Legislature(2007 - 2008)BARNES 124

03/28/2007 01:00 PM RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Scheduled But Not Heard
Scheduled But Not Heard
Scheduled But Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 186(FSH) Out of Committee
Heard & Held; Assigned to Subcommittee
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         March 28, 2007                                                                                         
                           1:04 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Carl Gatto, Co-Chair                                                                                             
Representative Craig Johnson, Co-Chair                                                                                          
Representative Vic Kohring                                                                                                      
Representative Bob Roses                                                                                                        
Representative Paul Seaton                                                                                                      
Representative Peggy Wilson                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 186                                                                                                              
"An Act relating to sharing with certain federal agencies                                                                       
records required of sport fishing guides."                                                                                      
     - MOVED CSHB 186(FSH) OUT OF COMMITTEE                                                                                     
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; ASSIGNED TO SUBCOMMITTEE                                                                                 
HOUSE BILL NO. 203                                                                                                              
"An Act creating the Kodiak Narrow Cape Public Use Area."                                                                       
     - HEARD AND HELD                                                                                                           
HOUSE BILL NO. 176                                                                                                              
"An Act creating the Fort Rousseau Causeway State Historical                                                                    
     - SCHEDULED BUT NOT HEARD                                                                                                  
HOUSE BILL NO. 194                                                                                                              
"An  Act  relating  to  fines   for  certain  offenses  involving                                                               
aeronautics, alcoholic  beverages, boats,  fish and  game, health                                                               
care  records and  public health,  medical review  organizations,                                                               
public    restroom   facilities,    smoking,   shelter    cabins,                                                               
refrigerators  and  similar  equipment, radiation  sources,  high                                                               
voltage  lines, child  labor,  employment  in underground  mines,                                                               
marriage   licenses,  motor   vehicles  and   driver's  licenses,                                                               
ignition  interlock devices,  pipelines, use  of the  state seal,                                                               
and  emissions   requirements;  relating  to  the   maximum  fine                                                               
provided for violations and infractions  and to the definition of                                                               
'minor   offenses';   redesignating   certain   fish   and   game                                                               
misdemeanor  offenses  as  class   A  misdemeanors;  relating  to                                                               
violations and offenses that are  committed on state land, water,                                                               
and land  and water or  that are  related to water  management or                                                               
dam  and reservoir  safety; amending  Rule 8(b),  Alaska District                                                               
Court  Rules   of  Criminal  Procedure;  and   providing  for  an                                                               
effective date."                                                                                                                
     - SCHEDULED BUT NOT HEARD                                                                                                  
HOUSE JOINT RESOLUTION NO. 4                                                                                                    
Requesting  the  Federal  Subsistence  Board  to  reconsider  its                                                               
decision  regarding the  subsistence  fishery  priority given  to                                                               
Ninilchik residents.                                                                                                            
     - SCHEDULED BUT NOT HEARD                                                                                                  
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 186                                                                                                                  
SHORT TITLE: SPORT FISHING GUIDE RECORDS                                                                                        
SPONSOR(s): REPRESENTATIVE(s) HARRIS BY REQUEST                                                                                 
03/12/07       (H)       READ THE FIRST TIME - REFERRALS                                                                        
03/12/07       (H)       FSH, RES                                                                                               
03/19/07       (H)       FSH AT 8:30 AM BARNES 124                                                                              
03/19/07       (H)       Heard & Held                                                                                           
03/19/07       (H)       MINUTE(FSH)                                                                                            
03/21/07       (H)       FSH AT 8:30 AM BARNES 124                                                                              
03/21/07       (H)       Moved CSHB 186(FSH) Out of Committee                                                                   
03/21/07       (H)       MINUTE(FSH)                                                                                            
03/22/07       (H)       FSH RPT CS(FSH) NT 4DP 2NR                                                                             
03/22/07       (H)       DP: JOHNSON, LEDOUX, EDGMON, SEATON                                                                    
03/22/07       (H)       NR: JOHANSEN, HOLMES                                                                                   
03/26/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/26/07       (H)       -- MEETING CANCELED --                                                                                 
03/28/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
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                                                                              
03/21/07       (H)       Heard & Held                                                                                           
03/21/07       (H)       MINUTE(RES)                                                                                            
03/23/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/23/07       (H)       Heard & Held                                                                                           
03/23/07       (H)       MINUTE(RES)                                                                                            
03/26/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/26/07       (H)       -- MEETING CANCELED --                                                                                 
03/28/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
BILL: HB 203                                                                                                                  
SHORT TITLE: KODIAK NARROW CAPE PUBLIC USE AREA                                                                                 
SPONSOR(s): REPRESENTATIVE(s) LEDOUX                                                                                            
03/14/07       (H)       READ THE FIRST TIME - REFERRALS                                                                        
03/14/07       (H)       RES, FIN                                                                                               
03/28/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
WITNESS REGISTER                                                                                                              
TOM WRIGHT, Staff                                                                                                               
Representative John Harris                                                                                                      
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Presented HB 186 on behalf of the sponsor,                                                               
Representative Harris by request.                                                                                               
DOUGLAS VINCENT-LANG, Special Projects Coordinator                                                                              
Division of Sport Fish                                                                                                          
Alaska Department of Fish & Game (ADF&G)                                                                                        
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Provided information related to HB 186.                                                                  
BERNARD HAJNY, Manager                                                                                                          
Production Tax and Royalties Alaska                                                                                             
BP Exploration Alaska                                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Provided testimony focusing on specific                                                                  
provisions of HB 128 and their impact on the new petroleum                                                                      
production profits tax.                                                                                                         
GARY ROGERS, Production Audit Manager                                                                                           
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  During hearing of HB 128, answered                                                                       
MICHAEL HURLEY, Director                                                                                                        
of State Government Relations                                                                                                   
ConocoPhillips Alaska, Inc.                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified in opposition to HB 128.                                                                       
MICHAEL FRALEY, Tax Counsel                                                                                                     
ConocoPhillips Alaska, Inc.                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified in opposition to HB 128.                                                                       
REPRESENTATIVE GABRIELLE LEDOUX                                                                                                 
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Spoke as the sponsor of HB 203.                                                                          
SUZANNE HANCOCK, staff                                                                                                          
Representative Gabrielle LeDoux                                                                                                 
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Presented HB 203 on behalf of the sponsor,                                                               
Representative LeDoux.                                                                                                          
DICK MYLIUS, Director                                                                                                           
Division of Mining, Land and Water                                                                                              
Department of Natural Resources                                                                                                 
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:     During  hearing  of   HB  203,  answered                                                             
BILL BURTON, Owner                                                                                                              
Kodiak Game Ranch                                                                                                               
Kodiak, Alaska                                                                                                                  
POSITION  STATEMENT:    During   hearing  of  HB  203,  suggested                                                             
including that existing  grazing rights or leases  be included as                                                               
one of the purposes of the Kodiak Narrow Cape Public Use Area.                                                                  
ACTION NARRATIVE                                                                                                              
CO-CHAIR  CARL   GATTO  called   the  House   Resources  Standing                                                             
Committee  meeting  to  order at  1:04:37  PM.    Representatives                                                             
Gatto,  Johnson,  Roses,  Guttenberg,  Wilson,  and  Edgmon  were                                                               
present  at  the  call  to   order.    Representatives  Kawasaki,                                                               
Kohring, and Seaton arrived as the meeting was in progress.                                                                     
HB 186-SPORT FISHING GUIDE RECORDS                                                                                            
1:04:54 PM                                                                                                                    
CO-CHAIR GATTO announced  that the first order  of business would                                                               
be HOUSE BILL  NO. 186, "An Act relating to  sharing with certain                                                               
federal agencies records required of sport fishing guides."                                                                     
1:05:12 PM                                                                                                                    
TOM  WRIGHT,  Staff,  Representative John  Harris,  Alaska  State                                                               
Legislature, explained  that HB 186 authorizes  the department to                                                               
release records required of sport  fishing guides to the National                                                               
Oceanic and  Atmospheric Administration  (NOAA) and  the National                                                               
Marine Fisheries  Service (NMFS).   He  expressed hope  that this                                                               
would  allow NOAA  and NMFS  to make  better decisions  regarding                                                               
allocation and law enforcement.                                                                                                 
1:06:22 PM                                                                                                                    
DOUGLAS VINCENT-LANG,  Special Projects Coordinator,  Division of                                                               
Sport Fish,  Alaska Department of  Fish & Game  (ADF&G), informed                                                               
the  committee  that  when the  department  originally  addressed                                                               
guide licensing  and business licensing  in the sport  fish guide                                                               
industry,   there  was   agreement   to   make  the   information                                                               
confidential.    That  agreement   of  confidentiality  was  made                                                               
because  the logbook  contained  the client  lists  of the  sport                                                               
fishing businesses.   He said that there was never  the intent to                                                               
not  allow full  enforcement  of sport  fish  guiding around  the                                                               
state.   An example of that  recently arose in the  North Pacific                                                               
Fishery Management Council (NPFMC).   In that case, the inability                                                               
to  share logbook  information with  NMFS enforcement  eliminated                                                               
the preferred alternative tool of  both the sport fishing charter                                                               
industry and NPFMC, in terms  of regulating the fishery to obtain                                                               
the guideline harvest  level.  Since the  information couldn't be                                                               
shared,  the federal  program  would have  to  institute its  own                                                               
marine  logbook program  and the  charter vessel  operators would                                                               
have  to  have  two  logbooks  onboard.   He  related  that  even                                                               
amending  the statute  as suggested  in HB  186, the  information                                                               
would have to remain confidential  unless there's a violation and                                                               
the  matter made  it  into the  court system.    Under the  court                                                               
system,  the information  pertaining  to the  violation would  be                                                               
public.   Therefore, this legislation would  merely allow sharing                                                               
of  confidential  information  with   NMFS  enforcement  and  the                                                               
International   Pacific  Halibut   Commission  (IPHC)   with  the                                                               
understanding  that they  would keep  it confidential  except for                                                               
the enforcement of fishing regulations in the state.                                                                            
1:09:17 PM                                                                                                                    
REPRESENTATIVE  SEATON recalled  that  the  original concern  was                                                               
that  the information  remain confidential,  which the  committee                                                               
has   been   ensured  is   the   case   with  this   legislation.                                                               
Representative  Seaton  said  that he's  comfortable  with  [CSHB
1:09:49 PM                                                                                                                    
CO-CHAIR  GATTO related  his  understanding that  Representatives                                                               
Wilson and Edgmon agree with Representative Seaton's statement.                                                                 
CO-CHAIR JOHNSON noted his agreement with this legislation.                                                                     
CO-CHAIR GATTO  then noted that  the legislation is  supported by                                                               
the Southeast Alaska Fisherman's Alliance.                                                                                      
1:10:42 PM                                                                                                                    
CO-CHAIR  GATTO, upon  determining  that no  one  else wished  to                                                               
testify, [announced that public testimony was closed].                                                                          
1:10:52 PM                                                                                                                    
CO-CHAIR JOHNSON moved  to report CSHB 186(FSH)  out of committee                                                               
with individual recommendations and  the accompanying zero fiscal                                                               
notes.  There being no objection, it was so ordered.                                                                            
HB 128-OIL & GAS PRODUCTION TAX: EXPENDITURES                                                                                 
1:11:18 PM                                                                                                                    
CO-CHAIR GATTO  announced that the  next 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),  as amended  at the  March 23,                                                               
2008, hearing.]                                                                                                                 
1:12:44 PM                                                                                                                    
BERNARD HAJNY,  Manager, Production Tax and  Royalties Alaska, BP                                                               
Exploration  Alaska,  paraphrased   from  the  following  written                                                               
testimony [original punctuation provided]:                                                                                      
     I  would  like  to  clarify  that  my  testimony  today                                                                    
     focuses  on  the specific  provisions  of  HB 128,  and                                                                    
     their impact  on the new  Petroleum Production  Tax, or                                                                    
     "PPT,"  from  my  perspective   as  someone  within  BP                                                                    
     charged   with  complying   with   it.  I   am  a   tax                                                                    
     professional, and  not an expert in  Oil Transit Lines,                                                                    
     corrosion,  pipeline  operations  or  pigging;  and  it                                                                    
     would  be  inappropriate for  me  to  talk about  those                                                                    
     areas. I am  here to talk about House Bill  128 and its                                                                    
     implications  for   BP  as  one  of   Alaska's  largest                                                                    
     Last   month  senior   BP   technical  and   operations                                                                    
     management,  Tony Brock  and Mike  Utsler, updated  the                                                                    
     Legislature  on the  status of  our efforts  to address                                                                    
     the issues  we discovered at  Prudhoe Bay last  year. I                                                                    
     can confirm  that both Tony  and Mike are  available in                                                                    
     the  future  should   this  Committee  require  further                                                                    
     updates   on  the   technical  and   operations  issues                                                                    
     relating to Prudhoe Bay.                                                                                                   
1:14:18 PM                                                                                                                    
     There are  two slides for my  presentation today, which                                                                    
     are printed  out on the  front and back of  a one-sheet                                                                    
     handout that  has been distributed to  you. Please look                                                                    
     at  the first  slide on  my handout,  which is  the one                                                                    
     entitled  "BP  Presentation   to  the  House  Resources                                                                    
     The PPT is working for the  State of Alaska, and I mean                                                                    
     "working" in  three senses  of the  term. First,  it is                                                                    
     "working" in the sense that  the PPT regulations by the                                                                    
     Department of  Revenue clarify in several  crucial ways                                                                    
     how the pieces of the  PPT fit together. Taxpayers know                                                                    
     what  is  expected  of them  in  computing  and  making                                                                    
     monthly installment payments, and  in making the annual                                                                    
     true-up on March 31st of the following year.                                                                               
     Second, the PPT is "working"  in the sense of providing                                                                    
     a major increase in state  production tax revenues last                                                                    
     year. For  BP, its  production tax nearly  tripled from                                                                    
     about  $180  million  under  the  old  [economic  limit                                                                    
     factor] ELF-based tax for the  last nine months of last                                                                    
     year,  to over  $500 million  under the  PPT for  those                                                                    
     months. This  is fully in  line with  the Legislature's                                                                    
     expectations about the PPT's revenue effects.                                                                              
     Third, the  PPT has  promise to  "work" in  response to                                                                    
     the  question  on  my slide  that  asks,  "Will  Alaska                                                                    
     attract  sufficient   investment  to   stem  production                                                                    
     decline?"   The   bulk   of  the   known   and   likely                                                                    
     opportunities  in Alaska  for  investing in  production                                                                    
     are  concentrated in  the existing  fields  - that  is,                                                                    
     investing  to  slow  their  decline,  to  increase  the                                                                    
     ultimate recovery  from them,  and to discover  ways to                                                                    
     develop and  produce the 20+  billion barrels  of heavy                                                                    
     and  viscous oil  that are  already known.  The PPT  is                                                                    
     significantly better  suited for  this future  than the                                                                    
     ELF  ever  was. In  addition,  through  its credit  for                                                                    
     capital   expenditures,  it   provides  an   investment                                                                    
     incentive that was absent from the old ELF-based tax.                                                                      
1:16:29 PM                                                                                                                    
MR. HAJNY continued:                                                                                                            
     But  even though  the PPT  structurally has  promise in                                                                    
     attracting the  new investment that  will be  needed to                                                                    
     deal  with  the  threat  of  declining  production,  BP                                                                    
     believes the  PPT is suboptimal  for the  State because                                                                    
     the  tax rate  is  too high.  If you  will  look at  my                                                                    
     second slide  - the graph  on the back of  the one-page                                                                    
     handout - you will find Alaska  at the wrong end of the                                                                    
     spectrum in  terms of government "take"  at the margin.                                                                    
     Investments   in  Alaska   must  compete   successfully                                                                    
     against  opportunities elsewhere,  and by  lowering the                                                                    
     PPT rate  Alaska would increase the  competitiveness of                                                                    
     its  investment  opportunities.   The  production  from                                                                    
     those investments will, we  are convinced, increase the                                                                    
     total revenues from Alaska's  property and income taxes                                                                    
     and royalties  by more  than any  reduction in  the PPT                                                                    
     that might result.                                                                                                         
1:17:26 PM                                                                                                                    
     Now, I would  ask you please to turn back  to the slide                                                                    
     on the  front of  the handout.  HB 128  would introduce                                                                    
     unnecessary  uncertainty into  the PPT.  We agree  with                                                                    
     the  AOGA  testimony  given by  Judy  Brady  about  the                                                                    
     overlap between existing  terms in the PPT  and the new                                                                    
     standard  of "improper"  maintenance  under this  Bill,                                                                    
     which either  makes the Bill  unnecessary or  means its                                                                    
     enactment will  create serious ambiguities. I  will not                                                                    
     repeat that testimony now.                                                                                                 
     Those  questions  about   what  constitutes  "improper"                                                                    
     maintenance only deal  with the matter of  when the new                                                                    
     provisions of HB  128 would be triggered.  What I would                                                                    
     like to  focus on  is what happens  under HB  128 after                                                                    
     that trigger  is pulled.  So I'd ask  you to  imagine a                                                                    
     hypothetical future situation  that indisputably arises                                                                    
     from improper maintenance.                                                                                                 
1:18:15 PM                                                                                                                    
MR. HAJNY continued:                                                                                                            
     If you  look at page 3  of the Bill, beginning  at line                                                                    
     23, you will see  three subparagraphs in paragraph (19)                                                                    
     that  are  designated "(A)",  "(B)"  and  "(C)". It  is                                                                    
     these  subparagraphs that  specify  what happens  after                                                                    
     the improper-maintenance trigger is pulled.                                                                                
     For the moment  I would like to  skip over subparagraph                                                                    
     (A) in  order to  talk about (B)  and (C),  which raise                                                                    
     questions about  sound tax policy. Then  I'll come back                                                                    
     to (19)(A),  which presents an entirely  different kind                                                                    
     of issue.                                                                                                                  
     Subparagraph (19)(B) disallows  any costs determined by                                                                    
     the Commissioner  of Revenue to have  been "incurred to                                                                    
     maintain  the operational  capability of  facilities or                                                                    
     equipment   shut   down   because   of   ...   improper                                                                    
     maintenance of property or equipment[.]"                                                                                   
     The first  thing to  note is  that the  disallowance is                                                                    
     not  limited  to  stand-by costs  for  keeping  up  the                                                                    
     operational  capability of  the  property or  equipment                                                                    
     that  was improperly  maintained.   When  you read  the                                                                    
     Bill closely, you  see that what is  disallowed are the                                                                    
     costs  of  sustaining  the  operational  capability  of                                                                    
     shut-down "facilities or  equipment", while the trigger                                                                    
     is  improper  maintenance  of "property  or  equipment"                                                                    
     (emphasis added). Because  these phrases are different,                                                                    
     they cover  different things.  In other  words, (19)(B)                                                                    
     would permit  disallowance of all costs  of standing by                                                                    
     and  staying  ready to  resume  production  - even  the                                                                    
     portion of stand-by costs  for facilities and equipment                                                                    
     that were properly maintained.                                                                                             
1:19:51 PM                                                                                                                    
MR. HAJNY continued:                                                                                                            
     Does this make sense?  (19)(B) penalizes spending money                                                                    
     to   "maintain    ...   operational    capability"   by                                                                    
     disallowing those  costs. I hope  that we would  want a                                                                    
     field to  get back up  and running as soon  as possible                                                                    
     after a shut-down,  but (19)(B) will be  an obstacle to                                                                    
     Subparagraph   (19)(C)    similarly   disallows   costs                                                                    
     determined  by  the  Commissioner   of  Revenue  to  be                                                                    
     "incremental  operating expenses  incurred as  a result                                                                    
     of  operating  facilities  or equipment  at  diminished                                                                    
     capacity  when that  diminished capacity  is caused  by                                                                    
     ...  improper maintenance  of  property or  equipment."                                                                    
     Here,  again,  the  disallowance   is  not  limited  to                                                                    
     diminished  capacity  of  the "property  or  equipment"                                                                    
     that   was   improperly    maintained,   but   includes                                                                    
     diminished  capacity of  any  "operating facilities  or                                                                    
     equipment"(emphasis added).                                                                                                
     Does this make  sense from a tax policy  point of view?                                                                    
     Again,  I  don't think  so.    Subparagraph (19)(C)  is                                                                    
     effectively  saying that  if  it costs  more  to run  a                                                                    
     field at  diminished capacity, the  State will  deter a                                                                    
     producer from  doing so by  disallowing those  costs. I                                                                    
     should   think  that   having  part   of  a   field  in                                                                    
     production,  even  at  a  higher-than-normal  operating                                                                    
     cost, is better  than having it completely  shut down -                                                                    
     especially in  light of state royalties  and income tax                                                                    
     which  are  both  enhanced  by  keeping  the  field  in                                                                    
     production.  If anything,  (19)(C)  should be  reducing                                                                    
     the PPT as an incentive for  keeping as much of a field                                                                    
     in production  as possible, but  it does  precisely the                                                                    
     opposite instead.                                                                                                          
     Thus,  I submit,  both (19)(B)  and (19)(C)  go off  in                                                                    
     exactly  the wrong  direction from  what  is sound  tax                                                                    
     policy for the State, and  both of them should be taken                                                                    
     out of the Bill.                                                                                                           
1:21:40 PM                                                                                                                    
MR. HAJNY continued:                                                                                                            
     This gets me back to  subparagraph (19)(A) on page 3 of                                                                    
     the Bill  at lines  23 - 24.   Under  this subparagraph                                                                    
     any costs determined by the  Commissioner of Revenue to                                                                    
     be  "related  to  the repair  or  replacement"  of  the                                                                    
     improperly   maintained  property   or  equipment   are                                                                    
     disallowed. The  problem with this new  disallowance is                                                                    
     that  it "double-dips"  on  the  flat-rate 30  cents-a-                                                                    
     barrel  disallowance under  paragraph (18).  Judy Brady                                                                    
     has explained  how this  30-cent disallowance  by Pedro                                                                    
     van Meurs was  directed at exactly the  same issue that                                                                    
     (19)(A)   addresses,  and   how   the  Senate   Special                                                                    
     Committee on  Natural Gas  Development then  rejected a                                                                    
     proposal like (19)(A)  twice in favor of  the van Meurs                                                                    
     flat rate  disallowance in paragraph  (18). I  will not                                                                    
     repeat those details now.                                                                                                  
     Even paragraph  (18) went too far  and was ill-advised.                                                                    
     Other provisions  in the PPT  law already  address, and                                                                    
     deal  with, the  questions about  adequate maintenance,                                                                    
     and  do  so  in  a  fair and  reasonable  way.  If  the                                                                    
     objective  is to  make the  PPT  a better  law for  the                                                                    
     future,  then  HB  128 should  repeal  paragraph  (18).                                                                    
     Instead, the  Bill proposes to  compound the  error not                                                                    
       only by keeping paragraph (18), but also by adding                                                                       
      subparagraph (19)(A) to double-dip on the very same                                                                       
     costs that paragraph (18) already disallows.                                                                               
       This concludes our testimony on HB 128. Thank you                                                                        
     again for this opportunity to appear before you.                                                                           
1:23:15 PM                                                                                                                    
MR.  HAJNY, in  response to  Co-Chair Gatto,  explained that  the                                                               
$.30 is calculated  such that $.30 a barrel is  multiplied by the                                                               
total number  of barrels  produced.   That dollar  amount reduces                                                               
both the  capital expenses and  the lease expenditures,  and thus                                                               
reduces   the  opportunity   for  a   deduction  and   a  credit.                                                               
Therefore, it reduces the deduction  against the 22.5 percent tax                                                               
rate as well as against the  20 percent credit.  He recalled that                                                               
Dr. van  Meurs estimated that the  $.30 will amount to  about $40                                                               
million at 900,000  barrels a day; $40 million  that the industry                                                               
wouldn't be  allowed to deduct as  costs or to obtain  as credits                                                               
under the PPT.  He opined that  Dr. van Meurs was trying to point                                                               
out  that  there  are  going  to  be  expenditures  dealing  with                                                               
maintenance  and  specific  issues  for  which  the  $.30  is  to                                                               
1:26:09 PM                                                                                                                    
REPRESENTATIVE  WILSON, referring  to paragraph  (18) on  page 3,                                                               
lines  13-18,  pointed out  that  in  the  future there  will  be                                                               
increases  in  inflation  and  increased  costs  to  fix  things.                                                               
Therefore,  it's probably  not in  the state's  best interest  to                                                               
leave it as  a flat amount because in the  long-term someone will                                                               
be responsible for paying the remainder beyond the flat rate.                                                                   
1:27:19 PM                                                                                                                    
CO-CHAIR  GATTO  asked  if  BP  made  more  money  the  year  the                                                               
petroleum  production profits  tax  (PPT)  was implemented,  even                                                               
though the taxes tripled.                                                                                                       
MR.  HAJNY  responded that  BP  estimates  that its  taxes  would                                                               
nearly  triple from  $180  million  under the  ELF  to over  $500                                                               
million [under  the PPT].  However,  he said that he  didn't know                                                               
BP Alaska's net income or  income figures during that same period                                                               
for 2006.   He acknowledged that  oil prices were higher  in 2006                                                               
than in the prior year.                                                                                                         
1:28:50 PM                                                                                                                    
CO-CHAIR GATTO  commented that he  was curious as to  whether the                                                               
state and the  companies both made money under the  PPT.  He said                                                               
that he's trying  to ascertain whether the effect of  the PPT was                                                               
truly devastating or somewhat negative.                                                                                         
MR. HAJNY  explained that the  point BP  tried to make  last year                                                               
during the  PPT hearings was  that increasing the tax  won't make                                                               
Alaska  more competitive  in  the  basins where  oil  and gas  is                                                               
produced.   In  further  response to  Co-Chair  Gatto, Mr.  Hajny                                                               
pointed out  BP's graph shows  that the marginal take  for Alaska                                                               
is higher  than the  provinces, which are  generally oil  and gas                                                               
provinces, that BP has represented.                                                                                             
1:29:56 PM                                                                                                                    
CO-CHAIR GATTO  asked if  the federal  government also  made more                                                               
money as compared to the prior year.                                                                                            
MR. HAJNY  surmised that if  the net  income rises, the  tax rate                                                               
would increase.                                                                                                                 
CO-CHAIR GATTO  opined then that  part of the government  take is                                                               
an increase  in the federal  government take, not just  the state                                                               
government's take.                                                                                                              
MR. HAJNY replied  yes, adding that all  provinces would've risen                                                               
at the same level.                                                                                                              
1:30:44 PM                                                                                                                    
REPRESENTATIVE  SEATON  referred  to  the chart  from  BP  titled                                                               
"Alaska  has  adopted the  highest  marginal  tax rate  in  North                                                               
America".  He  asked whether the chart for  Colorado, Kansas, and                                                               
Texas included the private royalties that are paid.                                                                             
MR. HAJNY  replied yes, and  specified that the chart  includes a                                                               
one-eighth or 12.5  percent royalty across the board  in order to                                                               
have an apples-to-apples comparison.                                                                                            
1:31:17 PM                                                                                                                    
REPRESENTATIVE  SEATON, referring  to paragraph  (19) on  page 3,                                                               
asked if shut  downs due to preventive maintenance  could be said                                                               
to  have  been   due  to  improper  maintenance,   and  thus  the                                                               
incremental cost of  operating the field with a  portion of wells                                                               
shut down wouldn't be deductible.                                                                                               
MR. HAJNY replied yes.   Therefore, BP reads the legislation such                                                               
that  if an  auditor  determines that  a portion  of  a piece  of                                                               
equipment was  improperly maintained or installed,  the operating                                                               
costs while the  field is down could be  disallowed as deductible                                                               
1:32:51 PM                                                                                                                    
REPRESENTATIVE SEATON related his  understanding that quite often                                                               
a portion of  a field's wells are shut down  for maintenance.  He                                                               
surmised then that  if it's determined that wells  were shut down                                                               
because  they should've  been  maintained  differently, then  the                                                               
incremental costs of operating the field wouldn't be deductible.                                                                
MR. HAJNY  noted his agreement  with Representative Seaton.   For                                                               
example, in a  situation in which a seal or  gasket was installed                                                               
backwards, the  language in [paragraph  (19)] says that  the cost                                                               
associated  with   the  whole   compression  facility   could  be                                                               
disallowed as  well as the  associated operating costs  while the                                                               
company tries to fix it.                                                                                                        
1:34:42 PM                                                                                                                    
CO-CHAIR  JOHNSON  asked  if  the  $.30  is  deductible  for  the                                                               
company's federal income taxes.                                                                                                 
MR. HAJNY  clarified that the $.30  is an ordinary cost  of doing                                                               
business and would be deductible.                                                                                               
1:35:20 PM                                                                                                                    
CO-CHAIR  JOHNSON  inquired  as  to   whether  the  rest  of  the                                                               
maintenance would fall  under the category of  a regular business                                                               
expense and be deductible from the federal income tax.                                                                          
MR. HAJNY,  noting that he  is not  a federal income  tax expert,                                                               
related   his  understanding   that  these   would  normally   be                                                               
deductible costs.                                                                                                               
1:35:53 PM                                                                                                                    
CO-CHAIR JOHNSON asked:                                                                                                         
     Will that  effect the 67 percent  take - if you  get to                                                                    
     deduct  these expenses  from your  federal income  tax,                                                                    
     will that  reduce that take?  ... If I  understand you,                                                                    
     the  $.30 is  deductible, the  maintenance ...  that is                                                                    
     performed  ... regardless  how  ...  we categorize  the                                                                    
     maintenance.    Will  that deduction  decrease  the  67                                                                    
     percent, in your opinion?                                                                                                  
MR. HAJNY answered that he didn't know.                                                                                         
1:36:32 PM                                                                                                                    
CO-CHAIR  GATTO  surmised that  if  a  company  has $1  worth  of                                                               
maintenance and  the state  doesn't allow  the $.30,  the company                                                               
spends the $1 and the company declares the $1.                                                                                  
1:37:24 PM                                                                                                                    
CO-CHAIR JOHNSON inquired as to  why the company wouldn't declare                                                               
$1.30 since  the $.30 is  already included  as a regular  part of                                                               
daily business.                                                                                                                 
CO-CHAIR GATTO noted  his disagreement, stating that  the $.30 is                                                               
a fictitious number  until the company pays a bill.   The $.30 is                                                               
only allowed  to offset  an expense.   Therefore, if  the company                                                               
doesn't offset an expense, the $.30 never existed, he opined.                                                                   
1:38:22 PM                                                                                                                    
MR.  HAJNY   related  his  understanding   that  the   costs  are                                                               
determined under  the Internal  Revenue Service  (IRS) guidelines                                                               
and not subject to what occurs under the PPT.                                                                                   
1:39:10 PM                                                                                                                    
GARY ROGERS,  Production Audit Manager, Tax  Division, Department                                                               
of  Revenue  (DOR),  related his  understanding  that  $1  spent,                                                               
expense or capital, the IRS  recognizes that as a $1 expenditure.                                                               
The IRS doesn't recognize the  $.30 that's a disallowance of that                                                               
$1 for the PPT.                                                                                                                 
1:40:20 PM                                                                                                                    
REPRESENTATIVE SEATON clarified that  the deductions can be taken                                                               
against the  PPT, federal income  tax, and the  state's corporate                                                               
income  tax.     Therefore,   these  aren't   mutually  exclusive                                                               
deductions.  The only way to  achieve a higher amount, he opined,                                                               
is based on  the credits that are allowed for  capital.  When the                                                               
credits are  allowed, an entity  can receive a credit  portion of                                                               
that entity's  investment.   In that some  additional tax  can be                                                               
achieved, he noted.                                                                                                             
1:41:22 PM                                                                                                                    
CO-CHAIR GATTO reminded  the committee that this  is really about                                                               
defining improper  maintenance.   He said  he's depending  on the                                                               
testimony  from  the  companies   to  relate  what  they  believe                                                               
constitutes proper maintenance.                                                                                                 
1:43:35 PM                                                                                                                    
REPRESENTATIVE  ROSES  recalled  testimony  in  which  there  was                                                               
discussion   regarding   the   following   four   categories   of                                                               
negligence:  intentional or willful  neglect; gross negligence or                                                               
disregard  to  the consequences  that  could  occur; ordinary  or                                                               
common negligence;  and strict liability.   The  testimony seemed                                                               
to indicate that  HB 128 is creating a definition  of ordinary or                                                               
common negligence and  the result of that.   Representative Roses                                                               
opined, "I think part of what  we're getting to here is trying to                                                               
define what occurred by plugging up  what we see as a loop hole."                                                               
He  then  asked  if  during  a  partial  shut  down  for  regular                                                               
maintenance, a company  would replace equipment that  is found to                                                               
be faulty or leave it until it stops working.                                                                                   
MR. HAJNY said  that he would be venturing into  an area in which                                                               
he's not familiar.                                                                                                              
1:46:55 PM                                                                                                                    
REPRESENTATIVE  ROSES related  his guess  that the  company would                                                               
probably replace  that faulty equipment.   If the  company didn't                                                               
replace  it, he  opined  that  it would  be  ordinary and  common                                                               
negligence.  According  to this legislation, the  company in such                                                               
a  circumstance wouldn't  be  able  to deduct  any  of the  costs                                                               
related  due  to   the  partial  shut  down.     On  the  surface                                                               
Representative  Roses noted  his  agreement with  Mr. Hajny  that                                                               
this is a bit excessive  in that the state encourages maintenance                                                               
but   punishes  the   company  when   it   does.     Furthermore,                                                               
Representative Roses said that he isn't fond of retroactivity.                                                                  
1:48:09 PM                                                                                                                    
REPRESENTATIVE    GUTTENBERG   requested    further   explanation                                                               
regarding  Mr.   Hajny's  assertion  that  the   PPT  had  higher                                                               
incentives for investment than the ELF.                                                                                         
MR. HAJNY clarified  that he's referring to  the deductibility of                                                               
the   expenses   and   the  credits   associated   with   capital                                                               
expenditures.     The  intent  appeared  to   be  to  incentivize                                                               
investment,  and therefore  try  to  incentivize investment  that                                                               
would  stem  the decline  in  Alaska,  he  related.   In  further                                                               
response  to Representative  Guttenberg, Mr.  Hajny said  that he                                                               
didn't know what the world average  is; the point of the slide is                                                               
that Alaska  would be well-served  to move in the  direction that                                                               
the Gulf of Mexico, Canada, and  Alberta are with regard to their                                                               
tax regimes and marginal rates.                                                                                                 
1:50:02 PM                                                                                                                    
REPRESENTATIVE SEATON, referring to page  3, line 19, inquired as                                                               
to Mr.  Hajny's understanding of the  "costs" as a standard.   He                                                               
then asked if there's a criteria  or is it merely a determination                                                               
that the commissioner can make at any given time.                                                                               
MR.  HAJNY said  that  Representative Seaton  has identified  the                                                               
biggest issue,  the potential ambiguity and  uncertainty, that BP                                                               
has with this legislation.                                                                                                      
1:51:29 PM                                                                                                                    
REPRESENTATIVE  SEATON inquired  as to  how [the  companies] will                                                               
project the replacement and maintenance  of equipment since these                                                               
characteristics are  not going to  be incident driven  but rather                                                               
audit driven.   He  recalled that  DOR has said  that one  of the                                                               
criteria used  by an auditor  would be a  high expense.   "Do you                                                               
feel  that under  this, it's  going to  be necessary  to maintain                                                               
that  piece of  equipment that's  been replaced  so that  you can                                                               
verify  that you  didn't  replace it  because  it was  improperly                                                               
maintained," he asked.  He  explained that he's trying to address                                                               
how  to   determine  whether  or   not  something   was  properly                                                               
maintained or not since this is  likely driven by an audit or tax                                                               
return  and will  be  a  capital expenditure,  "it  will be  long                                                               
MR. HAJNY  confirmed that the  aforementioned, the fact  that the                                                               
audits are  retrospective, is one  of the  difficulties companies                                                               
will have with  administering this.  Companies  will deduct costs                                                               
and  apply  credits  associated with  expenditures  as  they  are                                                               
spent.   The determination  of whether that  was replaced  due to                                                               
improper  maintenance  would   potentially  be  determined  years                                                               
later.  Trying to provide  information that would prove equipment                                                               
was  properly maintained  accompanied  with the  burden that  the                                                               
companies would  be against during  the audit could  be difficult                                                               
to document.                                                                                                                    
1:54:03 PM                                                                                                                    
CO-CHAIR GATTO commented that this  reminds him of court hearings                                                               
in which one can only be proven to be not guilty, not innocent.                                                                 
1:56:27 PM                                                                                                                    
MICHAEL   HURLEY,  Director,   of  State   Government  Relations,                                                               
ConocoPhillips  Alaska,   Inc.,  said   that  he   would  discuss                                                               
ConocoPhillips  Alaska, Inc.  (ConocoPhillips)  opposition to  HB
128.   As discussed in  a prior  hearing, Mr. Hurley  opined that                                                               
it's appropriate for  the legislature to determine  what it wants                                                               
to allow  or disallow under  the PPT.   However, Mr.  Hurley said                                                               
that he  believes the  $.30 can  be shown as  related to  and, in                                                               
fact,  because of  the incidents  that occurred  at Prudhoe  Bay.                                                               
The current  legislation seeks to duplicate  that disallowance in                                                               
a  different way.   He  suggested  that the  legislature has  the                                                               
responsibility to decide which way to disallow it.                                                                              
1:58:38 PM                                                                                                                    
REPRESENTATIVE WILSON  interjected that she misspoke  earlier and                                                               
in fact it's the opposite of what she said.                                                                                     
1:58:52 PM                                                                                                                    
MICHAEL  FRALEY,   Tax  Counsel,  ConocoPhillips   Alaska,  Inc.,                                                               
related that ConocoPhillips opposes  HB 128 for multiple reasons.                                                               
The  first reason  is that  ConocoPhillips believes  HB 128  is a                                                               
targeted  tax.   He  pointed out  that  AS 43.56.165(e)  includes                                                               
numerous  exclusions  that  reduce  lease  expenditures.    Those                                                               
disallowances   of   the   lease  expenditures   were   discussed                                                               
throughout  the   regular  session  as  well   as  three  special                                                               
sessions.   It wasn't until  the August 3, 2006,  special session                                                               
that AS 43.56.165(e)(18)  was discussed, which was  after the oil                                                               
spill became public.  He  noted that AS 43.56.165(e)(19) was also                                                               
discussed at the time, but  ultimately the legislature decided to                                                               
implement  AS 43.56.165(e)(18),  which  is  a broad  disallowance                                                               
versus a narrowly tailored disallowance.   Mr. Fraley opined that                                                               
a targeted tax is a bad way to  set tax policy.  Second, it's too                                                               
early to  reopen the PPT as  companies are just now  filing final                                                               
returns  for  the  last  nine   months  of  2006.    Furthermore,                                                               
regulations   have   not   yet    been   promulgated.      Third,                                                               
ConocoPhillips believes that existing  statute already covers the                                                               
issue addressed by HB 128.                                                                                                      
2:01:56 PM                                                                                                                    
MR.  HURLEY,  referring to  the  document  titled "30  Cents  per                                                           
Barrel Disallowance  Example", explained the PPT  calculation and                                                           
reviewed  an example  of the  PPT  under ConocoPhillips'  average                                                               
barrel of  oil last year, which  was $62.66.  In  response to Co-                                                               
Chair Gatto, Mr.  Hurley specified that the tariff  was taken out                                                               
prior to  arriving at the $62.66,  which is the value  of the oil                                                               
at  the lease  line.   He explained  that the  value on  the West                                                               
Coast minus transportation  gets to the lease line,  the point at                                                               
which  the  costs  and  investments   are  subtracted.    In  the                                                               
calculation,  the tariff  last year  was in  the range  of $4.25-                                                               
$4.50.    In  further  response to  Co-Chair  Gatto,  Mr.  Hurley                                                               
specified that the interstate rate is currently between $5.00-                                                                  
$5.50.  Mr. Hurley confirmed  that the [interstate rate] is still                                                               
an issue that's being resolved.                                                                                                 
2:04:49 PM                                                                                                                    
MR. HURLEY  continued his  review of the  PPT calculation  in the                                                               
case of  an average  barrel of  oil at  $62.66, which  results in                                                               
$9.98 a  barrel of tax,  absent other items.   He noted  that the                                                               
tax is  actually higher than  that because  of the surtax.   When                                                               
the $.30  comes into  play, it's  subtracted from  the investment                                                               
and that's  what the company is  allowed to claim on  its PPT tax                                                               
return although  it spent $.30 more  than is allowed.   The final                                                               
tax return in this example  illustrates that the $.30 is deducted                                                               
in  two places,  and thus  instead of  paying $9.98  in severance                                                               
tax,  ConocoPhillips  would  pay   $10.11  because  of  the  $.30                                                               
2:06:53 PM                                                                                                                    
CO-CHAIR GATTO surmised  then that in this example  with the $.30                                                               
disallowance, ConocoPhillips' tax increased by 1 percent.                                                                       
MR. HURLEY  specified that  the tax increase  was on  111 million                                                               
barrels,  which  amounts  to  about  $14.5-$15  million  in  this                                                               
2:07:42 PM                                                                                                                    
MR.  FRALEY  highlighted   that  ConocoPhillips  will  experience                                                               
additional impacts, such  as the 10 percent tie credit.   The tie                                                               
credit  will  be  reduced  for  the  first  five  to  six  years.                                                               
Furthermore,  any   progressivity  would  create   an  additional                                                               
impact.   For simplicity, the  aforementioned wasn't  included in                                                               
the example.                                                                                                                    
MR.  HURLEY explained  that [AS  43.56.165(e)(18)] is  already in                                                               
law to address maintenance.                                                                                                     
2:08:31 PM                                                                                                                    
REPRESENTATIVE ROSES  inquired as to  the percentage of  costs in                                                               
the  first  part of  the  formula  that  would be  attributed  to                                                               
2:08:52 PM                                                                                                                    
MR. HURLEY  said it would  depend on the  field.  For  example, a                                                               
field such as Prudhoe Bay that  started in the 1970s would have a                                                               
more   significant  portion   of  maintenance   costs  versus   a                                                               
relatively  new field  such as  Alpine.   He  clarified that  the                                                               
numbers utilized in the example  are an average number across all                                                               
of ConocoPhillips' fields.                                                                                                      
2:09:31 PM                                                                                                                    
REPRESENTATIVE ROSES  inquired as to  the overall costs  that are                                                               
attributable to maintenance.                                                                                                    
MR. HURLEY  said that he  doesn't know.   In further  response to                                                               
Representative Roses, Mr.  Hurley said he would hope  that if the                                                               
incident-by-incident  approach outlined  in HB  128  is used,  it                                                               
wouldn't get rid  of all maintenance.  The  department would have                                                               
to show what sorts of things were improperly maintained.                                                                        
2:10:51 PM                                                                                                                    
REPRESENTATIVE  ROSES   posed  a  situation  in   which  half  of                                                               
ConocoPhillips' cost is maintenance,  included in which are labor                                                               
costs,  and only  half of  it was  attributable to  some sort  of                                                               
negligence  or shut  down.   The aforementioned  would amount  to                                                               
only one-fourth  of that.   However, if the $9.98  was disallowed                                                               
under  the normal  deduction of  cost,  the cost  of that  barrel                                                               
would be increased  by an additional $.35.   Representative Roses                                                               
opined  that if  ConocoPhillips is  going  to testify  as to  the                                                               
financial impact  this proposal  will have on  the company,  at a                                                               
minimum  he  said  he  expected  some of  the  numbers  would  be                                                               
available.  He said that he's  trying to get a realistic estimate                                                               
as to what percentage of the  costs are maintenance and when must                                                               
a shut down occur to perform  regular maintenance.  Those are the                                                               
times  in which  the possibility  of an  audit could  trigger the                                                               
company's  inability  to  deduct   the  costs  because  of  being                                                               
shutdown due to negligence.                                                                                                     
MR. HURLEY  explained that when  he used this example,  it wasn't                                                               
intended  to make  a case  about how  large the  number is.   The                                                               
example  was only  for illustrative  purposes  regarding how  the                                                               
disallowance works.                                                                                                             
2:13:56 PM                                                                                                                    
REPRESENTATIVE  SEATON  surmised  then   that  the  example  only                                                               
relates to  AS 43.55.165(e)(19)(A), the cost  of maintenance, but                                                               
not to  AS 43.55.165(e)(19)(B)  or AS  43.55.165(e)(19)(C), which                                                               
have  to  do  with  the  costs  of  operation  if  something  was                                                               
determined  to be  improperly maintained.    Therefore, the  $.30                                                               
can't be  related to  direct cost  because it's  the cost  of the                                                               
nonmaintained  items,  plus  a shut  down  or  reduced  operating                                                               
2:14:46 PM                                                                                                                    
MR. HURLEY  clarified that $.30  isn't in AS  43.55.165(e)(19) at                                                               
all,  but rather  in existing  law  in AS  43.55.165(e)(18).   He                                                               
further clarified  that the aforementioned already  exists and is                                                               
deducted from  the PPT  filings every month.   Therefore,  HB 128                                                               
includes  an additional  disallowance on  an incident-by-incident                                                               
basis  based  on subsections  (a)-(c)  over  and above  the  $.30                                                               
that's already being disallowed.                                                                                                
2:15:44 PM                                                                                                                    
CO-CHAIR  GATTO  recalled that  Mr.  Fraley  objected to  HB  128                                                               
because it's a targeted tax.   Co-Chair Gatto pointed out various                                                               
taxes that  are targeted  taxes, including  the cruise  ship tax,                                                               
the fuel tax,  the tire tax, a business license,  a sales tax, or                                                               
income tax.   He asked Mr. Fraley to name  some taxes that aren't                                                               
MR. FRALEY remarked  that the taxes Co-Chair  Gatto mentioned are                                                               
generally  applicable  to  the  industry,  and  therefore  aren't                                                               
targeted taxes.   He  related that his  definition of  a targeted                                                               
tax  is  one in  which  the  tax is  created  due  to a  specific                                                               
2:16:47 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  inquired as to the  level of incidence                                                               
to  which something  has  to  arise and  cause  this  to go  into                                                               
MR. FRALEY commented that one  of the problems ConocoPhillips has                                                               
with HB  128 is  that it  is unknown;  no certainty  is involved.                                                               
"There's an imprecise standard, and then  on top of that we don't                                                               
know it's going to be applied  and how it's going to be applied,"                                                               
he opined.   Therefore, it's  an unknown cost  for ConocoPhillips                                                               
and contributes to the opposition to HB 128.                                                                                    
2:17:53 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  reminded everyone that last  year when                                                               
the  PPT  was  passed,  the   general  assumption  was  that  the                                                               
incidents causing these (indisc.)  and repair costs weren't going                                                               
to be  deductible.   However, now the  legislature is  being told                                                               
that they will be deducted.   He then recalled hearing that under                                                               
the  old ELF  program there  were  few incentives  and that  when                                                               
companies  had  cash in  hand,  they  [didn't deduct  the  repair                                                               
costs].   However, there was  an incident when the  companies had                                                               
cash in  hand and  the proper maintenance  wasn't performed.   He                                                               
opined that  to reach  a level  at which this  would kick  in, it                                                               
would have  to be a fairly  high level.  The  concern, he opined,                                                               
is  when the  field  shuts  down, the  pipe  is  corroded, and  a                                                               
significant amount of revenues are impacted.                                                                                    
2:20:18 PM                                                                                                                    
REPRESENTATIVE SEATON directed attention to  page 3, line 19, and                                                               
inquired  as to  whether  that language  has  any direction  with                                                               
regard to what will be disallowed.                                                                                              
MR.  FRALEY  echoed  earlier comments  that  the  language  seems                                                               
ambiguous  and  penalizes  an  operator  who  tries  to  maintain                                                               
facilities  and  equipment even  when  there's  a shutdown.    He                                                               
stressed that  operators who operate  at a reduced  capacity will                                                               
be penalized for doing so.                                                                                                      
2:21:20 PM                                                                                                                    
REPRESENTATIVE SEATON  surmised then that within  the legislation                                                               
there's no standard or direction for a determination.                                                                           
MR.  HURLEY noted  that they  never reached  their fourth  point,                                                               
which  is that  some of  the ambiguity  in the  way in  which the                                                               
legislation is  constructed is troublesome  and that is one.   He                                                               
pointed out  that portion of cost  doesn't provide a guide  as to                                                               
which portion  of the  costs "we're  trying to  figure out."   He                                                               
highlighted  that it's  difficult  to tell  what  portion of  the                                                               
costs are  from improper  maintenance or  regular wear  and tear.                                                               
The  aforementioned is  impossible  to know,  and thus  companies                                                               
wouldn't know  how to file their  returns and thus would  have to                                                               
be  brought forth  under  an  audit that  occurs  later when  the                                                               
different standard is applied.                                                                                                  
2:22:51 PM                                                                                                                    
MR. FRALEY turned  to ConocoPhillips' third point,  which is that                                                               
there  are  already protections  in  statute.   For  example,  AS                                                               
43.55.165(e)(16)  disallows  the  deduction   of  any  oil  spill                                                               
cleanup costs.   Furthermore, AS 43.55.165(e)(6)  discusses gross                                                               
negligence  and any  maintenance  issue due  to gross  negligence                                                               
wouldn't be deducted either.                                                                                                    
2:23:17 PM                                                                                                                    
CO-CHAIR GATTO related  his understanding when a  company has oil                                                               
spill  cleanup  costs,  it  would  have to  have  in  place  much                                                               
equipment in order  to perform the cleanup.   Therefore, he asked                                                               
if  the industry  of cleaning  up the  oil would  be part  of the                                                               
capital expenses that are all deductible.                                                                                       
2:23:41 PM                                                                                                                    
MR.  HURLEY clarified  that [cleanup  equipment] is  part of  the                                                               
companies'  normal  operating  costs.     The  company  pays  for                                                               
response vessels through a co-op  amongst the different operators                                                               
such  that  it's available  when  an  incident actually  happens.                                                               
When there  is an incident  and vessels and cleanup  products are                                                               
used, the company  with the spill has to resupply  the co-op with                                                               
all  the  items  that  it  used, which  isn't  a  deductible  PPT                                                               
expense.  In further response  to Co-Chair Gatto, Mr. Hurley said                                                               
that the cleanup items were purchased several years ago.                                                                        
2:25:09 PM                                                                                                                    
MR.  FRALEY   then  directed  attention   to  a   handout  titled                                                               
"Disallowing  'deemed capital  maintenance'  costs" which  offers                                                           
another explanation of  how AS 43.55.165(e)(19) works.   He noted                                                               
that this information was derived  from Pedro van Meurs August 8,                                                               
2006, letter.   He highlighted  the following quote from  Dr. van                                                               
Meurs,  "I believe  that  this  would provide  a  good answer  to                                                               
possible public criticism that under  the PPT we would provide 50                                                               
percent of the replacement costs of  pipelines as a result of the                                                               
Prudhoe Bay shut down."                                                                                                         
2:26:17 PM                                                                                                                    
REPRESENTATIVE  ROSES  remarked  that  there are  parts  of  this                                                               
legislation  that he  doesn't  like at  all.   He  noted that  he                                                               
agrees  that there  is already  negligence and  other factors  in                                                               
place  that disallow  [the  deduction of  the  costs of  improper                                                               
repair  and/or   maintenance].    This  legislation   places  the                                                               
negligence  at  the level  of  ordinary  negligence, which  is  a                                                               
lesser requirement of  proof for negligence.  He said  that he is                                                               
seeking  numbers  that relate  the  tax  ramifications on  a  per                                                               
barrel  basis as  it provides  something  by which  to weigh  the                                                               
MR.  FRALEY offered  to provide  the  committee information  with                                                               
regard to the  percentage of maintenance costs, noting  that as a                                                               
field ages  there are  more maintenance  costs for  those fields.                                                               
With  regard  to  how  much  of the  maintenance  costs  will  be                                                               
disallowed, Mr.  Fraley reiterated  that he  doesn't know.   With                                                               
regard   to  the   actual  language   of   the  legislation,   AS                                                               
43.55.165(e)(19) seems to specify that  the final arbiter will be                                                               
accountants and  attorneys at  DOR rather  than engineers  at the                                                               
Alaska  Oil  and  Gas   Conservation  Commission  (AOGCC),  which                                                               
creates further uncertainty.                                                                                                    
2:29:07 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  surmised that  there's a  problem with                                                               
defining with  what's allowable and  what's disallowable  as well                                                               
as  what   triggers  the  aforementioned.     He   indicated  the                                                               
possibility of  requiring every regularly scheduled  shut down to                                                               
be  reported and  thus  an  unexpected shut  down  would cause  a                                                               
review into whether the proper maintenance was being performed.                                                                 
2:30:22 PM                                                                                                                    
MR. HURLEY  expressed concern  that even  if all  the appropriate                                                               
maintenance is performed, equipment could  still fail.  He opined                                                               
that the investigation of all  equipment failures would amount to                                                               
a lot.                                                                                                                          
REPRESENTATIVE   GUTTENBERG  questioned   the  [feasibility]   of                                                               
investigating shut downs that result in  the loss of revenue.  He                                                               
acknowledged that incidents  occur all the time,  but last year's                                                               
leak due to corrosion wasn't normal.                                                                                            
MR. HURLEY commented that last year's leak was extraordinary.                                                                   
2:31:19 PM                                                                                                                    
CO-CHAIR  GATTO   appointed  a  subcommittee  of   the  following                                                               
members:    Representative  Johnson, Chair,  and  Representatives                                                               
Wilson and Guttenberg.                                                                                                          
2:31:44 PM                                                                                                                    
CO-CHAIR JOHNSON  said that he  is terribly  uncomfortable making                                                               
any decisions  on HB 128  until some real numbers  are available.                                                               
He  expressed the  desire  to  have tax  returns  and the  actual                                                               
expenses and what DNR has decided.                                                                                              
[HB 128 was held over.]                                                                                                         
HB 203-KODIAK NARROW CAPE PUBLIC USE AREA                                                                                     
2:32:27 PM                                                                                                                    
CO-CHAIR GATTO announced  that the final order  of business would                                                               
be HOUSE  BILL NO. 203, "An  Act creating the Kodiak  Narrow Cape                                                               
Public Use Area."                                                                                                               
2:33:20 PM                                                                                                                    
REPRESENTATIVE  GABRIELLE   LEDOUX,  Alaska   State  Legislature,                                                               
speaking as  the sponsor of  HB 203, informed the  committee that                                                               
it should  have a proposed  committee substitute (CS),  which was                                                               
necessitated  by some  changes to  the legal  description in  the                                                               
original legislation.                                                                                                           
2:34:18 PM                                                                                                                    
SUZANNE HANCOCK,  Staff, Representative Gabrielle  LeDoux, Alaska                                                               
State  Legislature,  explained that  HB  203  sets aside  a  very                                                               
special  area of  Kodiak for  public use.   Currently,  there are                                                               
five public  use areas recognized  in state law, the  most recent                                                               
is  the Knik  River Public  Use Area.   The  Narrow Cape  area of                                                               
Kodiak has  a long history  of public  use from beach  combing to                                                               
REPRESENTATIVE  LEDOUX  interjected  that  Kodiak  is  a  popular                                                               
destination for extreme surfers.                                                                                                
MS.  HANCOCK informed  the  committee that  there  is footage  of                                                               
Kodiak in the  movie "Endless Summer II".  She  then informed the                                                               
committee  that Narrow  Cape has  an area  referred to  as Fossil                                                               
Beach,  where rocks  bear  the imprint  of  leaves from  previous                                                               
centuries.   In  fact,  the committee  packet  includes a  prize-                                                               
winning photo  and essay  from a  local Kodiak  student regarding                                                               
Fossil Beach.   The area  is also the  home of the  Kodiak Launch                                                               
Complex.   A few years  ago there  was an initiative  to transfer                                                               
this land to  the University of Alaska, which  triggered a review                                                               
of possible steps  to recognize and protect  the important public                                                               
use  value of  this land.   Creation  of a  public use  area will                                                               
require the  adoption of  a management plan  for the  area, which                                                               
should help manage  any usage conflicts and  ensure the important                                                               
multiple use of the area.                                                                                                       
2:37:45 PM                                                                                                                    
CO-CHAIR  JOHNSON   asked  if  this   fits  within   the  coastal                                                               
management plan.                                                                                                                
MS. HANCOCK deferred to the borough manager.                                                                                    
2:38:03 PM                                                                                                                    
REPRESENTATIVE  WILSON asked  if this  legislation would  prevent                                                               
any activity from happening that currently does.                                                                                
MS.  HANCOCK  specified  that  all who  regulate  land  use  will                                                               
continue to  do so  under HB 203,  unless through  the management                                                               
plan other things are determined.                                                                                               
2:38:46 PM                                                                                                                    
REPRESENTATIVE WILSON  surmised that if  the Narrow Cape  area is                                                               
set aside, no hunting would be allowed in the area.                                                                             
2:38:57 PM                                                                                                                    
CO-CHAIR GATTO recalled  when the Knik River Public  Use Area was                                                               
set aside, it didn't prevent fishing  or any other use.  Since HB
203 is modeled after the Knik  River Public Use Area, he surmised                                                               
that similar restrictions or nonrestrictions exist.                                                                             
2:39:49 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI inquired  as  to the  difference in  the                                                               
definition of a public use area  versus a refuge, a sanctuary, or                                                               
a  critical habitat  area.   He then  inquired as  to whether  an                                                               
inclusive or  exclusive list  of what's allowed  in a  public use                                                               
area would be necessary.                                                                                                        
MS.  HANCOCK  deferred to  the  Department  of Natural  Resources                                                               
2:40:37 PM                                                                                                                    
DICK  MYLIUS,  Director,  Division  of Mining,  Land  and  Water,                                                               
Department  of Natural  Resources,  explained that  a public  use                                                               
area is  an area of  state land  that the legislature  sets aside                                                               
for retention or state ownership  in order to accommodate a large                                                               
number of multiple uses.  The  key component of a public use area                                                               
is that it's  to be retained in state ownership.   Therefore, the                                                               
disposal of the land is prohibited.   The land remains state land                                                               
and is  managed by  the Division  of Mining,  Land and  Water for                                                               
multiple  use,  including  mining,  oil  and  gas,  hunting,  and                                                               
fishing.  A public use  designation, he noted, often identifies a                                                               
higher level of management of the  area and thus the division may                                                               
be more active  in managing public use areas as  is the case with                                                               
the Knik  Public Use Area.   Mr. Mylius said that  the public use                                                               
designation  wouldn't  significantly  change   how  the  area  is                                                               
managed.   About three years  ago the  Kodiak area land  use plan                                                               
was completed.   The management  proposed in the public  use area                                                               
is very  similar to that outlined  area plan.  He  mentioned that                                                               
the area land use plan didn't  identify any land disposals in the                                                               
area.   The legislation makes  the determination in the  land use                                                               
plan permanent.                                                                                                                 
2:43:18 PM                                                                                                                    
CO-CHAIR  GATTO asked  if  a  person with  in  holdings would  be                                                               
protected from losing his/her property.                                                                                         
MR. MYLIUS  replied yes, and  specified that the public  use area                                                               
only  applies  to state  land.    There are  specific  provisions                                                               
included in HB  203, including the provision  specifying that the                                                               
state  cannot  use  eminent  domain to  acquire  any  private  in                                                               
holdings.     There  is   another  provision   in  HB   203  that                                                               
specifically  provides  access  to  in holdings.    In  terms  of                                                               
enforcement,  Mr. Mylius  pointed out  that the  Knik Public  Use                                                               
Area legislation included specific  enforcement language that was                                                               
given  to DNR,  which  isn't currently  provided  on state  land.                                                               
Therefore, a  higher level  of enforcement  was provided  for the                                                               
Knik Public  Use Area.  He  further pointed out that  there is no                                                               
such provision in HB 203, but it's addressed in HB 194.                                                                         
2:44:30 PM                                                                                                                    
REPRESENTATIVE  SEATON,  referring  to page  3,  subsection  (f),                                                               
opined that  there seems to  be a mechanism for  determining uses                                                               
that cannot  be done  in the proposed  Kodiak Narrow  Cape Public                                                               
Use Area.   He asked if  there could be a  challenge that there's                                                               
an incompatible use that would place  at risk any of the existing                                                               
uses.  For  instance, he surmised that  mining, although allowed,                                                               
would be challenged under this compatibility standard.                                                                          
MR.  MYLIUS stated  that  although  the legislation  specifically                                                               
protects  certain  types  of  uses, such  as  the  rocket  launch                                                               
facility,  those  uses can  be  restricted  within certain  areas                                                               
through a land use plan.  A  land use plan requires a very public                                                               
process.   He  noted  that the  mechanism  for preventing  mining                                                               
would  be a  mineral  closing order.   The  purpose  for doing  a                                                               
management  plan is  so that  existing uses  can be  reviewed and                                                               
there's a mechanism for addressing conflicts.                                                                                   
2:46:57 PM                                                                                                                    
CO-CHAIR  GATTO, referring  to  a color  photo  in the  committee                                                               
packet, noted that  there is denotation of a ranch  and a landing                                                               
strip.   He asked if that  landing strip is merely  a dirt runway                                                               
or something that may ultimately  be extended to accommodate more                                                               
MR. MYLIUS  confirmed that  it's a dirt  landing strip,  which he                                                               
said he  wasn't sure  whether it's  on state  land or  within the                                                               
private in holding  of the Kodiak Ranch.  In  further response to                                                               
Co-Chair Gatto,  Mr. Mylius specified  that the  Alaska Aerospace                                                               
Development  Corporation   has  very  specific  rights   to  some                                                               
property [within the  proposed Narrow Cape Public  Use Area], but                                                               
those  won't  be  compromised  by the  legislation  as  they  are                                                               
existing rights.   The  Alaska Aerospace  Development Corporation                                                               
is  a  state  agency  that has  an  interagency  land  management                                                               
agreement with DNR.  Therefore,  the corporation has the right to                                                               
use the land for specific things  and the ability to make certain                                                               
land use  decisions on  its own within  the property,  subject to                                                               
what's specified in the agreement.                                                                                              
2:48:23 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG   highlighted  the  fiscal   note  for                                                               
$150,000 over two years, which  includes analysis specifying that                                                               
the existing  Kodiak Area  Plan for State  Lands adopted  in 2004                                                               
may be sufficient  to address the current public  land use issues                                                               
in  the area.   Therefore,  he inquired  as to  the point  of the                                                               
fiscal note.                                                                                                                    
MR. MYLIUS  pointed out  that the  legislation requires  that the                                                               
department perform  a management  plan, and therefore  the fiscal                                                               
note  outlines   the  potential   cost.    However,   the  recent                                                               
completion of the  Kodiak Area Plan seems to address  most of the                                                               
immediate  issues, and  therefore  the department  doesn't see  a                                                               
burning need  to perform  a management  plan.   One option  is to                                                               
delete   the  requirement   for  a   management  plan   from  the                                                               
legislation.  He noted that  the aforementioned wouldn't preclude                                                               
the department from doing a management plan in the future.                                                                      
2:49:53 PM                                                                                                                    
REPRESENTATIVE WILSON  inquired as to  the reason section  15 was                                                               
included as part of the Kodiak Narrow Cape Public Use Area.                                                                     
MR. MYLIUS  responded that he  wasn't sure  of the reason  it was                                                               
included.   He suggested  that perhaps it  would follow  the land                                                               
encompassed by  a grazing  lease or the  land immediately  to the                                                               
north may not be state land.  He offered to check that.                                                                         
2:51:01 PM                                                                                                                    
BILL  BURTON, Owner,  Kodiak Game  Ranch, informed  the committee                                                               
that he [has owned] the  Kodiak Game Ranch, which raises buffalo,                                                               
elk, yak, cattle,  and horses, for around 40 years.   Hunters and                                                               
fishermen are  taken in  on horseback.   The property  includes a                                                               
bunkhouse  and  leases a  lodge  for  the  launch facility.    He                                                               
confirmed that the ranch also  includes a grass strip for private                                                               
use.   In response to  Co-Chair Gatto, Mr. Burton  specified that                                                               
the  landing  strip  is  primarily for  the  Kodiak  Game  Ranch.                                                               
Generally, people  interested in using the  landing strip contact                                                               
him first  since it's  a private  landing strip.   He  noted that                                                               
when  he purchased  the  ranch  in 1967,  the  landing strip  was                                                               
there.   There  is  a state  road  to the  ranch  that the  ranch                                                               
maintains.   He noted  that there  are times  when the  gates are                                                               
locked due to the location of the elk.                                                                                          
2:55:27 PM                                                                                                                    
MR. BURTON  suggested that the language  "existing grazing rights                                                               
or   leases"  be   inserted  on   page  1,   line  8,   following                                                               
"perpetuate,".  He acknowledged  that the aforementioned language                                                               
is included  later in the legislation.   These leases will  be up                                                               
for renewal  in a  few years, and  inserting this  language would                                                               
help ranchers and the ranching industry.                                                                                        
2:57:12 PM                                                                                                                    
CO-CHAIR GATTO  announced that  the committee  is running  out of                                                               
time today and will hold HB 203.                                                                                                
2:57:32 PM                                                                                                                    
REPRESENTATIVE  SEATON  moved  to adopt  the  proposed  committee                                                               
substitute  (CS)  for  HB   203,  Version  25-LS0732\C,  Bullock,                                                               
3/21/07  as the  working document  before the  committee.   There                                                               
being no objection, Version C was before the committee.                                                                         
2:57:48 PM                                                                                                                    
REPRESENTATIVE SEATON  moved to adopt Conceptual  Amendment 1, as                                                               
     Page 2, line 1, following "commissioner":                                                                                  
          Delete "shall"                                                                                                        
          Insert "may"                                                                                                          
The sponsor  indicated her agreement with  Conceptual Amendment 1                                                               
by nodding her head.                                                                                                            
There being no objection, Conceptual Amendment 1 was adopted.                                                                   
[HB 203 was held over.]                                                                                                         
2:58:27 PM                                                                                                                    
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 2:58 p.m.                                                                 

Document Name Date/Time Subjects