserves  to underpin                                                               
the  gas pipeline  economics."   She  added  that incentives  may                                                               
encourage  the  early  production  of the  liquids  that  require                                                               
expensive infrastructure.                                                                                                       
                                                                                                                                
1:48:05 PM                                                                                                                    
                                                                                                                                
MS.  WILSON  was  asked  for better  definitions  for  "point  of                                                               
production,"  "oil", and  "gas" and  if the  state has  litigated                                                               
these terms.   She said the  question is unclear and  she will be                                                               
happy to  work on  the clarity  of the  definitions in  the bill.                                                               
Regarding  past  litigation,  the  point of  production  and  the                                                               
definitions  of oil  and  gas  have not  been  a  major focus  of                                                               
litigation; however,  there has  been considerable  litigation of                                                               
related concepts.   "In the tax  context, there was at  least one                                                               
dispute, which was decided at  the internal Department of Revenue                                                               
appeal stage, which  related to point of production,  but most of                                                               
the controversy  in this area  is about the  regulations defining                                                               
gas  processing plant  rather than  litigation.   The use  of the                                                               
term 'gas  processing' in  the bill  is consistent  with existing                                                               
department  regulations, but  under current  law, gas  processing                                                               
generally is  considered an activity occurring  downstream of the                                                               
point of  production, while  under the bill  it is  considered an                                                               
activity occurring upstream."                                                                                                   
                                                                                                                                
CO-CHAIR SAMUELS  surmised that  changing it  will allow  the tax                                                               
credit on the gas processing,  "which allows the small players to                                                               
not be beholden to the big three to use their plants."                                                                          
                                                                                                                                
MR. DICKINSON  said he  thinks that's correct,  as Dr.  Van Meurs                                                               
indicated.   Access  to facilities  is  a complaint  that he  has                                                               
heard frequently from  those who try to develop  pools outside of                                                               
the main pool.  The change  may lead to the construction of other                                                               
facilities or to negotiation leverage.                                                                                          
                                                                                                                                
1:51:03 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS  asked  about any  unintended  consequences  or                                                               
tradeoffs.  "What about any associated feeder lines?"                                                                           
                                                                                                                                
MR.  DICKINSON said  the notion  of including  the pipeline  is a                                                               
little less problematic because most  of these lines on the North                                                               
Slope are publicly  regulated, "and so folks will  have access to                                                               
them."   "If I go  out and develop a  new field some  place, I'll                                                               
have to  build a pipeline to  the nearest place I  can hook into.                                                               
But where I do some of my gas processing is a choice."                                                                          
                                                                                                                                
ROB MINTZ  said, "The philosophy  in drafting this bill  is, with                                                               
regard to the current production  tax statute, if it ain't broke,                                                               
let's not fix it."  He tried  to preserve as much of the existing                                                               
law  as possible  and  supplement it  with  changes bringing  the                                                               
calculation of value  upstream to be net value  rather than gross                                                               
value.   "I would say  there's not any particular  downsides that                                                               
we've identified to making these  changes in the definition."  He                                                               
said there always could be unintended consequences.                                                                             
                                                                                                                                
1:53:50 PM                                                                                                                    
                                                                                                                                
MS. WILSON  said that question 15  asks what steps must  be taken                                                               
to  make the  tax  credits refundable  rather than  transferable.                                                               
She said  Section 12 would need  to be changed, and  she referred                                                               
the  committee to  43.55.024(d) and  (e).   Question 16  asks, on                                                               
page 13,  line 24, of  the bill, what  "payment in lieu  of" ties                                                               
into for  oil.   She said  that phrase  is about  property taxes.                                                               
She said Sec.  43.55.160(c) presents the general  rule that lease                                                               
expenditures are deductible, which  would include property taxes.                                                               
She noted  that (d)  simply clarifies those  items that  might be                                                               
questionable,  such  as a  payments  in  lieu of  property  taxes                                                               
rather than  straight property tax.   Question 17 asks  about the                                                               
limit on  transferable tax  credits in  Section 12,  limiting the                                                               
amount of  tax credits  that a single  taxpayer can  take against                                                               
its own production tax  in a single year.  "I  believe this was a                                                               
question raised on  that 20 percent limit, and I  would just like                                                               
to clarify  that Section  12, that  is Sec.  43.55.024(e), limits                                                               
the amount of tax that  can be reduced through purchased credits.                                                               
There is  no limit on the  credit used when a  taxpayer generates                                                               
their own credit."                                                                                                              
                                                                                                                                
1:55:49 PM                                                                                                                    
                                                                                                                                
MS. WILSON  said question 18 is:  The State of Alaska  had relied                                                               
on the  services and expertise  of multiple outside law  firms to                                                               
handle disputes over oil and  gas issues; have you conferred with                                                               
such counsel in  the drafting or review of this  legislation?  If                                                               
so, have they assessed the  impacts of legislation on the state's                                                               
legal position  in past agreements,  current disputes,  or future                                                               
disputes?     She  said  yes;   they  have  been   consulted  but                                                               
discussions have not generated a formal document.                                                                               
                                                                                                                                
REPRESENTATIVE LEDOUX asked if there has been agreement.                                                                        
                                                                                                                                
MR.  MINTZ  said,  as  he  looks  through  the  bill,  "the  only                                                               
significant change to the current  law, other than the additional                                                               
provisions that deal with net value,  would be the changes in the                                                               
definition that  we were just  alluding to."   That would  be the                                                               
focus  of future  potential disputes,  he said.   "No,  we didn't                                                               
have  any significant  disagreement as  to whether  these changes                                                               
would cause problems or what the impact would be."                                                                              
                                                                                                                                
1:57:40 PM                                                                                                                    
                                                                                                                                
MS. WILSON said question 19 is:  Have you asked the Department of                                                               
Law to review this legislation in  light of the 6th Circuit Court                                                               
of  Appeals' decision  in  Cuno v.  DaimlerChrysler  that is  now                                                               
pending before the Alaska State Supreme Court?                                                                                  
                                                                                                                                
CO-CHAIR SAMUELS said it was in the United States Supreme Court.                                                                
                                                                                                                                
MS. WILSON said  the Cuno case is about  the constitutionality of                                                               
special  tax  credits.    She  said the  Department  of  Law  has                                                               
examined the  question and has  noted it doesn't have  any direct                                                               
precedence  for  Alaska.    Many analysts  believe  it  won't  be                                                               
sustained in its current form, she stated.                                                                                      
                                                                                                                                
REPRESENTATIVE ROKEBERG said legislation may be pending.                                                                        
                                                                                                                                
MS. WILSON  said she was  asked to provide  information regarding                                                               
the expenditures  that will qualify for  the transition credits--                                                               
including the  depreciation method  chosen under the  federal and                                                               
state income tax systems.   The expenditures that qualify are the                                                               
same  as those  that qualify  for capital  credit, she  answered.                                                               
The  expenditures include  exploration costs  and those  that are                                                               
capitalized   for   federal   income  tax   purposes,   including                                                               
intangible   drilling  costs.     Exploration   expenses  include                                                               
geological  and   geophysical  exploration.    She   referred  to                                                               
question  59.   There are  certain federal  rules and  lives, and                                                               
Alaska lives are longer, she said.                                                                                              
                                                                                                                                
2:00:16 PM                                                                                                                    
                                                                                                                                
MS. WILSON  said question 21 is:  Have any of the  definitions in                                                               
sections  30-33 been  the  subject of  disputes  with tax  and/or                                                               
royalty payers  in the  past?   To the  extend they  have, please                                                               
provide  the definitions  the state  asserted in  those disputes.                                                               
She will  clarify that [later].   Question 22: Please  provide an                                                               
identification of  the point  of production at  each unit  in the                                                               
state  under  existing  statutes,  regulations,  agreements,  and                                                               
court decisions, and:   Provide the same under  the definition as                                                               
proposed.  She  said that will be forthcoming.   Question 24 asks                                                               
what standard will be used to  determine whether oil or gas is of                                                               
'pipeline quality'  under the definition  of 'gross value  at the                                                               
point of  production.'  She  said this  term only applies  in the                                                               
definition of  oil; it was  not in the  old or new  definition of                                                               
gas.    Current  statute  defines it  as  good  and  merchantable                                                               
condition, and it is not changed by the bill.                                                                                   
                                                                                                                                
2:02:11 PM                                                                                                                    
                                                                                                                                
MS.  WILSON  said the  answer  to  question  25 on  a  historical                                                               
analysis of  the results of the  evaluation methodologies adopted                                                               
by  the  Department  of  Revenue under  all  agreements  will  be                                                               
provided.   Question 26: Will  abandonment costs be  eligible for                                                               
deductions  or  credits  under  the legislation?    If  so,  what                                                               
estimates of  the timing and  costs of those activities  does the                                                               
Department project?   She said  she doesn't have  any information                                                               
of a field actually having  been technically abandoned in Alaska.                                                               
Question 27:  How will AS  43.55.160(j) protect the state  from a                                                               
proliferation  of   corporate  entities  claiming   the  tax-free                                                               
allowance?   She said that will  be provided later.   Question 28                                                               
asks  for  the  number  of   exploration  and  delineation  wells                                                               
estimated  to  be  drilled  over  the first  ten  years  of  your                                                               
economic models,  and include the technical  and economic success                                                               
rates projected in  this modeling.  "We do not  include a success                                                               
rate in  our model, but we  show five exploration wells  per year                                                               
included in  the model."  The  DOR assumes $100 million  is spent                                                               
on exploration per  year with an average cost of  $20 million per                                                               
well.  She said delineation  wells are different and are included                                                               
under  development expenditures.   She  said, "The  model assumes                                                               
that four  finds of  large oil  accumulations, reserves  in place                                                               
that would  be on the  order of 500  million barrels.   There are                                                               
four  relatively small  fields  that are  characterized as  being                                                               
heavy oil,  and these  fields would pay  no production  tax under                                                               
the current system because their ELF would be zero."                                                                            
                                                                                                                                
2:04:23 PM                                                                                                                    
                                                                                                                                
MS. WILSON said  question 29 asks for  estimates for undiscovered                                                               
resources  in  Alaska,  and  the  breakdown  between  technically                                                               
recoverable and economically recoverable  resources to the extent                                                               
possible.  She said DNR will  provide that.  Question 30: Provide                                                               
a historical analysis of the effective  tax rate on each field in                                                               
production on  the North Slope over  the past twenty years.   She                                                               
said to  look at  attachments a1  and a2.   Those tax  rates vary                                                               
from  15 percent  for Prudhoe  Bay to  zero for  a number  of the                                                               
fields.   Question 31: How  will the  net profit share  leases be                                                               
affected  by  this  legislation,  and will  the  gross  costs  of                                                               
exploration and  development go into the  development account--or                                                               
those costs  net of the  credits and  deductions?  She  said that                                                               
information will  be provided.   Question 32: It's  been reported                                                               
that the  gas line contract will  propose the state take  its gas                                                               
production tax share  in the form of gas, and  how does that work                                                               
in  this bill?   She  said the  state proposes,  in the  gas line                                                               
contract, taking deliveries of gas  in place of a production tax,                                                               
and  is not  reflected in  HB 488.   If  the producers  sell gas,                                                               
those revenues would  be part of the net  profit calculation, she                                                               
noted, and  under the gas line  they would not.   The state would                                                               
receive  a  percentage  of  the   gas  and  monetize  it  through                                                               
marketing.  "Note  that the costs of developing,  for example Pt.                                                               
Thompson,  or running,  for  example Prudhoe  Bay,  a field  that                                                               
produces  both oil  and gas  would  go into  calculating the  oil                                                               
profits for the PPT."                                                                                                           
                                                                                                                                
2:07:08 PM                                                                                                                    
                                                                                                                                
MS. WILSON said that question 33  asks what the cost to the state                                                               
will  be for  legacy fields  and frontier  regimes from  the claw                                                               
back provision.  She said, "This references item 20."                                                                           
                                                                                                                                
REPRESENTATIVE ROKEBERG asked about  question 32, where the costs                                                               
of developing  Pt. Thomson and  Prudhoe Bay, fields  that produce                                                               
both oil  and gas, would  be calculated  for the purposes  of the                                                               
PPT.  "Is that one of the  primary reasons why we've come up with                                                               
a single  definition of production tax  for both gas and  oil, so                                                               
they're  consistent, so  they  could be  applied  to these  large                                                               
reservoirs of  gas and oil  that we  have and we'll  be producing                                                               
together?                                                                                                                       
                                                                                                                                
MS. WILSON  said one of the  key reasons why they're  combined is                                                               
because costs are  incurred "to pull both oil and  gas out of the                                                               
ground at the same  time.  So a real issue,  if you have separate                                                               
tax  schemes for  oil and  gas, then,  how do  you allocate  that                                                               
piece  of  equipment?    There  are  some  real  cost  accounting                                                               
problems with that."                                                                                                            
                                                                                                                                
MR. DICKINSON said, "The incentive  here is that we are examining                                                               
these upstream  costs and if  there is gas line  development, for                                                               
example, which includes  Pt. Thompson, then this  would, in fact,                                                               
be an  incentive available  to encourage that.   If  Pt. Thompson                                                               
doesn't  go  forward,  then  there   would  be  very  little  gas                                                               
development.   I think Prudhoe  Bay...except for the  presence of                                                               
extra CO2 and  H2S, is, basically...8.5 billion cubic  feet a day                                                               
are already compressed a couple  hundred yards from where the GTP                                                               
would  be,  but  instead  of   going  to  a  sales  line,  that's                                                               
nonexistent, they simple go back down in the ground."                                                                           
                                                                                                                                
2:10:01 PM                                                                                                                    
                                                                                                                                
MS. WILSON said question 34 asks  of the claw back provision, how                                                               
many investment  credits were sold  under SB  185, and how  do we                                                               
ensure  the  person  who  holds  the  credit,  not  the  original                                                               
recipient, gets  the credit?   She answered that sales  of credit                                                               
under SB  185 do not  affect the ability  of the seller  to claim                                                               
those credits as transitional investment expenditures.                                                                          
                                                                                                                                
REPRESENTATIVE ROKEBERG  said he is  trying to absorb  the answer                                                               
to question  34.   He asked  if "there  could a  credit available                                                               
under  SB 185  provisions  that  can also  be  claimed  as a  TIE                                                               
[transitional  investment expenditure],  or does  that mean  they                                                               
could be counted doubly?"                                                                                                       
                                                                                                                                
MR. DICKINSON said  that is correct; the TIE is  a deduction, and                                                               
an  investment  made  during  that  five-year  look-back  doesn't                                                               
qualify for an additional credit,  but it still might qualify for                                                               
the existing  credits under SB 185.   "We really view  the TIE as                                                               
investments  that you  make and  you then  recoup them  or...they                                                               
show up  in the  calculation of your  deduction of  your profits,                                                               
but they're not an additional credit."                                                                                          
                                                                                                                                
CO-CHAIR SAMUELS said, "Do you get it twice; yes or no?"                                                                        
                                                                                                                                
MS. WILSON said,  "Just as with new assets that  would enjoy both                                                               
a deduction and  a credit, and in fact what  you've identified is                                                               
that  potentially applicable  assets that  were purchased  during                                                               
the  transition  period would  similarly  have  the potential  of                                                               
having received a credit under SB  185, and then would be subject                                                               
to  the transition  deduction.   So  it would  be treating  those                                                               
assets the same-the old assets as the new assets."                                                                              
                                                                                                                                
REPRESENTATIVE ROKEBERG said,  "So the answer to  the question is                                                               
yes."   He  then asked  about exploration  licensing, which  is a                                                               
credit  against future  production.   He  asked  about any  other                                                               
kinds of  credits that could  be applied that would  provide duel                                                               
credit under a current credit program.                                                                                          
                                                                                                                                
2:13:27 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON said the 10  percent credit for certain investments                                                               
in  Kenai gas  facilities would  also  get both  a deduction  and                                                               
credit.  He will think about the exploration license.                                                                           
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  if  those are  only used  against                                                               
future revenues.                                                                                                                
                                                                                                                                
MR. DICKINSON said, "My understanding  of the exploration license                                                               
is that the  licensee makes a commitment.  Instead  of bidding on                                                               
a lease,  they make a commitment  to spend a certain  amount.  If                                                               
specifically excluded,  those amounts, we  view that simply  as a                                                               
lease acquisition  cost, and  even though  the activity  may look                                                               
like something  that gets the  treatment under here as  a credit,                                                               
for example, it is excluded,  specifically."  He said he believes                                                               
that he  also made  that exclusion  for the  exploration credits,                                                               
but he will try to answer that later.                                                                                           
                                                                                                                                
REPRESENTATIVE ROKEBERG  said that seems to  be inconsistent with                                                               
Mr.  Dickinson's  previous  testimony.   "You  could  still  have                                                               
expenditures under your agreement under  the license, but then it                                                               
would seem to me, unless  they're specifically restricted by this                                                               
bill,  they  wouldn't apply  for,  let's  say, tax  loss  credits                                                               
and/or any other tax credits that would allowed under the PPT."                                                                 
                                                                                                                                
MR.  DICKINSON said,  "We  specifically carve  those  out as  not                                                               
qualifying."                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG said  that is not consistent  with the SB
185 credits.                                                                                                                    
                                                                                                                                
MR. DICKINSON said he will check that out.                                                                                      
                                                                                                                                
2:16:25 PM                                                                                                                    
                                                                                                                                
MS. WILSON said question  35 asks:  If we have  a gas pipeline in                                                               
2015, what  will the ELF  tax "take" be  on the North  Slope gas,                                                               
and what will it  be under the PPT?  What will  the take be under                                                               
PPT if we take  gas in lieu of the production tax?   She said the                                                               
take would be  the day-to-day value of the gas,  less the state's                                                               
cut  in selling  the  gas on  the marketplace.    She said,  "The                                                               
upstream costs  are covered in  the PPT, so the  difference could                                                               
be as  simple as, under the  PPT a taxpayer would  pay 20 percent                                                               
of the  gross value  at the  point of  production, that  is sales                                                               
revenue less the  tariff charged by the gas  treatment plant, and                                                               
the tariff  between the North Slope  and the point of  sale would                                                               
be paid  to the state.   And  that's without taking  into account                                                               
the effect  of the $73  million allowance,  or be, under  the gas                                                               
contract, the state  will receive some percentage of  the gas and                                                               
then pay  the tariff charged by  the gas treatment plant  and the                                                               
tariff between  the North Slope  and the point  of sale.   If the                                                               
state  owns  part of  the  pipeline,  then  the state  will  also                                                               
receive that portion  of the tariff, which is  profit accruing to                                                               
the owner."                                                                                                                     
                                                                                                                                
MS.  WILSON  said  question  36 is:  Is  current  production  tax                                                               
deductible from  corporate tax?   If  no, is  this impact  in the                                                               
model  presented  by  the  administration.    She  answered  yes;                                                               
current production  is deductible  from corporate income  tax for                                                               
federal and state purposes.                                                                                                     
                                                                                                                                
MS. WILSON said Question 37 is:  Referring to Section 5, what oil                                                               
and  gas  is exempt  from  taxation--just  what is  discussed  in                                                               
Section 10?   She said those  are two separate topics.   "The oil                                                               
and gas  royalty amounts  paid to  federal and  state governments                                                               
are exempt.   They don't even go into the  initial calculation of                                                               
the  gross   amount."    She  said   current  statutory  language                                                               
clarifies "ownership or  right to which is  exempt from taxation"                                                               
means any  ownership interest  of the  federal government  or the                                                               
state.  "That doesn't change under  this bill."  She said Section                                                               
10 simplifies  the treatment  of flared gas.   Under  current law                                                               
there  are  three  categories  of gas:  gas  used  in  production                                                               
operations which  is exempt from  tax; gas produced in  excess of                                                               
that needed for safety purposes,  which is taxable; and gas flare                                                               
beyond  the amount  authorized  for safety,  which  is taxed  and                                                               
subject to a penalty.  She said  that there is no free use of oil                                                               
and she  wonders if that  should say free  use of gas  to produce                                                               
more oil in statute.   "The bill exempts from tax  any oil or gas                                                               
used  in production  operations  unless the  Alaska  Oil and  Gas                                                               
Conservation Commission  determines that  it was waste,  in which                                                               
case it is taxed--but no penalty."                                                                                              
                                                                                                                                
2:19:48 PM                                                                                                                    
                                                                                                                                
MS.  WILSON said  question 38  is: Referring  to Section  6, will                                                               
there be  any impact  to current state  taxes or  municipal taxes                                                               
from this change?  "No, there should  be no impact."  She said it                                                               
is just  cleanup language.  Question  39 is: Why was  the payment                                                               
for taxes  and surcharges changed from  the 20th day to  the last                                                               
day  of the  month,  and  what is  the  economic  impact of  this                                                               
change?  She said it is  simply a cleanup provision that does not                                                               
impact the PPT.  Question 40:  Do other nations with a net profit                                                               
system  have the  90 percent  payment of  taxes with  the true-up                                                               
provision the  following year?   And what is the  economic impact                                                               
of  this change?   She  said Pedro  van Meurs  will answer  that.                                                               
Question 41: What  are the penalties for  underpayment when true-                                                               
up is more than 10 percent of  the taxes owed?  She answered that                                                               
there will  be interest accruing  on the difference  between what                                                               
the taxpayer paid  and the 90 percent.  "So  if the taxpayer paid                                                               
75 percent, then interest would  accrue on the difference between                                                               
75 and 90."                                                                                                                     
                                                                                                                                
REPRESENTATIVE GATTO  said the IRS  usually charges  interest and                                                               
penalties.                                                                                                                      
                                                                                                                                
MS. WILSON said, "In effect,  what that estimated tax penalty is,                                                               
is interest.   It is labeled a penalty, but  the function of that                                                               
penalty  is for  the federal  government to  collect interest  on                                                               
money that they should have gotten."                                                                                            
                                                                                                                                
CO-CHAIR SAMUELS asked what interest rate is charged.                                                                           
                                                                                                                                
MS. WILSON said that is in statute at 11 percent.                                                                               
                                                                                                                                
2:23:19 PM                                                                                                                    
                                                                                                                                
MR.  MINTZ said  the  interest is  automatically  assessed on  an                                                               
underpayment.    There  is  also  the  potential  for  additional                                                               
penalties under  the revenue  law; however,  that depends  on the                                                               
reasons for  the underpayment.   If the  underpayment is  in good                                                               
faith and  there is a reasonable  basis for it, then  there would                                                               
not be a penalty.  But if  there was intent to underpay, it could                                                               
trigger penalties in addition to the interest.                                                                                  
                                                                                                                                
REPRESENTATIVE  SEATON  said  he  is  hearing  that  interest  is                                                               
assessed or not assessed.  Which is it?                                                                                         
                                                                                                                                
MR. MINTZ  said, "What you  owe is 90 percent  of the tax  at the                                                               
end of the next  month.  And so, if you pay  90 percent, then you                                                               
pay  what  you owe  and  there  is  no  interest and  there's  no                                                               
penalty.    The  interest  would   be  triggered  if  there's  an                                                               
underpayment, which is to say less than 90 percent."                                                                            
                                                                                                                                
REPRESENTATIVE LEDOUX asked why would anybody pay 100 percent?                                                                  
                                                                                                                                
MR. DICKINSON  said it is  difficult to  know the exact  tax owed                                                               
every month,  "so I don't  think people will target  the absolute                                                               
lowest number.   What they  will target  is the number  that they                                                               
are safe, that  they think will not get them  their interest and,                                                               
depending on the  complexity of a taxpayer's  business, they will                                                               
build a lessor or smaller margin into that."                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  said if companies  are willing to  buy tax                                                               
credits at a discounted rate of  90 or 95 percent, why would they                                                               
not target the 90 percent amount?                                                                                               
                                                                                                                                
DICKINSON said  the companies will spend  a good deal of  time to                                                               
make sure they will pay the smallest amount.                                                                                    
                                                                                                                                
2:26:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KOHRING   referred  to  question  40,   which  he                                                               
believes should  be the "centerpiece  of our entire  analysis and                                                               
review of this  legislation.  And, that is, what  is the economic                                                               
impact of  increasing taxes?"   He said the legislature  needs to                                                               
evaluate its goal.  Is it to  "get a short-term chunk of money or                                                               
is our  goal to help the  industry as a whole  in the long-term?"                                                               
He said  he is really  concerned about this legislation  and said                                                               
that a tax increase  is going to hurt the state,  and he wants an                                                               
expedited analysis of that.                                                                                                     
                                                                                                                                
MR.  DICKINSON said  question  40  is only  focused  on a  narrow                                                               
issue.  He said  there is no intent by the  governor to drive the                                                               
industry  away, and  he believes  the PPT  will benefit  both the                                                               
state and  the industry.  He  clarified that the higher  tax rate                                                               
will  only  occur  when  companies  are  profitable.    When  the                                                               
industry is not profitable, "the state will not be taxing them."                                                                
                                                                                                                                
REPRESENTATIVE  KOHRING   said  he   is  not  convinced   that  a                                                               
substantial tax  increase is going to  help, and he said  that he                                                               
has never seen a tax increase help any economy.                                                                                 
                                                                                                                                
2:30:34 PM                                                                                                                    
                                                                                                                                
MS.  WILSON said  question 42  is: Referring  to Section  10, why                                                               
does the Alaska Oil and  Gas Conservation Commission (AOGCC) role                                                               
change from  focusing on  excess [flared  gas] needed  for safety                                                               
reasons to  whatever they  determine to be  waste, and  does this                                                               
provision provide more power to the  AOGCC on what is included or                                                               
excluded for  taxation?  She  said the categories for  flared gas                                                               
are different  under the  Department of  Revenue than  the AOGCC.                                                               
The  bill  would simplify  the  categorization  and harmonize  it                                                               
completely with AOGCC, so the  state is moving from two standards                                                               
administered by  two agencies to  one standard under  one agency.                                                               
She went  on to question  43: Why does  it seem that  the credits                                                               
and incentive  are on production  along with exploration,  if our                                                               
focus is  to provide  incentives for exploration?   She  said the                                                               
bill is  based on the  expectation that exploration  and existing                                                               
field investments will increase.                                                                                                
                                                                                                                                
2:33:04 PM                                                                                                                    
                                                                                                                                
MS. WILSON said  question 44 is: Can the  carry-forward amount be                                                               
used for  a credit for more  than the first year  after the loss?                                                               
She said they  can be used indefinitely.  Question  45: Is it the                                                               
case   that  any   allowable   expenses   for  the   exploration,                                                               
development,  or  production of  gas  can  be deducted  from  oil                                                               
revenues in determining net value,  and if so, could the expenses                                                               
of a gas line be included in these deductible expenses?                                                                         
                                                                                                                                
2:33:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO  asked  if carry-forwards  can  be  changed                                                               
legislatively with regard to their value.                                                                                       
                                                                                                                                
2:34:18 PM                                                                                                                    
                                                                                                                                
MS. WILSON  said it is within  the purview of the  legislature to                                                               
change it,  but credits are dollar  for dollar.  A  credit carry-                                                               
forward does not  carry a time limit, but it  could be changed by                                                               
another legislature.                                                                                                            
                                                                                                                                
2:35:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO  asked  if  the credits  that  are  already                                                               
issued  are locked  in, even  if the  legislature eliminated  the                                                               
program.                                                                                                                        
                                                                                                                                
2:35:33 PM                                                                                                                    
                                                                                                                                
MR. MINTZ said he is not  sure, but courts have said taxpayers do                                                               
not have  vested rights in the  current tax system, which  is one                                                               
reason why there  is some leniency in  making retroactive changes                                                               
to  taxes, but  whether  that  would extend  to  someone who  has                                                               
already purchased a certificate, "I can't say at the moment."                                                                   
                                                                                                                                
2:36:29 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  said someone  purchasing a  credit will  use it                                                               
immediately.                                                                                                                    
                                                                                                                                
2:36:52 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON  said the market  could be  saturated.  He  gave an                                                               
example of  a company going  out of business and  selling credits                                                               
at basement prices,  and in that case the purchasers  may hold on                                                               
to the credits for several years.                                                                                               
                                                                                                                                
2:37:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO  said that if  the incentive is  designed to                                                               
get people to "act on them,  maybe the incentives ought to have a                                                               
declining value."                                                                                                               
                                                                                                                                
2:37:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  said one idea  is for the  state to give  a 100                                                               
percent refund without  the 10 percent leakage  caused by selling                                                               
the credit to  ExxonMobil Corporation and requiring  the money to                                                               
be used for a lease purchase or another capital outlay.                                                                         
                                                                                                                                
2:38:22 PM                                                                                                                    
                                                                                                                                
MS.  WILSON said,  "What we  are  trying to  incentivize are  the                                                               
expenditures,  the  investment  in  the exploration  and  in  the                                                               
existing  fields."    Once  that  money is  spent,  a  credit  is                                                               
generated, and the state shouldn't really care when it's used.                                                                  
                                                                                                                                
2:38:59 PM                                                                                                                    
                                                                                                                                
MS. WILSON answered question 45.   Expenses are allowable only if                                                               
they are  upstream costs, she said.   A gas line  is a downstream                                                               
cost, and gathering lines are upstream costs.                                                                                   
                                                                                                                                
MS.  WILSON  said  question  46  is: Why  not  use  GAP  [general                                                               
accounting principles]  versus setting up our  system of defining                                                               
revenues and  expenses?  She  said GAP is useful  for determining                                                               
if  an expenditure  qualifies to  be an  expense, but  it doesn't                                                               
differentiate between expenses that  are applicable directly to a                                                               
lease or  items of expense that  are indirect.  For  example, GAP                                                               
does not distinguish  between wages paid to  a lease-based worker                                                               
compared to an employee in the home office, she noted.                                                                          
                                                                                                                                
2:40:32 PM                                                                                                                    
                                                                                                                                
MS. WILSON said  question 47 is: Which credits can  be applied to                                                               
multiply  years?   She said  there is  no time  limit for  credit                                                               
carry-forwards nor  the optional credit  in 43.55.025.   A dollar                                                               
spent can only  generate one credit, and that credit  can only be                                                               
used one time, she stated.                                                                                                      
                                                                                                                                
2:41:00 PM                                                                                                                    
                                                                                                                                
MS. WILSON said question  48 is: Can a tax credit  be sold in any                                                               
year or  just after the  year it's accrued?   She said  that once                                                               
the credit has been turned into  a certificate, it can be sold at                                                               
any time.  A person can apply for the certificate at any time.                                                                  
                                                                                                                                
2:41:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  if there  will be  a registry  or                                                               
paper trail for credit certificates.                                                                                            
                                                                                                                                
2:41:42 PM                                                                                                                    
                                                                                                                                
MR. DICKENSON said the state keeps a registry.                                                                                  
                                                                                                                                
REPRESENTATIVE ROKEBERG  said, "Under  [SB] 185  you can  get all                                                               
the applications  for those credits  in a Volkswagen."   He hopes                                                               
there will be more under HB 488.                                                                                                
                                                                                                                                
2:42:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG said there  should be a consent provision                                                               
in an assignment of a right, which is common in legal documents.                                                                
                                                                                                                                
2:43:28 PM                                                                                                                    
                                                                                                                                
MR.  DICKENSON  said  page  7-g  clarifies  that  DOR  may  adopt                                                               
regulations for  recording and  for certification  procedures for                                                               
verifying  the accuracy  of  credits claimed.    On the  specific                                                               
legal point, it would be good to  know where they are going.  "We                                                               
have certainly helped ensure those transactions occur."                                                                         
                                                                                                                                
2:44:44 PM                                                                                                                    
                                                                                                                                
MR. MINTZ said the department  currently has detailed regulations                                                               
to address this kind of issue.                                                                                                  
                                                                                                                                
2:45:10 PM                                                                                                                    
                                                                                                                                
MS. WILSON  said question 49  is: What is the  estimated economic                                                               
impact to  the state  of the  ability to sell  tax credits?   She                                                               
said that will be provided.                                                                                                     
                                                                                                                                
MS. WILSON said question 50 is:  Referring to Section 16, what is                                                               
the  current  system,   and  why  do  we  need   this  change  in                                                               
confidentiality?    She said  this  section  is specific  to  the                                                               
production  tax  and  is  in  addition  to  the  current  general                                                               
confidentiality statute.  She said Mr. Dickinson has covered it.                                                                
                                                                                                                                
2:46:53 PM                                                                                                                    
                                                                                                                                
MS. WILSON said  question 51 is: In what  circumstances would oil                                                               
and gas taxes go straight  into the Constitutional Budget Reserve                                                               
fund (CBR)?  She said any  taxes collected in the resolution of a                                                               
dispute would go to the CBR.                                                                                                    
                                                                                                                                
2:47:30 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS asked about a settlement the state loses.                                                                      
                                                                                                                                
MR. DICKERSON  said that when  that happened before, it  came out                                                               
of the general fund.                                                                                                            
                                                                                                                                
2:48:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG  said this  could  be  significant.   He                                                               
suggested there  would be more  dispute in interpreting  the PPT,                                                               
putting a significant  amount of money in play.   He thinks there                                                               
could be "quite a bit of money here that we'd miss out on."                                                                     
                                                                                                                                
2:49:12 PM                                                                                                                    
                                                                                                                                
MR. DICKERSON said  he thinks the constitutional  language is one                                                               
thing, and  a certain lawsuit  "really sets up the  guidance that                                                               
we use  to figure out whether  we have a resolution  of a-whether                                                               
it qualifies  or not."  Optimistically  he said he is  hoping the                                                               
bill  is  clarifying  a  number  of things,  and  the  amount  of                                                               
conflicts  will be  limited, but  rationally, envisions  disputes                                                               
lasting for  many years with money  going into the CBR.   He said                                                               
most of it  will revolve around whether something  qualifies as a                                                               
lease expenditure  or not.  He  said tens of millions  of dollars                                                               
could escape from the general fund into the CBR.                                                                                
                                                                                                                                
2:51:08 PM                                                                                                                    
                                                                                                                                
MR. MINTZ said money going into  the budget reserve fund is money                                                               
the  state  receives   as  a  result  of  a   termination  of  an                                                               
administrative proceeding; refunds would be from tax payments.                                                                  
                                                                                                                                
REPRESENTATIVE  ROKEBERG requested  that  the  department take  a                                                               
little closer look at this issue to quantify it.                                                                                
                                                                                                                                
2:53:29 PM                                                                                                                    
                                                                                                                                
MS. WILSON  said she would hope  that the bill language  is tight                                                               
enough and taxpayers  are careful enough that  those disputes are                                                               
minimized.  She said question 52  is: Referring to Section 18 and                                                               
19, why change  from "shall" to "is"?  She  said that was changed                                                               
in  accordance with  the state  style manual.   Question  53: Why                                                               
does the  bill offer multiple  methods to determine  gross value,                                                               
and who  will choose a methodology?   She answered that  the bill                                                               
does not directly allow a  taxpayer to elect alternative methods,                                                               
it  just  allows  the  department   to  authorize  use  of  such.                                                               
Question 54:  Referring to  Section 21,  page 1,  line 8,  why is                                                               
this clause constrained by December 1, 2005?                                                                                    
                                                                                                                                
REPRESENTATIVE LEDOUX  said regarding question 53,  is it correct                                                               
that if  the department doesn't authorize  an alternative method,                                                               
the "usual" method will be used.                                                                                                
                                                                                                                                
MS. WILSON said yes; the basic rules are still in place.                                                                        
                                                                                                                                
REPRESENTATIVE LEDOUX  asked if the methodology  is completely up                                                               
to the department.                                                                                                              
                                                                                                                                
MS. WILSON said that is her understanding.                                                                                      
                                                                                                                                
MR. MINTZ said that is absolutely correct.                                                                                      
                                                                                                                                
2:56:22 PM                                                                                                                    
                                                                                                                                
MS. WILSON  said question 55 refers  to Section 21 (h),  and asks                                                               
which  consumer price  index the  administration will  use.   She                                                               
said those have not been evaluated.                                                                                             
                                                                                                                                
REPRESENTATIVE  ROKEBERG said  the  legislature  could adopt  the                                                               
U.S. city average  consumer index and provide  for an alternative                                                               
in case  there was  a revision  of that  index.   He said  he has                                                               
dealt with that index for 30  years, and he would rather use that                                                               
instead of  get in  the debate about  the Anchorage  index, which                                                               
would be inappropriate for this issue.                                                                                          
                                                                                                                                
2:58:14 PM                                                                                                                    
                                                                                                                                
MS. WILSON said question 56  is: Are the current oil conservation                                                               
surcharges deductible  from any other  taxation?  If no,  what is                                                               
the policy  reason to make  them a credit in  SB 305 and  what is                                                               
the economic impact?  The answer  she gave is that yes, currently                                                               
those surcharges are deductible  from state and federal corporate                                                               
income tax.                                                                                                                     
                                                                                                                                
REPRESENTATIVE SEATON asked  for the logic of that.   He said the                                                               
general fund  will make  all of  the surcharge  payments, because                                                               
the production tax  comes into the fund.  "We're  saying they can                                                               
take a  dollar-for-dollar credit  against the general  fund money                                                               
they're going  to deposit  for the hazard  mitigation money.   So                                                               
aren't  we really  saying we  should just  eliminate the  credit,                                                               
because it's  all going to come  out of the general  fund anyway,                                                               
if we do this as a credit?"                                                                                                     
                                                                                                                                
MR.  DICKINSON said  the focus  was on  trying to  have a  single                                                               
point of taxation, which was the  profitability.  "For a while we                                                               
were  looking at  a minimum  tax...and we  didn't want  to tamper                                                               
with, or  mess with, the payments  that were being made  into the                                                               
fund."  Representative Seaton is  correct, but "what we're trying                                                               
to do is look at profitability, and that's what we tax."                                                                        
                                                                                                                                
REPRESENTATIVE   SEATON  said,   "What  we're   doing  is   we're                                                               
eliminating the  hazard mitigation fund from  anything other than                                                               
the general fund."   There is no use having  a surcharge and then                                                               
offering to  pay for it.   "We can make those  direct deposits if                                                               
we're going to do that."  He doesn't look favorably at it.                                                                      
                                                                                                                                
MR.  DICKINSON  said these  credits  cannot  be sold  or  carried                                                               
forward.   The  payments need  to be  made every  month, "so,  in                                                               
effect, on a smaller producer, in fact,  is a real charge.  It is                                                               
a minimum  tax and those payments  are differentiated from...the,                                                               
particularly if  they're not making  any payments of  the general                                                               
tax, these would still be there."                                                                                               
                                                                                                                                
3:01:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG said  he shares  Representative Seaton's                                                               
concern.  The  original surcharge was on a per-barrel  basis.  An                                                               
oil  spill  doesn't  differentiate  between  a  large  and  small                                                               
company.   He questioned getting rid  of a 3 to  5-cent surcharge                                                               
and  default it  into the  general fund,  which creates  a bigger                                                               
fiscal gap.                                                                                                                     
                                                                                                                                
MR. DICKINSON said, mathematically, that  is correct.  "We're not                                                               
removing it.   The funds will  still be paid to  those mitigation                                                               
accounts without interruption or alteration."   When the state is                                                               
taxing  profits and  there is  several  hundred million  dollars,                                                               
this would not be an increment on top of it, he stated.                                                                         
                                                                                                                                
3:03:49 PM                                                                                                                    
                                                                                                                                
MS. WILSON said  question 57 is: Do any other  state taxes have a                                                               
standard  deduction?    She  said   four  do:  seafood  marketing                                                               
assessment, mining license, gaming  tax, and Alaska's estate tax.                                                               
She  said two  of those  exemptions do  not impose  a tax  if the                                                               
taxable amount is  at a low level  but kicks in at  a set amount.                                                               
Question 58: How  many net profit share Leases (NPSL)  are in the                                                               
state, and how  much are they paying royalties?   She said out of                                                               
19 NPSLs, 7  are paying net profit share payments  in addition to                                                               
royalties, and the  total received in calendar year  2005 was $81                                                               
million.    The total  NPSL  receipts  from 2001-2005  were  $254                                                               
million.  She referred to attachment B.                                                                                         
                                                                                                                                
REPRESENTATIVE ROKEBERG asked if the  NPSLs are paying all of the                                                               
other taxes and another charge on top of the royalty.                                                                           
                                                                                                                                
MR. DICKINSON  said this is  an additional element, and  when the                                                               
leases are put  out for bid, the  NPS is the bid  variable.  "The                                                               
highest net profit share is the bidder that takes the lease."                                                                   
                                                                                                                                
REPRESENTATIVE ROKEBERG asked if they  are paying all of the five                                                               
elements  required plus  "a different  element on  top of  even a                                                               
stipulated royalty within that bonus bid application."                                                                          
                                                                                                                                
MR. DICKINSON said that is correct.                                                                                             
                                                                                                                                
CO-CHAIR  SAMUELS said,  "So at  Duck Island,  if the  488 passes                                                               
here, the royalty rate's at 20,  and the net profit share rate is                                                               
80, and  we're going  to take  20 of the  remaining 20.   Because                                                               
total cost recovery has already been achieved.  Is that true?"                                                                  
                                                                                                                                
3:07:31 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON  said the severance  tax is calculated  first; that                                                               
would go into  the account for calculating net  profit share, and                                                               
then the state  would take the net profit share.   The 79 percent                                                               
would be what's left over after paying a PPT, he stated.                                                                        
                                                                                                                                
CO-CHAIR SAMUELS said, "So 80 percent of the 80 percent."                                                                       
                                                                                                                                
CO-CHAIR SAMUELS asked if corporate income tax comes last.                                                                      
                                                                                                                                
MR. DICKINSON  said, "It is  my belief that corporate  income tax                                                               
is not an element for the NPSL, so that would come last."                                                                       
                                                                                                                                
CO-CHAIR SAMUELS asked who operates Duck Island.                                                                                
                                                                                                                                
MR. DICKINSON said it's called "Endicott" and is operated by BP.                                                                
                                                                                                                                
REPRESENTATIVE  ROKEBERG said  one  of the  major  issues in  his                                                               
career as a legislator is the  royalty relief or net profit share                                                               
relief  on  the  Northstar  prospect.     Because  of  very  high                                                               
percentages, the  legislature agreed  to lower  it significantly,                                                               
and it did allow  that project to go forward until  it ran into a                                                               
lawsuit  from  a former  member.    "Those  types of  leases  had                                                               
stifled  development  and  investment  in  the  Alaska  petroleum                                                               
industry."   He said  there was  a period  of euphoria,  which is                                                               
similar to  today, where everybody  thought the price of  oil was                                                               
going to go over $100 per barrel.                                                                                               
                                                                                                                                
3:09:53 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON said he believes there  was a lease there where the                                                               
NPSL was above 90 percent.                                                                                                      
                                                                                                                                
REPRESENTATIVE ROKEBERG said that was a Northstar lease.                                                                        
                                                                                                                                
3:10:18 PM                                                                                                                    
                                                                                                                                
MS. WILSON  said question  59 has been  discussed.   Question 60:                                                               
Produce  a tax  calculation under  the bill,  with the  following                                                               
assumptions: gross  value of $60  million; operating  expenses of                                                               
$15 million; capitalized  expenditures of $10 million.   She said                                                               
it  comes to  a net  taxable income  of zero.   This  calculation                                                               
assumes that the  taxpayer has not reached the  $73 million limit                                                               
for the  standard deduction.   Question 61: Are net  profit lease                                                               
payments included  as a  direct cost under  43.55.160?   She said                                                               
net profit  share payments  under NPSLs  would not  be deductible                                                               
lease  expenditures  because they  are  in  the nature  of  lease                                                               
acquisition costs.                                                                                                              
                                                                                                                                
REPRESENTATIVE  SEATON asked  if NPSLs  are currently  deductible                                                               
because the  production tax  is calculated  first, and  under the                                                               
PPT it will be calculated last.                                                                                                 
                                                                                                                                
MR.  DICKINSON said  the  PPT  will not  have  an  effect on  the                                                               
calculation made  for the  NPSL.  The  order of  the calculations                                                               
will not change the consequence of this bill, he stated.                                                                        
                                                                                                                                
MS. WILSON said the production tax is a deduction for the NPSL.                                                                 
                                                                                                                                
3:13:20 PM                                                                                                                    
                                                                                                                                
MS. WILSON  said question 63 is:  How are payments for  "spec 3D"                                                               
handled?    Are they  credit  eligible  under 43.55.024  or  only                                                               
allowed as a  deduction under 43.55.160?  She said  "spec 3d" are                                                               
certain  seismic costs,  which  are allowed  as deductions  under                                                               
section 21, and they are  also eligible for credits under section                                                               
12.   Question 64:  Please explain the  taxation or  exemption of                                                               
royalties.   She  said  public  royalties paid  to  the state  or                                                               
federal  government  never enter  into  the  base calculation  of                                                               
gross  value because  of  the  way current  statute  works.   She                                                               
referred to AS 43.55.011(a), which  levies the tax on oil, except                                                               
that  which is  exempt,  which is  defined  in AS  43.55.900(13).                                                               
Regarding deductions, because  the bill changes the tax  to a tax                                                               
on  net  profits,  it's  necessary  to  address  deductions,  she                                                               
stated.  Public royalties are not  in the starting number so they                                                               
cannot be deducted.   Private royalties are not exempt  in line 1                                                               
so they are not deductible.   Question 65: Under Section 21 (Sec.                                                               
43.55.160(d)), where it says,  "direct costs... include...", does                                                               
the  world "include"  serve  to restrict  the  list of  allowable                                                               
expenses  to only  those items  included below  in (A)-(C).   She                                                               
said subsection  (c) provides the  general rule that  lease costs                                                               
are deductible,  and (d) only  addresses questionable items.   It                                                               
is merely a clarification.                                                                                                      
                                                                                                                                
3:17:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  for  [an  analysis of  tax/credit                                                               
ratios of] 25/25, 15/20 and 15/25.                                                                                              
                                                                                                                                
3:18:43 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS  pointed  out   that  the  discussions  are  in                                                               
increments of  5 percentage  points.  He  asked if  22.5 percent,                                                               
for example, would be on a straight line across the models.                                                                     
                                                                                                                                
MS. NIENHUIS  said she would  have to  look at the  effective tax                                                               
rate separately.                                                                                                                
                                                                                                                                
REPRESENTATIVE OLSON asked for a analysis of 22.5/22.5.                                                                         
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  for a  1 percent  increment.   He                                                               
said the graphs are hard to understand in terms of dollars.                                                                     
                                                                                                                                
3:21:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG said  for  example, "You  have 20/20  at                                                               
2010, at $20/$40/$60  per barrel.  What's the number?   We're not                                                               
going  to make  decisions off  a graphic  chart."   He asked  the                                                               
difference between 21 percent and 26 percent, for example.                                                                      
                                                                                                                                
MS. NIENHUIS said she will provide it.                                                                                          
                                                                                                                                
3:23:16 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS  said  it  doesn't  hurt to  see  things  in  a                                                               
different way.                                                                                                                  
                                                                                                                                
REPRESENTATIVE ROKEBERG said  it would be a lot easier  if he had                                                               
a   spreadsheet  to   compare  different   prices  at   different                                                               
percentages, including how to account  for the tax credits-to say                                                               
nothing for the claw backs and other aspects of the bill.                                                                       
                                                                                                                                
MR. DICKINSON said  he can provide the spreadsheets  that back up                                                               
the graphs.   He said he could also do  an iso-revenue graph with                                                               
tax rate on the x axis and credit  rate on the y axis for a given                                                               
set of  assumptions, like  volume and price,  and then  show what                                                               
combinations of  a tax  rate and  credit rate  bring in  the same                                                               
amount of revenue.                                                                                                              
                                                                                                                                
REPRESENTATIVE  ROKEBERG  said,  "The expression  of  the  dollar                                                               
amounts, like in a spreadsheet, are  very valuable.  But what you                                                               
run into, if you use that  only, is you have, like this crossover                                                               
point you  can take from  this model for  FY07 price-sensitivity,                                                               
and it shows somewhere between $24  and $25 per barrel, where the                                                               
state take  equates with the company  take."  He said  it doesn't                                                               
show  what the  downside is,  "so you  need to  make sure  you're                                                               
following that there's  a continuum on the up or  downside to see                                                               
where  the revenue  growth is.   So  you've got  to look  at them                                                               
together."                                                                                                                      
                                                                                                                                
3:26:03 PM                                                                                                                    
                                                                                                                                
MR. DICKINSON said,  "The more we generate, the more  you need to                                                               
keep in  front of you", and  each one is an  abstraction from one                                                               
point of view.                                                                                                                  
                                                                                                                                
MR. NIENHUIS asked  if the one percent increment  request was for                                                               
the tax rate or credit rate.                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS said  he wants  it  at a  tax rate  at a  given                                                               
credit rate  and vice versa,  so that he can  extrapolate numbers                                                               
under his set of assumptions.                                                                                                   
                                                                                                                                
REPRESENTATIVE ROKEBERG  said no  one knows  the behavior  of the                                                               
companies due to the credits.                                                                                                   
                                                                                                                                
3:28:13 PM                                                                                                                    
                                                                                                                                
[HB 488 was held over]                                                                                                          
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 3:28 p.m.                                                                 
                                                                                                                                
                                                                                                                                

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