Legislature(2007 - 2008)BARNES 124

03/21/2007 01:00 PM RESOURCES

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

Document Name Date/Time Subjects