Legislature(2013 - 2014)BARNES 124

03/21/2014 01:00 PM RESOURCES


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01:08:48 PM Start
01:09:06 PM SB138
03:00:11 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 138 GAS PIPELINE; AGDC; OIL & GAS PROD. TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Administration Presentation of the Bill TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         March 21, 2014                                                                                         
                           1:08 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Eric Feige, Co-Chair                                                                                             
Representative Dan Saddler, Co-Chair                                                                                            
Representative Peggy Wilson, Vice Chair                                                                                         
Representative Mike Hawker                                                                                                      
Representative Paul Seaton                                                                                                      
Representative Scott Kawasaki                                                                                                   
Representative Geran Tarr                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Craig Johnson                                                                                                    
Representative Kurt Olson                                                                                                       
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                              
Representative Andrew Josephson                                                                                                 
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
COMMITTEE SUBSTITUTE FOR SENATE BILL NO. 138(FIN) AM                                                                            
"An  Act relating  to the  purposes,  powers, and  duties of  the                                                               
Alaska Gasline  Development Corporation; relating to  an in-state                                                               
natural gas  pipeline, an Alaska  liquefied natural  gas project,                                                               
and  associated   funds;  requiring  state  agencies   and  other                                                               
entities to expedite  reviews and actions related  to natural gas                                                               
pipelines and  projects; relating  to the authorities  and duties                                                               
of  the commissioner  of natural  resources relating  to a  North                                                               
Slope natural gas  project, oil and gas and gas  only leases, and                                                               
royalty gas  and other  gas received by  the state  including gas                                                               
received as  payment for the  production tax on gas;  relating to                                                               
the tax on oil and gas  production, on oil production, and on gas                                                               
production;  relating  to  the  duties  of  the  commissioner  of                                                               
revenue relating  to a  North Slope natural  gas project  and gas                                                               
received   as  payment   for   tax;   relating  to   confidential                                                               
information and  public record status of  information provided to                                                               
or in the custody of the  Department of Natural Resources and the                                                               
Department of  Revenue; relating to apportionment  factors of the                                                               
Alaska  Net Income  Tax  Act; amending  the  definition of  gross                                                               
value at  the 'point of production'  for gas for purposes  of the                                                               
oil  and  gas production  tax;  clarifying  that the  exploration                                                               
incentive credit, the  oil or gas producer  education credit, and                                                               
the film production  tax credit may not be taken  against the gas                                                               
production tax paid  in gas; relating to the oil  or gas producer                                                               
education  credit;  requesting  the   governor  to  establish  an                                                               
interim  advisory  board  to advise  the  governor  on  municipal                                                               
involvement in  a North  Slope natural  gas project;  relating to                                                               
the  development of  a plan  by the  Alaska Energy  Authority for                                                               
developing infrastructure  to deliver affordable energy  to areas                                                               
of the  state that will not  have direct access to  a North Slope                                                               
natural gas  pipeline and  a recommendation  of a  funding source                                                               
for  energy infrastructure  development; establishing  the Alaska                                                               
affordable energy fund; requiring  the commissioner of revenue to                                                               
develop  a  plan  and  suggest  legislation  for  municipalities,                                                               
regional  corporations, and  residents  of the  state to  acquire                                                               
ownership  interests  in  a  North  Slope  natural  gas  pipeline                                                               
project;  making  conforming  amendments; and  providing  for  an                                                               
effective date."                                                                                                                
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 138                                                                                                                  
SHORT TITLE: GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                            
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
01/24/14       (S)       READ THE FIRST TIME - REFERRALS                                                                        
01/24/14       (S)       RES, FIN                                                                                               
02/07/14       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/07/14       (S)       Heard & Held                                                                                           
02/07/14       (S)       MINUTE(RES)                                                                                            
02/10/14       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/10/14       (S)       Heard & Held                                                                                           
02/10/14       (S)       MINUTE(RES)                                                                                            
02/12/14       (S)       RES WAIVED PUBLIC HEARING NOTICE, RULE                                                                 
                         23                                                                                                     
02/12/14       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/12/14       (S)       Heard & Held                                                                                           
02/12/14       (S)       MINUTE(RES)                                                                                            
02/13/14       (S)       RES AT 8:00 AM BUTROVICH 205                                                                           
02/13/14       (S)       Heard & Held                                                                                           
02/13/14       (S)       MINUTE(RES)                                                                                            
02/14/14       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/14/14       (S)       Heard & Held                                                                                           
02/14/14       (S)       MINUTE(RES)                                                                                            
02/19/14       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/19/14       (S)       Heard & Held                                                                                           
02/19/14       (S)       MINUTE(RES)                                                                                            
02/20/14       (S)       RES AT 8:00 AM BUTROVICH 205                                                                           
02/20/14       (S)       Heard & Held                                                                                           
02/20/14       (S)       MINUTE(RES)                                                                                            
02/21/14       (S)       RES AT 8:00 AM BUTROVICH 205                                                                           
02/21/14       (S)       Heard & Held                                                                                           
02/21/14       (S)       MINUTE(RES)                                                                                            
02/21/14       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/21/14       (S)       Heard & Held                                                                                           
02/21/14       (S)       MINUTE(RES)                                                                                            
02/24/14       (S)       RES RPT CS  2DP 4NR 1AM   NEW TITLE                                                                    
02/24/14       (S)       DP: GIESSEL, MCGUIRE                                                                                   
02/24/14       (S)       NR:     FRENCH,    MICCICHE,     BISHOP,                                                               
                         FAIRCLOUGH                                                                                             
02/24/14       (S)       AM: DYSON                                                                                              
02/24/14       (S)       RES AT 8:00 AM BUTROVICH 205                                                                           
02/24/14       (S)       -- MEETING CANCELED --                                                                                 
02/24/14       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/24/14       (S)       Moved CSSB 138(RES) Out of Committee                                                                   
02/24/14       (S)       MINUTE(RES)                                                                                            
02/25/14       (S)       FIN AT 9:00 AM SENATE FINANCE 532                                                                      
02/25/14       (S)       Heard & Held                                                                                           
02/25/14       (S)       MINUTE(FIN)                                                                                            
02/25/14       (S)       FIN AT 5:00 PM SENATE FINANCE 532                                                                      
02/25/14       (S)       Heard & Held                                                                                           
02/25/14       (S)       MINUTE(FIN)                                                                                            
02/26/14       (S)       FIN AT 9:00 AM SENATE FINANCE 532                                                                      
02/26/14       (S)       Heard & Held                                                                                           
02/26/14       (S)       MINUTE(FIN)                                                                                            
02/27/14       (S)       FIN AT 9:00 AM SENATE FINANCE 532                                                                      
02/27/14       (S)       Heard & Held                                                                                           
02/27/14       (S)       MINUTE(FIN)                                                                                            
02/28/14       (S)       FIN AT 9:00 AM SENATE FINANCE 532                                                                      
02/28/14       (S)       Heard & Held                                                                                           
02/28/14       (S)       MINUTE(FIN)                                                                                            
03/03/14       (S)       FIN AT 9:00 AM SENATE FINANCE 532                                                                      
03/03/14       (S)       Heard & Held                                                                                           
03/03/14       (S)       MINUTE(FIN)                                                                                            
03/04/14       (S)       FIN AT 9:00 AM SENATE FINANCE 532                                                                      
03/04/14       (S)       Heard & Held                                                                                           
03/04/14       (S)       MINUTE(FIN)                                                                                            
03/05/14       (S)       FIN AT 9:00 AM SENATE FINANCE 532                                                                      
03/05/14       (S)       Heard & Held                                                                                           
03/05/14       (S)       MINUTE(FIN)                                                                                            
03/05/14       (S)       FIN AT 5:00 PM SENATE FINANCE 532                                                                      
03/05/14       (S)       Scheduled But Not Heard                                                                                
03/06/14       (S)       FIN AT 9:00 AM SENATE FINANCE 532                                                                      
03/06/14       (S)       Heard & Held                                                                                           
03/06/14       (S)       MINUTE(FIN)                                                                                            
03/07/14       (S)       FIN AT 9:00 AM SENATE FINANCE 532                                                                      
03/07/14       (S)       -- MEETING CANCELED --                                                                                 
03/10/14       (S)       FIN AT 9:00 AM SENATE FINANCE 532                                                                      
03/10/14       (S)       Heard & Held                                                                                           
03/10/14       (S)       MINUTE(FIN)                                                                                            
03/10/14       (S)       FIN AT 5:00 PM SENATE FINANCE 532                                                                      
03/10/14       (S)       Heard & Held                                                                                           
03/10/14       (S)       MINUTE(FIN)                                                                                            
03/11/14       (S)       FIN AT 5:00 PM SENATE FINANCE 532                                                                      
03/11/14       (S)       Heard & Held                                                                                           
03/11/14       (S)       MINUTE(FIN)                                                                                            
03/12/14       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/12/14       (H)       -- MEETING CANCELED --                                                                                 
03/14/14       (S)       FIN RPT CS  6DP 1AM  NEW TITLE                                                                         
03/14/14       (S)       LETTER OF INTENT WITH FINANCE REPORT                                                                   
03/14/14       (S)       DP: KELLY, MEYER, DUNLEAVY, FAIRCLOUGH,                                                                
                        BISHOP, HOFFMAN                                                                                         
03/14/14       (S)       AM: OLSON                                                                                              
03/14/14       (S)       FIN AT 9:00 AM SENATE FINANCE 532                                                                      
03/14/14       (S)       Moved CSSB 138(FIN) Out of Committee                                                                   
03/14/14       (S)       MINUTE(FIN)                                                                                            
03/14/14       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/14/14       (H)       <Pending Referral>                                                                                     
03/17/14       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/17/14       (H)       <Pending Referral>                                                                                     
03/18/14       (S)       TRANSMITTED TO (H)                                                                                     
03/18/14       (S)       VERSION: CSSB 138(FIN) AM                                                                              
03/19/14       (H)       READ THE FIRST TIME - REFERRALS                                                                        
03/19/14       (H)       RES, L&C, FIN                                                                                          
03/19/14       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/19/14       (H)       Heard & Held                                                                                           
03/19/14       (H)       MINUTE(RES)                                                                                            
03/21/14       (H)       RES AT 1:00 PM BARNES 124                                                                              
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
MICHAEL PAWLOWSKI, Deputy Commissioner                                                                                          
Office of the Commissioner                                                                                                      
Department of Revenue                                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  On behalf of the administration, provided a                                                              
section-by-section review of CSSB 138(FIN) am, a continuation of                                                                
a presentation he began on 3/19/14.                                                                                             
                                                                                                                                
SUSAN POLLARD, Assistant Attorney General                                                                                       
Oil, Gas & Mining Section                                                                                                       
Civil Division (Juneau)                                                                                                         
Department of Law (DOL)                                                                                                         
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:    During the  administration's  section-by-                                                             
section review of CSSB 138(FIN) am, answered questions.                                                                         
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:08:48 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  ERIC   FEIGE  called   the  House   Resources  Standing                                                             
Committee meeting to order at  1:08 p.m.  Representatives Hawker,                                                               
Kawasaki, P. Wilson, Saddler, and  Feige were present at the call                                                               
to  order.    Representatives  Seaton and  Tarr  arrived  as  the                                                               
meeting  was  in progress.    Representative  Josephson was  also                                                               
present.                                                                                                                        
                                                                                                                                
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
                                                                                                                                
1:09:06 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that the  only order of business  is CS                                                               
FOR  SENATE  BILL  NO.  138(FIN)  am, "An  Act  relating  to  the                                                               
purposes, powers,  and duties of  the Alaska  Gasline Development                                                               
Corporation;  relating to  an in-state  natural gas  pipeline, an                                                               
Alaska  liquefied  natural  gas project,  and  associated  funds;                                                               
requiring state  agencies and other entities  to expedite reviews                                                               
and  actions  related  to natural  gas  pipelines  and  projects;                                                               
relating to  the authorities  and duties  of the  commissioner of                                                               
natural resources relating to a  North Slope natural gas project,                                                               
oil and  gas and gas only  leases, and royalty gas  and other gas                                                               
received by the  state including gas received as  payment for the                                                               
production  tax on  gas;  relating  to the  tax  on  oil and  gas                                                               
production, on  oil production, and  on gas  production; relating                                                               
to the duties of the commissioner  of revenue relating to a North                                                               
Slope natural  gas project and  gas received as payment  for tax;                                                               
relating to confidential information  and public record status of                                                               
information provided  to or in  the custody of the  Department of                                                               
Natural  Resources and  the Department  of  Revenue; relating  to                                                               
apportionment factors of the Alaska  Net Income Tax Act; amending                                                               
the definition  of gross value  at the 'point of  production' for                                                               
gas for  purposes of the  oil and gas production  tax; clarifying                                                               
that the  exploration incentive credit,  the oil or  gas producer                                                               
education credit, and  the film production tax credit  may not be                                                               
taken against  the gas  production tax paid  in gas;  relating to                                                               
the  oil  or  gas  producer   education  credit;  requesting  the                                                               
governor to  establish an  interim advisory  board to  advise the                                                               
governor on  municipal involvement in  a North Slope  natural gas                                                               
project;  relating to  the development  of a  plan by  the Alaska                                                               
Energy  Authority   for  developing  infrastructure   to  deliver                                                               
affordable  energy to  areas  of  the state  that  will not  have                                                               
direct  access  to a  North  Slope  natural  gas pipeline  and  a                                                               
recommendation  of a  funding  source  for energy  infrastructure                                                               
development;  establishing  the  Alaska affordable  energy  fund;                                                               
requiring  the commissioner  of  revenue to  develop  a plan  and                                                               
suggest  legislation for  municipalities, regional  corporations,                                                               
and residents  of the state  to acquire ownership interests  in a                                                               
North  Slope  natural  gas pipeline  project;  making  conforming                                                               
amendments; and providing for an effective date."                                                                               
                                                                                                                                
1:09:15 PM                                                                                                                    
                                                                                                                                
MICHAEL   PAWLOWSKI,   Deputy   Commissioner,   Office   of   the                                                               
Commissioner,  Department of  Revenue, continued  his section-by-                                                               
section  review  of   CSSB  138(FIN)  am,  which   he  had  begun                                                               
presenting on  3/19/14.  He  reminded members that  Sections 1-12                                                               
of the  enabling legislation  are related  to the  Alaska Gasline                                                               
Development   Corporation  (AGDC)   and   how   the  state   will                                                               
participate in  the [Alaska Liquefied  Natural Gas  Project (LNG)                                                               
Project].   He further reminded  members that the  other sections                                                               
of  the  bill  he  discussed  on  3/19/14  were  related  to  the                                                               
Department of  Natural Resources and the  process for negotiating                                                               
the project-enabling  contracts.  He  said today he  will discuss                                                               
the tax-related  sections of  the bill,  Sections 27  and onward,                                                               
which are "the percentage questions."   The state's percentage of                                                               
gas  share   will,  in   turn,  determine   what  level   of  the                                                               
infrastructure the state will invest in.                                                                                        
                                                                                                                                
MR.  PAWLOWSKI  noted Section  27,  page  21,  lines 2-15,  is  a                                                               
conforming amendment  to confidentiality and  protecting taxpayer                                                               
information.   Previous provisions are related  to the Department                                                               
of  Natural Resources  (DNR)  and AS  38.05.020,  a statute  that                                                               
links back to  the powers of DNR to negotiate  the agreements and                                                               
contracts that  will come back  to the legislature  for approval.                                                               
Because the Department of Revenue  (DOR) will play a consultative                                                               
role with DNR and will  need to have confidentiality protections,                                                               
language needs  to be added  into the  confidentiality protection                                                               
sections  so  that  DOR  can keep  the  information  under  those                                                               
negotiations confidential.                                                                                                      
                                                                                                                                
1:11:41 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI explained  Section 28, page 21, lines  16-29, is an                                                               
amendment.    He  reminded   members  about  previous  discussion                                                               
regarding effective  dates and amending sections  just previously                                                               
amended,  which   is  needed  because  the   tax  provisions  are                                                               
effective 1/1/15.  The language inserted  on page 21, line 21, is                                                               
an exception to information that  [DOR] keeps confidential and is                                                               
related to the publication of the tax as gas provision.                                                                         
                                                                                                                                
MR. PAWLOWSKI  drew attention  to Section 29,  page 21,  line 30,                                                               
through page 24, line 1.  He  said page 23, line 31, through page                                                               
24,  line  1,  references  AS  38.05.020(b),  which  is  the  DNR                                                               
provision for the  negotiation of those agreements.   [Section 29                                                               
amends  AS  40.25.120(a)  to establish  an  exception  in  public                                                               
records for information confidential  under the new provisions of                                                               
AS  3.05.020(b) (related  to contract  negotiations  for a  North                                                               
Slope natural gas project).]                                                                                                    
                                                                                                                                
MR. PAWLOWSKI said Section 30, page  24, line 2, through page 25,                                                               
line 8, expands  the powers of the duties of  the commissioner of                                                               
revenue.   Page 25,  lines 6-8,  is the  new language  that deals                                                               
with  consultation with  the commissioner  of natural  resources.                                                               
Just as the commissioner of  natural resources is directed in the                                                               
DNR section to  consult with the commissioner of  revenue, in the                                                               
revenue  section  the  commissioner  of revenue  is  directed  to                                                               
consult with the commissioner of natural resources.                                                                             
                                                                                                                                
1:13:35 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  stated Section 31,  page 25, line 9,  through page                                                               
26,  line 19,  is the  same section  amended to  account for  the                                                               
effective date.   Page 26,  line 16, inserts new  paragraph (17),                                                               
which references  AS 43.55.014(b),  the statute  for tax  as gas,                                                               
where  the  tax  is  taken  as  a  percentage  of  the  molecules                                                               
produced.  Section 31 relates  to the commissioner of revenue and                                                               
calls out that it is the  commissioner of revenue who directs the                                                               
disposition of  revenues received from  the gas delivered  to the                                                               
state in  lieu of  tax, gas  that is  then sold  under agreements                                                               
with the commissioner  of natural resources.   Statutes have been                                                               
passed throughout  time that direct the  disposition of revenues,                                                               
so  this  provision clarifies  that  it  is the  commissioner  of                                                               
revenue who  directs that tax as  gas.  In the  DNR sections, the                                                               
sale of  royalty gas is  talked about along with  the calculation                                                               
and direction  of a percentage  that goes to the  permanent fund.                                                               
If there are  similar directions to the  commissioner of revenue,                                                               
they would do  that with the tax proceeds.   Today, proceeds from                                                               
tax go  into the general fund  and are available broadly  for the                                                               
legislature to appropriate.                                                                                                     
                                                                                                                                
1:15:02 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  noted Section 32,  page 26, lines  20-24, provides                                                               
an  exception  to  taxpayer  confidentiality  for  those  parties                                                               
electing to  pay their tax with  gas.  The department  is allowed                                                               
to publish the name of the  person and the amount of gas produced                                                               
from each lease or property  that is effective for that election.                                                               
He clarified that in the  tax sections, "person" typically refers                                                               
to a  corporation. Section  32 ensures that  when a  company pays                                                               
its taxes  with gas, that  information is public and  is included                                                               
in DOR's revenue sources book so  Alaskans can see it and account                                                               
for it.                                                                                                                         
                                                                                                                                
1:15:52 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE asked  whether DOR will be required  to have three                                                               
producers, as  is currently the  case, before the  department can                                                               
publish a total number.                                                                                                         
                                                                                                                                
MR. PAWLOWSKI responded the reason  for the specific exemption is                                                               
so  that those  provisions do  not apply.   This  will provide  a                                                               
higher level of public disclosure around the tax as gas concept.                                                                
                                                                                                                                
CO-CHAIR FEIGE  surmised the people  of the state will  then know                                                               
exactly how much  gas has been conveyed to the  state, either for                                                               
royalties or for [the tax as gas].                                                                                              
                                                                                                                                
MR. PAWLOWSKI  replied correct.  For  the tax as gas,  the people                                                               
of  Alaska will  know  how  much, where  it  came  from, and  who                                                               
provided that gas.                                                                                                              
                                                                                                                                
1:16:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR inquired  how the dollar amount  for that gas                                                               
will be  arrived at.   She recalled that enalytica  estimates the                                                               
amount will  be up to  $350 million a  year.  She  understood the                                                               
provision  is that  it will  be in  the revenue  sources book  as                                                               
projected  from where  it will  be coming  from, rather  than the                                                               
actual dollar  amount.  She  presumed the dollar amount  would be                                                               
found through the budget documents.                                                                                             
                                                                                                                                
MR. PAWLOWSKI  answered the  point in  Section 31  is for  DOR to                                                               
direct the disposition of revenue  received for the gas delivered                                                               
to the  state under  the tax  as gas provision.   The  state will                                                               
have an accounting of the sale  of that gas, so the proceeds will                                                               
be  known.   Also, DOR  will have  the essential  payment of  the                                                               
terms  of   moving  the  gas   through  the   infrastructure  and                                                               
ultimately a number that goes into the general fund.                                                                            
                                                                                                                                
REPRESENTATIVE  TARR  understood  that   Section  32  would  make                                                               
available  to the  public  all the  information  absent a  dollar                                                               
amount associated with it.                                                                                                      
                                                                                                                                
MR. PAWLOWSKI responded correct.                                                                                                
                                                                                                                                
CO-CHAIR FEIGE said  that is because the dollar  amount is really                                                               
up  to the  state to  sell that  gas by  whatever means,  such as                                                               
selling in-state or to a local utility.                                                                                         
                                                                                                                                
MR. PAWLOWSKI replied correct.                                                                                                  
                                                                                                                                
1:18:20 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  returned to his  sectional analysis,  pointing out                                                               
that Section 33,  page 26, line 25, through page  27, line 15, is                                                               
an amendment  to the  corporate income  tax provisions  in Alaska                                                               
statute.   The changes on  page 27,  lines 1-15, are  intended to                                                               
capture  what is  a  business  activity in  the  state.   When  a                                                               
company produces  gas and pays  a production tax, that  volume of                                                               
gas  is included  in the  company's  apportionment factor,  which                                                               
affects the company's  level of corporate income tax  paid to the                                                               
state under current statute.   Section 33 provides that the state                                                               
will include in the apportionment factor the tax paid as gas.                                                                   
                                                                                                                                
1:19:16 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI,   in  response   to  Co-Chair   Saddler,  defined                                                               
apportionment factor,  explaining that Alaska's  corporate income                                                               
tax  takes  the   broad  business  activity  of   a  company  and                                                               
apportions the  income, for tax  purposes, based on  the business                                                               
activity in the  state.  Section 33 is a  clarifying amendment to                                                               
ensure the status  quo of the regular production  tax, or taxable                                                               
gas, will continue to be included,  whether it is paid in-kind or                                                               
under the normal  production tax.  Previous versions  of the bill                                                               
in  the  other  body  included clarifying  language  intended  to                                                               
capture the  status quo treatment of  inner-company transactions,                                                               
which  are not  taxed under  Alaska's corporate  income tax.   He                                                               
said  the  administration  may  be   looking  to  work  with  the                                                               
committee to provide that clarifying  language in statute to this                                                               
section.    It is  not  intended  to  change DOR's  treatment  of                                                               
corporate  income tax  and  there may  be  some opportunities  to                                                               
provide additional  clarity.  However,  the corporate  income tax                                                               
apportionment factor  is in  a separate section.   The  intent is                                                               
not to  change corporate income  tax, but rather  provide clarity                                                               
to  taxpayers.   It is  believed that  this section  clearly does                                                               
that  for  the  extraction  factor,   while  providing  that  the                                                               
business activity is taxed in the state of Alaska.                                                                              
                                                                                                                                
MR.  PAWLOWSKI,   in  response   to  Representative   P.  Wilson,                                                               
explained  the extraction  factor is  part of  the equation  that                                                               
determines the business activity within  the state of Alaska.  In                                                               
further response, he confirmed that  the corporation is worldwide                                                               
and it is the part that the  corporation does in Alaska.  A proxy                                                               
is  being created,  he said,  so the  State of  Alaska (SOA)  can                                                               
calculate a corporate income tax liability.                                                                                     
                                                                                                                                
1:21:40 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI  resumed  his   sectional  analysis,  noting  that                                                               
Section 34,  page 27, line 16,  through page 28, line  7, relates                                                               
directly   to  the   production   tax,  which   is  found   under                                                               
AS 43.55.011.  Section 34 calls out  the specifics of how the tax                                                               
regime  will work  after 1/1/22.   The  operative language  is on                                                               
page 27,  line 31, through page  28, line 7, which  state that on                                                               
and after 1/1/22, the production tax  for oil is separated out at                                                               
35 percent  and the  tax on  gas is  equal to  13 percent  of the                                                               
gross value at the point of production of the taxable gas.                                                                      
                                                                                                                                
1:22:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER recalled that when  introduced SB 138 had a                                                               
figure of [10.5]  percent, which has been changed  to 13 percent.                                                               
He requested the administration's opinion on the change.                                                                        
                                                                                                                                
MR. PAWLOWSKI responded  the original figure of  10.5 percent was                                                               
chosen by the  administration because, when looking  at the broad                                                               
range of economics in a status  quo world, 10.5 percent seemed to                                                               
be the most likely crossover  where the state preserved the value                                                               
that it  would receive  from going  in a status  quo world.   The                                                               
intent of  the state  was to  preserve value, not  to say  that a                                                               
status  quo  would actually  work  to  advance  a project.    The                                                               
royalty  study that  DNR previously  presented  to the  committee                                                               
talked about  fiscal changes  that needed to  be made  to improve                                                               
the economics.  One opportunity was  to do something like is done                                                               
under royalty relief  - reduce the royalties,  reduce the state's                                                               
share -  but the  governor and the  administration said  that was                                                               
not the  intent.   The intent  was to  move the  project forward,                                                               
preserving the value  that the state would get and  that is where                                                               
the concept  of co-investment  came.  The  10.5 percent  was that                                                               
crossover.   In the  Heads of Agreement  (HOA), the  parties have                                                               
agreed that an appropriate production  tax is somewhere between 7                                                               
and 13  percent.  The other  body turned the dial  to the maximum                                                               
of 13  percent which,  when coupled with  the royalty,  moves the                                                               
state  to an  approximately  25 percent  share.   In  that it  is                                                               
within the  boundaries of the  range contemplated in the  HOA, it                                                               
is something that  will continue momentum on the  project and the                                                               
administration is supportive of the change.                                                                                     
                                                                                                                                
1:25:03 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI returned  to his discussion of  Section 34, stating                                                               
the administration  chose the  date of  1/1/22 because  there are                                                               
several  ceilings designed  in statute  to  limit the  production                                                               
tax.     The  administration  was  extremely   conscious  of  the                                                               
legislature's direction  that until  2022, gas produced  and used                                                               
in-state, outside of  the Cook Inlet, receives the  same tax rate                                                               
as Cook  Inlet gas.   With the "Interior energy  project" looking                                                               
at entering  into gas  contracts today, that  change in  that tax                                                               
rate would  have an  impact on consumers  in the  Interior during                                                               
the  time  period  that  that   tax  rate  was  provided  by  the                                                               
legislature.   The administration  also looked  at the  timing of                                                               
advancing projects and decided that  allowing that tax ceiling to                                                               
expire  provided the  predictability that  people needed  to plan                                                               
the projects they  are looking at today, but provide  the type of                                                               
clarity that the Alaska LNG Project needs to go forward.                                                                        
                                                                                                                                
MR.  PAWLOWSKI explained  Section 35,  page 28,  line 8,  through                                                               
page 29, line  25, is an amendment to the  minimum tax provision.                                                               
Under last  year's SB 21, the  state retained a minimum  tax of 4                                                               
percent  on the  gross  value  for oil.    That was  particularly                                                               
important for the sliding scale  credits that were per barrel and                                                               
developed in this  committee; those credits could not  be used to                                                               
offset a  tax liability below that  minimum tax.  Now  that there                                                               
will be two  tax rates for oil  and gas after 1/1/22,  and one of                                                               
those is a gross  tax rate on gas, it makes  no sense to maintain                                                               
a minimum  4 percent  gross tax rate  on gas if  the tax  rate is                                                               
just 13 percent of  the gross value.  So, the  change on page 29,                                                               
line 3, is that the minimum tax  only applies for oil and that is                                                               
because  the oil  tax remains  on the  net value  of 35  percent,                                                               
whereas the tax rate on gas is 13 percent of the gross value.                                                                   
                                                                                                                                
1:27:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON, in regard to  the gross value at the point                                                               
of production  for oil after  gas is out, inquired  whether there                                                               
are gas expenses that will be subtracted from the value.                                                                        
                                                                                                                                
MR. PAWLOWSKI replied the issue is  not at the gross value at the                                                               
point of production;  it is at the calculation  of the production                                                               
tax value.   Lease expenditures  come out  of the gross  value at                                                               
the  point  of production.    Lease  expenditures will  be  taken                                                               
against the production tax value overall  and there will not be a                                                               
calculation of  a gas  production tax  value because,  under CSSB                                                               
138(FIN) am,  gas is 13 percent  of the gross value  at the point                                                               
of production.                                                                                                                  
                                                                                                                                
1:28:45 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI turned  back to  his sectional  analysis, pointing                                                               
out that Section 36, page 29,  line 26, through page 30, line 22,                                                               
is the  core section  of the tax  provisions, is  the opportunity                                                               
for  a company  to  pay tax  as  gas, and  includes  a couple  of                                                               
triggering events.   Page 29, lines 28-31, provide  that [for gas                                                               
produced  on and  after 1/1/22],  "the department  shall allow  a                                                               
producer to  make an election  ... to  pay in gas  the production                                                               
tax levied  by this section in  lieu of the tax  otherwise levied                                                               
for the gas by AS 4.55.011(e)."   This means that after 1/1/22, a                                                               
producer will have an opportunity  to pay its production tax with                                                               
gas.  Page 29, line 31, through  page 30, line 3, provide that an                                                               
"election  under this  subsection  applies only  to gas  produced                                                               
from oil and  gas leases modified under  AS 38.05.180(hh)".  This                                                               
subsection  is  in the  powers  of  the commissioner  of  natural                                                               
resources, which  begins on  page 16, line  16, and  which states                                                               
that the commissioner  of natural resources is  allowed to modify                                                               
lease terms on specific leases to do  a couple of things.  One is                                                               
to make changes  related to the ability to switch  back and forth                                                               
between  in-kind  and  in-value.    The state  has  to  make  the                                                               
decision to modify the leases to  provide the clarity so that all                                                               
the parties  can go forward  and make determinations on  what gas                                                               
they have to be able to  market it; it is a predictability issue.                                                               
When those  leases are  modified, the opportunity  to pay  tax as                                                               
gas under Section 36 is enabled.                                                                                                
                                                                                                                                
1:31:50 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI noted, however, that  for federal leases, DNR plays                                                               
no  role and  cannot  modify the  lease because  DNR  is not  the                                                               
landowner and therefore there would  be no opportunity under this                                                               
bill to  pay tax as gas.   Under the Heads  of Agreement, Article                                                               
8, the  decision to take  gas in-kind,  both for royalty  and tax                                                               
purposes, is subject  to a couple of things, the  first being the                                                               
successful negotiation of project-enabling  contracts.  Those are                                                               
described as offtake supply  agreements and balancing agreements,                                                               
as well  as the satisfactory disposition  of the LNG.   The state                                                               
needs  to know  it  has  the right  contracts  in  place and  the                                                               
predictability  to  get its  gas  supply,  just as  the  producer                                                               
parties need  to know that the  state is not going  to change how                                                               
the  state takes  gas share  during year  five of  a contract  in                                                               
which  the producer  has committed  to provide  gas as  LNG to  a                                                               
buyer.  With the agreements  that the legislature will assist the                                                               
administration  in   drafting,  and   which  come  back   to  the                                                               
legislature  for approval,  the state  will be  in a  position to                                                               
allow the modification of leases  to occur and the opportunity to                                                               
pay tax as gas to happen.   The administration crafted a targeted                                                               
and limited  opportunity.   Once the leases  are modified  by the                                                               
state, that  opportunity is available  to the taxpayer;  DOR does                                                               
not  get   to  take   it  away   and,  through   the  contractual                                                               
arrangements,  DOR will  work how  that  election is  determined.                                                               
The point  is to  provide predictability  of gas  for all  of the                                                               
parties to  be able to  enter into  the type of  arrangements the                                                               
committee's consultants have described  as critical to underlying                                                               
the project.                                                                                                                    
                                                                                                                                
1:33:43 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE inquired  whether the decision to  pay the royalty                                                               
in-kind is still an irrevocable decision.                                                                                       
                                                                                                                                
MR. PAWLOWSKI  answered that  the original  language in  this tax                                                               
provision  to pay  the tax  was an  irrevocable decision  and was                                                               
modified  with the  word "may".   The  other body  deleted "may",                                                               
inserted  "shall", and  repealed  "irrevocable".   So, [page  29,                                                               
line 29,] now  says that [DOR] shall provide an  election for the                                                               
taxpayer to  make its  payment with  gas.   The decision  to take                                                               
royalties is the province of DNR.                                                                                               
                                                                                                                                
CO-CHAIR FEIGE  asked whether  the taxpayer  can switch  back and                                                               
forth between in-kind and in-value.                                                                                             
                                                                                                                                
MR. PAWLOWSKI  replied the  key is  the contracts  which underpin                                                               
the modification.   The satisfactory  contracts that will  be the                                                               
foundation for  the modification  of leases  are where  the state                                                               
will bind the parties in their ability to make an election.                                                                     
                                                                                                                                
1:34:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON understood the state  is binding itself                                                               
and the  taxpayer to  make that decision.   She  inquired whether                                                               
the taxpayer can change it later through an agreement.                                                                          
                                                                                                                                
MR.  PAWLOWSKI responded  that is  part of  the agreements  which                                                               
will be developed under the earlier  sections.  In no way can the                                                               
state  allow the  other  parties  to switch,  just  as the  state                                                               
cannot switch.                                                                                                                  
                                                                                                                                
REPRESENTATIVE P. WILSON  said she is confused,  then, given that                                                               
"irrevocable" was deleted.                                                                                                      
                                                                                                                                
MR. PAWLOWSKI  answered Legislative  Legal and  Research Services                                                               
thought the term  "irrevocable", as introduced in  HB 277, raised                                                               
some issues  around tax  and binding around  tax.   The operative                                                               
term was taken  out because "shall" provide  an election provided                                                               
the necessary clarity for the state and the taxpayer.                                                                           
                                                                                                                                
1:36:10 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE understood  the departments  are being  given the                                                               
opportunity  to  make  the choice  available  to  the  companies.                                                               
Then, when  time comes  to sign the  final contracts  between the                                                               
producers and the state, the  parties become bound in a long-term                                                               
contract.                                                                                                                       
                                                                                                                                
MR. PAWLOWSKI  replied correct.   [The  administration] envisions                                                               
the companies  will have  to commit  to how  they will  make that                                                               
election in the contracts for the  contract term.  There may come                                                               
a point after  the initial contract term where  the necessity for                                                               
tax as gas is not in the same  place as it was to get the project                                                               
up and moving.  That flexibility down the road may be important.                                                                
                                                                                                                                
1:36:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER asked  whether there is a risk  if the producers                                                               
choose to not  exercise their provision to pay tax  in gas, given                                                               
the project is envisioned [with the state taking tax as gas].                                                                   
                                                                                                                                
MR.  PAWLOWSKI responded  [the administration]  believes that  is                                                               
unlikely, and  he does  not believe the  state would  execute the                                                               
associated  contracts necessary  to move  the project  forward if                                                               
the state allowed  the producers that opportunity.   For the same                                                               
reason  the   state  wants  clarity  on   these  provisions,  the                                                               
producers  want clarity.   He  recalled  the committee's  3/19/14                                                               
discussion about this  dilemma of switching when  a company makes                                                               
a long-term  commitment to provide LNG  to a buyer.   The company                                                               
must have  molecules to  move through the  LNG plant  for turning                                                               
into LNG for shipping out.   If, five years into the project, the                                                               
state says  it wants  some of  that gas  for something  the state                                                               
wants to  do and takes the  gas in-kind instead of  in-value, the                                                               
company  would  then not  have  the  gas  necessary to  meet  the                                                               
contract it had  committed to.  It is a  predictability issue for                                                               
the companies as  well as the state, because the  state will also                                                               
be  entering  into  contracts  either  directly  or  through  the                                                               
producers  or other  agents or  other parties.   The  disposition                                                               
agreements for sale  go through the royalty process  with all the                                                               
associated statutory protections and governing precedent.                                                                       
                                                                                                                                
1:38:50 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI  resumed his  discussion  of  Section 36,  drawing                                                               
attention to page  30, lines 4-7, which state  that a "production                                                               
tax levied  by this  section is  equal to 13  percent of  the gas                                                               
otherwise  taxable under  AS 43.55.011(e)(3)  produced from  each                                                               
oil and  gas lease to  which an  effective election under  (a) of                                                               
this section  applies, when  and as  that gas  is produced."   He                                                               
said the  difference here is an  operative one.  The  key is that                                                               
the state  is not doing a  value calculation and then  turning it                                                               
into molecules.   The  state is actually  taking a  percentage of                                                               
the gas produced.   That is important because gas  is used in the                                                               
project as  fuel.   The state  was concerned  that doing  a value                                                               
calculation would  present an opportunity  for that to  get lost.                                                               
Just as  with royalty, the  state will  get the gas  produced and                                                               
will then  be able to use  gas to meet the  fuel obligations that                                                               
the state will have in the project.                                                                                             
                                                                                                                                
1:40:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  requested a  refresher  on  where is  the                                                               
point of production.                                                                                                            
                                                                                                                                
MR. PAWLOWSKI answered the definition  of the point of production                                                               
is being  modified to be  the farthest  upstream of the  inlet to                                                               
the transmission lines  going to the treatment plant.   For Point                                                               
Thomson it  will be the entry  of the pipeline leaving  the Point                                                               
Thomson field.   For Prudhoe Bay  it will be wherever  the gas is                                                               
leaving the infrastructure at Prudhoe  Bay to go to the treatment                                                               
plant.                                                                                                                          
                                                                                                                                
REPRESENTATIVE TARR  inquired what  the actual monetary  value is                                                               
of doing the tax as  gas provision modeled against several ranges                                                               
of production tax.                                                                                                              
                                                                                                                                
MR. PAWLOWSKI  believed [the administration's  consultant], Black                                                               
&  Veatch, have  done  some of  this in  its  presentations.   He                                                               
complimented the legislature's  consultants [enalytica], however,                                                               
as doing  the best work on  this by showing how  in-kind across a                                                               
range  of prices  delivers better  production to  the state.   He                                                               
encouraged members to look at  [enalytica's] modeling for in-kind                                                               
versus in-value when the consultants come before the committee.                                                                 
                                                                                                                                
CO-CHAIR  FEIGE  advised that  the  most  recent posting  on  the                                                               
Legislative Budget and Audit Committee's  web site includes about                                                               
22  pages from  enalytica in  which there  is a  specific section                                                               
dealing with this modeling.                                                                                                     
                                                                                                                                
REPRESENTATIVE TARR clarified she is  asking about the tax as gas                                                               
provisions, not the royalty-in-kind.                                                                                            
                                                                                                                                
MR. PAWLOWSKI answered that is what he is referring to.                                                                         
                                                                                                                                
MR.  PAWLOWSKI,   in  response   to  Representative   P.  Wilson,                                                               
reiterated the  definition of  point of  production as  being the                                                               
farthest upstream of the inlet of  the pipelines that lead to the                                                               
gas treatment plant.                                                                                                            
                                                                                                                                
1:42:38 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI returned  to  his  sectional analysis,  addressing                                                               
Section 37, page  30, line 23, through page 31,  line 16.  Noting                                                               
that credits are  available for taxpayers to  apply against their                                                               
tax  liability, he  pointed out  that page  30, line  25, deletes                                                               
"due  under  this  chapter"  for  the  education  credit  applied                                                               
against the production tax.  Under  current law the credit can be                                                               
applied  against  the  tax  "due under  this  chapter",  but  the                                                               
dilemma  is  that  under  Section  36 a  producer  will  have  an                                                               
opportunity  on certain  gas on  certain  leases to  pay its  tax                                                               
liability with  molecules.  However,  as discussed on  3/19/14, a                                                               
tax credit  cannot be  taken against a  molecule because  it does                                                               
not make  sense.  Section  37 clarifies  that the tax  credit for                                                               
education may  be used only against  the tax paid in-value.   The                                                               
[Senate] expanded this  tax credit to allow  the education credit                                                               
against the  production tax  to be generated  on investment  in a                                                               
nonprofit regional  training center or an  apprenticeship program                                                               
that is registered  under the U.S. Department of  Labor, page 31,                                                               
lines 2-6.   This  expansion of  applicable expenditures  did not                                                               
change the limit  of those expenditures.   Responding to Co-Chair                                                               
Feige,  Mr. Pawlowski  said a  list of  the qualifying  nonprofit                                                               
regional training centers is currently being put together.                                                                      
                                                                                                                                
1:44:48 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI resumed  his sectional  analysis, stating  Section                                                               
38,  page 31,  line 17,  through page  32, line  3, is  a similar                                                               
amendment to  the education  tax and  expands what  qualifies for                                                               
the  education  credit.   It  provides  for vocational  education                                                               
courses, programs, equipment, and  facilities by a state-operated                                                               
vocational technical education and training school.                                                                             
                                                                                                                                
CO-CHAIR  FEIGE inquired  whether Section  38 eliminates  several                                                               
credits  under an  effective date  of 2022.   He  understood that                                                               
between sections  37 and  38, some credits  are dropped  from the                                                               
statute.   He  further  inquired whether  that  is because  those                                                               
credits expire.                                                                                                                 
                                                                                                                                
MR. PAWLOWSKI deferred to the Department of Law for an answer.                                                                  
                                                                                                                                
REPRESENTATIVE  SEATON understood  the aforementioned  deals with                                                               
the  education  tax credit  under  which  there  is a  number  of                                                               
different termination  dates.  Thus,  to remain, the  tax credits                                                               
must be repeated throughout several sections.                                                                                   
                                                                                                                                
SUSAN  POLLARD, Assistant  Attorney  General, Oil,  Gas &  Mining                                                               
Section,  Civil  Division  (Juneau),  Department  of  Law  (DOL),                                                               
confirmed  the  amendment in  Section  38  addresses a  springing                                                               
sunset date  for the  education credits, which  is seen  again in                                                               
the effective date of Section 63 on page 56, line 8.                                                                            
                                                                                                                                
1:47:16 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI turned back to  his sectional analysis, noting that                                                               
Section 39, page 32, lines 4-8,  is a clarifying amendment to the                                                               
regular production tax under AS  43.55.011(3), hence the deletion                                                               
on line 6 of the words "this chapter".                                                                                          
                                                                                                                                
MR.  PAWLOWSKI explained  Section 40,  page 32,  line 9,  through                                                               
page 39, line  24, addresses the monthly  installment payments of                                                               
production  tax that  are  paid  to the  State  of  Alaska.   The                                                               
changes begin on page 37, line 9,  for oil and gas produced on or                                                               
after 1/1/22.   A good  example of the  change is the  35 percent                                                               
for oil which is on page 38, line  20, and the 13 percent for gas                                                               
which  is on  page 38,  line  27.   The language  clarifies to  a                                                               
taxpayer  how to  make its  monthly installment  payments against                                                               
its production  tax for the world  as it will exist  after 1/1/22                                                               
should this legislation pass.                                                                                                   
                                                                                                                                
1:49:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR asked  why  the language  "for  oil and  gas                                                               
produced" is added  in paragraph (1) on page 32,  line 12, and in                                                               
paragraph (5) on page 35, line 4.                                                                                               
                                                                                                                                
MR. PAWLOWSKI  believed it is  a conforming amendment  related to                                                               
the state's tax ceiling.  He deferred to Ms. Pollard.                                                                           
                                                                                                                                
MS.  POLLARD  explained Section  40  is  the monthly  installment                                                               
payments  for the  production  tax; although  the  tax is  levied                                                               
annually,  it  is paid  in  monthly  installments.   [Under  CSSB                                                               
138(FIN)  am],  there are  three  different  scenarios for  those                                                               
monthly  installment payments.    [Oil and  gas produced]  before                                                               
1/1/14 is  addressed on page 32,  line 10, through page  35, line                                                               
[3].   Oil and  gas produced  after 1/1/14  and before  1/1/22 is                                                               
addressed on  page 35, line  4, [through page  37, line 8].   The                                                               
reason "oil and gas" is underlined  is to clarify or flag what is                                                               
happening in this long section.                                                                                                 
                                                                                                                                
MR. PAWLOWSKI  interjected the point  is that the  production tax                                                               
is on both oil and gas.                                                                                                         
                                                                                                                                
REPRESENTATIVE TARR observed  that the third scenario  is for oil                                                               
and gas produced  on or after 1/1/22 [addressed on  page 37, line                                                               
9, through page 39, line 24].                                                                                                   
                                                                                                                                
MS. POLLARD responded  correct, noting this is  addressed on page                                                               
37, line 9, [through page 39, line 24].                                                                                         
                                                                                                                                
1:52:13 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  continued his sectional analysis,  stating Section                                                               
41, page 39,  line 25, through page 40, line  15, and Section 42,                                                               
page  40,  line 16,  through  page  41,  line 4,  are  conforming                                                               
changes  for  interest  on overpayment  or  underpayment  of  the                                                               
aforementioned monthly  installment payments.   The  additions on                                                               
page  40,  line  7  and  lines 18-19,  are  to  account  for  the                                                               
renumbering in Section 40.                                                                                                      
                                                                                                                                
MR.  PAWLOWSKI  advised Section  43,  page  41, lines  5-23,  and                                                               
Section  44, page  41, line  24, through  page 42,  line 14,  are                                                               
conforming amendments for oil and  gas produced before 1/1/22 and                                                               
for after 1/1/22 as it  relates to the private landowner royalty.                                                               
No change is made to the  private landowner royalty, it is just a                                                               
clarification.                                                                                                                  
                                                                                                                                
1:53:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  asked about  paragraph  (8)  on page  39,                                                               
lines 15-18, which states, "an  amount calculated under (7)(C) of                                                               
this subsection  may not exceed  four percent of the  gross value                                                               
at the point of production".                                                                                                    
                                                                                                                                
MR. PAWLOWSKI responded the 4 percent is the minimum tax.                                                                       
                                                                                                                                
REPRESENTATIVE SEATON  said that is  why he does  not understand.                                                               
He asked  whether the amount  calculated under (7)(C) is  the oil                                                               
and gas produced from leases subject to [AS 43.55.011(p)].                                                                      
                                                                                                                                
MR. PAWLOWSKI deferred to Ms. Pollard for an answer.                                                                            
                                                                                                                                
MS. POLLARD replied that (7)(C), on  page 38, lines 17-19, is the                                                               
reference to the tax ceiling that  applies to Middle Earth -- oil                                                               
and gas produced  south of 68 degrees and outside  the Cook Inlet                                                               
sedimentary basin.   That  particular tax  limitation on  oil and                                                               
gas is  that it not  exceed 4 percent of  the gross value  at the                                                               
point of production and that limitation is extended until 2027.                                                                 
                                                                                                                                
MR. PAWLOWSKI  apologized, saying  he got  his "4  percents mixed                                                               
up."  He concurred it is the tax ceiling for Middle Earth.                                                                      
                                                                                                                                
1:56:30 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  moved back to  his sectional  analysis, explaining                                                               
that Section 45,  page 42, line 15, through page  43, line 13, is                                                               
an amendment to  the annual statements made by  the producers and                                                               
explorers to  require the separate  identification of  the amount                                                               
of  gas produced  and the  lease  to which  it is  effective.   A                                                               
previous section  sets up the tax  delivered to the state  as gas                                                               
as separately  reported, so a  change must  be put in  statute to                                                               
require  the  producer to  identify  that  to  the state  on  the                                                               
producer's  annual statement.    Thus, it  is  conforming to  the                                                               
transparency of that public information.                                                                                        
                                                                                                                                
REPRESENTATIVE SEATON inquired what the reason is for this.                                                                     
                                                                                                                                
MR. PAWLOWSKI answered the opportunity  to pay tax as gas depends                                                               
on certain leases being modified.   The state wants to know where                                                               
that  gas is  coming from  because  the leases  may be  different                                                               
between, say, Point Thomson and Prudhoe  Bay.  The state wants to                                                               
be able to identify  where the tax as gas is  coming from and the                                                               
state  wanted to  error on  the  side of  transparency of  public                                                               
information.                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  understood the  leases may  have different                                                               
royalty rates but said he does  not think different tax rates are                                                               
being established.                                                                                                              
                                                                                                                                
MR.  PAWLOWSKI  confirmed  different  tax  rates  are  not  being                                                               
established for  gas to the  royalty rate  under Section 45.   He                                                               
said amendments to that effect are in future sections.                                                                          
                                                                                                                                
REPRESENTATIVE  SEATON  understood  the  royalty  rates  will  be                                                               
maintained  throughout for  gas produced  from those  leases that                                                               
have differing royalty rates.                                                                                                   
                                                                                                                                
MR. PAWLOWSKI  replied correct; there  will be  different royalty                                                               
rates between  the Point Thomson  unit and the Prudhoe  Bay unit,                                                               
for example.   Point Thomson typically has a  higher royalty rate                                                               
than the  Prudhoe Bay unit.   The tax  will apply to  the taxable                                                               
production and it will be a uniform tax between the two units.                                                                  
                                                                                                                                
1:58:54 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI turned back to  his sectional analysis, noting that                                                               
Section 46,  page 4, line  14, through page  45, line 22,  is the                                                               
calculation  of  the  annual  production  tax  values  and  is  a                                                               
clarification for oil  and gas produced before  1/1/22, except as                                                               
provided in (b), (f),  and (g) of this section.   It is about the                                                               
tax ceilings  that are in  statute for Cook Inlet,  Middle Earth,                                                               
and gas produced and used in-state.                                                                                             
                                                                                                                                
MR. PAWLOWSKI advised that Section  47, page 45, line 23, through                                                               
page 46, line 11, provides  for the determination of excess lease                                                               
expenditures for the purpose of  calculating a carry forward loss                                                               
credit.   This section clarifies  that "or (h)" must  be included                                                               
in the calculation, the (h) being added in Section 50.                                                                          
                                                                                                                                
MR. PAWLOWSKI  skipped to Section  50, page 47, line  15, through                                                               
page 48,  line 22,  explaining it is  the operative  section that                                                               
deals  with  lease  expenditures.   On  the  North  Slope,  lease                                                               
expenditures  are those  qualifying expenditures  made above  the                                                               
point of  production, which are currently  deductible in Alaska's                                                               
production  tax system.   Those  expenditures are  made for  what                                                               
really are blended oil and gas; oil  and gas come out of the same                                                               
wells  typically on  these units  and on  the North  Slope.   The                                                               
purpose of Section 50 is  to allow lease expenditures to continue                                                               
to be  deductible for  the purposes  of determining  a taxpayer's                                                               
production tax  value.   The production tax  value is  the number                                                               
against which that  35 percent tax rate is  applied.  Separately,                                                               
there  is the  13 percent  tax rate  on the  gross value  of gas.                                                               
There  will  not be  separate  accounting  for determining  which                                                               
expenditures are for gas and which are for oil.                                                                                 
                                                                                                                                
2:02:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked whether a  chart is available for how                                                               
the aforementioned would work and  what the effect would be since                                                               
all of the gas expenditures will be taken against oil.                                                                          
                                                                                                                                
MR.  PAWLOWSKI answered  that both  the administration's  and the                                                               
legislature's  consultants have  provided such  charts and  these                                                               
charts  have been  run on  [the administration's]  predictions as                                                               
well as  with cost overruns.   Lease expenditures for  gas happen                                                               
when  the gas  is  going to  be produced,  so  internal rates  of                                                               
return on that deduction for the  state have also been looked at.                                                               
For  the prior  few years,  the effect  ranges somewhere  between                                                               
$200 and  $300 million a  year depending  on the number  that was                                                               
used.   This information has  been presented in  other committees                                                               
and when  the consultants  come before  this committee  they will                                                               
call out where those numbers are happening.                                                                                     
                                                                                                                                
2:03:23 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR stated  the aforementioned  is what  she was                                                               
referencing  earlier  when she  related  that  enalytica said  it                                                               
could be  between $250 and $375  million per year, but  also that                                                               
this  could reduce  oil  tax collections  from  Point Thomson  to                                                               
nearly zero.                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  responded Point  Thomson is  tricky because  it is                                                               
confidential information.  He said  [enalytica] has some modeling                                                               
assumed around  that and encouraged  that this question  be asked                                                               
of [enalytica].   The  idea that  it reduces  oil taxes  on Point                                                               
Thomson toward  zero is  not something  he has  seen or  would be                                                               
able to testify to.  Modeling  presented to the other body by Ms.                                                               
Poduval of  Black & Veatch  pointed out that  expanded production                                                               
at  Point  Thomson  to  develop   gas  leads  to  higher  liquids                                                               
production and in  the model the additional  production was about                                                               
6 percent  of the  total revenues that  the state  was receiving.                                                               
He said  he will work with  DOR's legal counsel on  how to answer                                                               
Representative Tarr's question.                                                                                                 
                                                                                                                                
REPRESENTATIVE TARR remarked it is  important to know the overall                                                               
impact  because that  loss of  revenue  is not  reflected in  the                                                               
fiscal   notes,  which   only  reflect   the  state's   financial                                                               
contributions to moving forward.                                                                                                
                                                                                                                                
MR. PAWLOWSKI replied the timing  of those impacts typically will                                                               
fall outside the  range of a fiscal note right  now.  The impacts                                                               
have been  in every model the  state has presented and  have been                                                               
put  out in  every committee  in which  [the administration]  has                                                               
testified.  When  reading Section 50 it is hard  to see that that                                                               
is what  is actually happening,  so [the administration]  has put                                                               
it on  the record in  every committee and it  is in the  Heads of                                                               
Agreement for  the deduction of  lease expenditures.  It  is part                                                               
of  the economics  of the  project,  and the  revenues the  state                                                               
receives  in  the long  run  are  from  that gas  production  and                                                               
additional liquids production.                                                                                                  
                                                                                                                                
2:06:20 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI returned  to  his  sectional analysis,  specifying                                                               
that  Section 48,  page 46,  lines  12-30, relates  to the  issue                                                               
raised  by  Representative   Seaton  about  creating  essentially                                                               
different effective  tax rates based on  different royalty rates.                                                               
He  explained these  are  the gross  value  reductions that  were                                                               
included in SB  21 last year.  Section 48,  [lines 25-27], state,                                                               
"This subsection does not apply  to gas produced before 2022 that                                                               
is used in the  state or to gas produced on  and after January 1,                                                           
2022."   Thus,  the  value of  gas  is being  pulled  out of  the                                                           
determination of those gross value  reductions.  Section 48 is an                                                               
exclusion section because  it would be inappropriate  for the gas                                                               
to create that gross value reduction  with the way the tax system                                                               
is being done.                                                                                                                  
                                                                                                                                
MR. PAWLOWSKI  advised a  similar change is  made in  Section 49,                                                               
page 46, line 31, through page  47, line 14.  He reminded members                                                               
that in addition  to a 20 percent gross value  reduction there is                                                               
an  additional  10  percent gross  value  reduction;  Section  49                                                               
[excludes the  additional 10 percent  gross value  reduction] for                                                               
the gas produced after [1/1/22].                                                                                                
                                                                                                                                
MR. PAWLOWSKI stated  Section 51, page 48, line  23, through page                                                               
51,  line 22,  is  a clarifying  amendment.   Page  49, line  26,                                                               
provides  that tax  as gas  is not  considered lease  expenditure                                                               
under  AS 43.55.014 [or  AS 43.55.011].   Section  51 is  all the                                                               
things that are not considered lease expenditures.                                                                              
                                                                                                                                
2:08:34 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI pointed out that  Sections 52-55, page 51, line 23,                                                               
through  page  53,  line  7,  are  amendments  on  the  point  of                                                               
production.   He  said this  is  important because  the point  of                                                               
production  is the  point at  which things  upstream towards  the                                                               
wells are lease expenditures and  things downstream are recovered                                                               
through tariffs in the charges for the infrastructure.                                                                          
                                                                                                                                
MR. PAWLOWSKI directed  attention to Section 53,  page 52, [lines                                                               
9-10], which  delete the  language "OTHER  THAN GAS  DESCRIBED IN                                                               
(C)  OF  THIS  PARAGRAPH",  and  to  [lines  12-15]  which  state                                                               
"farthest  upstream  of   the  first  point  where   the  gas  is                                                           
accurately metered,  the inlet of  any pipeline  transporting the                                                           
gas to  a gas treatment plant,  or the inlet of  any gas pipeline                                                           
system transporting  gas to a  market".  The deleted  language in                                                           
Section 53, page 52, line 27,  through page 53, line 1, is legacy                                                               
language  the administration  thought  potentially unclear  about                                                               
where the  point of production  is.  The  administration believes                                                               
the language, as amended, provides  very clear direction of where                                                               
that point  of production is.   The concept of an  integrated gas                                                               
processing plant  and gas  treatment facility,  the inlet  of the                                                               
pipeline, has  the effect  of clarifying,  for example,  that the                                                               
Point Thomson pipeline  would not fall into  a lease expenditure,                                                               
which would  be deductible  in the production  tax, and  which is                                                               
the  reason the  administration defined  the point  of production                                                               
consistent with  the Heads  of Agreement  and the  description of                                                               
what is contained in the Alaska LNG Project.                                                                                    
                                                                                                                                
2:10:32 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  specified Section  54, page 53,  lines 2-4,  is an                                                               
amendment adding a new definition of "gas treatment plant".                                                                     
                                                                                                                                
MR.  PAWLOWSKI  said  Section  55,  page  53,  lines  5-7,  is  a                                                               
recommendation from  Legislative Legal  and Research  Services to                                                               
fix the definition  of "point of production" for  the purposes of                                                               
AS  43.90.900.   It  is  related  to  the inducements  that  were                                                               
offered  under the  Alaska Gasline  Inducement Act  (AGIA), which                                                               
included an exemption  from changes in gas production  tax for 10                                                               
years after  commercial production  for those producers  that bid                                                               
during  the first  binding open  season.   Because  the point  of                                                               
production plays  an important point  in the calculation  of that                                                               
production tax, Legislative Legal  and Research Services believed                                                               
Section 55 was  necessary in case an inducement  was available to                                                               
a  taxpayer.   The administration  does not  believe there  is an                                                               
inducement available to  a taxpayer.  Section 55  is an amendment                                                               
added in the other body for clarification on this statute.                                                                      
                                                                                                                                
CO-CHAIR FEIGE  inquired whether Section  55 would be  clearer if                                                               
the language  was the text [of  AS 43.55.900] as it  read on [the                                                               
date of 6/8/07].                                                                                                                
                                                                                                                                
MR. PAWLOWSKI answered it is stylistic.                                                                                         
                                                                                                                                
2:12:26 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI  turned  to  Section  56,  page  53,  lines  8-13,                                                               
explaining the change  made on line 11 makes  the film production                                                               
tax credit  applicable specifically  against the  production tax.                                                               
Tax as gas is excluded from the film production tax credit.                                                                     
                                                                                                                                
MR. PAWLOWSKI  reminded members  that Section  57, page  53, line                                                               
14,  was  discussed  during  his review  of  the  Alaska  Gasline                                                               
Development Corporation  (AGDC) statutes.   This  section repeals                                                               
AS 31.25.080(f),  which directs  AGDC to  cooperate with  a large                                                               
diameter project.   This directive  is now unnecessary  given the                                                               
re-purposing  of AGDC  under Sections  1-12 to  participate in  a                                                               
large gasline  development project under the  unified umbrella of                                                               
AGDC.                                                                                                                           
                                                                                                                                
MR. PAWLOWSKI  specified that Section  58, page 53,  lines 15-25,                                                               
directs the  governor to establish  an interim advisory  board to                                                               
bring  together  interested  and  affected  communities  to  make                                                               
recommendations around  the property  tax system as  described in                                                               
the   Heads  of   Agreement.     Subject  to   consultation,  the                                                               
administration will engage with  communities to develop a payment                                                               
in  lieu  of tax  (PILT)  system,  as  well as  impact  payments.                                                               
Large-scale  construction projects  like this  have an  impact on                                                               
communities throughout  the state in addition  to the communities                                                               
that are directly affected.   The recommendations will be brought                                                               
back to  the legislature  for consideration,  most likely  in the                                                               
2015 legislative session.                                                                                                       
                                                                                                                                
CO-CHAIR FEIGE  understood the aforementioned is  a specific term                                                               
within the Heads of Agreement (HOA).                                                                                            
                                                                                                                                
MR. PAWLOWSKI responded correct.                                                                                                
                                                                                                                                
2:14:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  understood the  HOA envisions the  PILT, but                                                               
said it  is an issue around  which there is tension  and not full                                                               
agreement.   The  mayors of  four  cities have  written a  letter                                                               
about wanting  to be a part  of this.  Questions  have been asked                                                               
about  the kind  of modifications  that  could be  made to  those                                                               
existing  documents  before  it  becomes a  deal  breaker.    She                                                               
inquired  how the  interim advisory  board can  participate in  a                                                               
meaningful  way based  on  the  limitations of  the  HOA and  the                                                               
requirement that it be within the PILT framework.                                                                               
                                                                                                                                
MR.  PAWLOWSKI  replied  the  administration  believes  the  PILT                                                               
framework offers  the best opportunity for  predictability on the                                                               
project.   In  testimony on  the Alaska  LNG Project,  the mayors                                                               
have not necessarily objected to the  PILT; they have asked to be                                                               
at  the table.   The  other key  piece is  that there  are impact                                                               
payments.   There  are impacts  prior to  the real  taxable value                                                               
being  achieved.   The  concept  in the  Heads  of Agreement  was                                                               
subject to consultation.  Under  the direction of Section 58, the                                                               
administration intends  to bring together the  mayors of affected                                                               
communities, as  well as the  mayors of communities  not directly                                                               
affected, to work  on the broader concept of the  impacts of this                                                               
project   and  the   property  tax   for  this   project.     The                                                               
administration  believes  this  open  process  will  provide  the                                                               
maximum  flexibility for  the administration  and communities  to                                                               
come back  to the legislature  with a unified  recommendation for                                                               
that  project.   This is  important because  recommendations that                                                               
come outside of that process will  not carry the same weight with                                                               
the  legislature   and  the   public  as   those  recommendations                                                               
deliberatively developed with the communities  at the table.  The                                                               
governor  has  described his  work  on  the administrative  order                                                               
underlying this concept.  This  is an opportunity consistent with                                                               
the HOA.  How the framework  gets designed will be the subject of                                                               
much work going forward with the municipalities at the table.                                                                   
                                                                                                                                
2:17:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR remarked  that  Section 58  reads more  like                                                               
intent  language  that  does  not   have  the  same  strength  as                                                               
statutory language.  Further, it  does not include any permission                                                               
for those affected  municipalities to be a voting  member in that                                                               
decision  making.   She  asked  to what  extent  the language  in                                                               
Section  58  will  give the  municipalities  the  opportunity  to                                                               
participate in a meaningful way.                                                                                                
                                                                                                                                
MS.  POLLARD answered  it is  uncodified law  which is  typically                                                               
done when  something is perhaps  of limited duration  and perhaps                                                               
will not  be in effect  for five years.   A direct answer  to the                                                               
question is  "no, it is not  a statutory provision that  is going                                                               
to  ...  have  absolute   legislative  direction,"  although  the                                                               
language is very clear.  This  is typically the type of provision                                                               
where lawmakers  express their intent.   Lawmakers  have listened                                                               
to municipalities  and have asked  for the governor  to establish                                                               
this board.                                                                                                                     
                                                                                                                                
MR.  PAWLOWSKI  interjected  that   in  the  state  constitution,                                                               
Article  9, Sections  3 and  4, clearly  state that  the property                                                               
tax, as  well as  changes to  the value,  are prescribed  by law.                                                               
Concern was  expressed about whether the  state can contractually                                                               
do  something.   Under  the state  constitution,  changes to  the                                                               
property tax are necessary prior  to any execution or development                                                               
of a  project.   Changes must  come back  to the  legislature for                                                               
consideration.                                                                                                                  
                                                                                                                                
2:19:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON inquired whether  the information that this                                                               
board is going to look at will be required to be confidential.                                                                  
                                                                                                                                
MR. PAWLOWSKI  responded the way  this is structured now  he does                                                               
not believe so.  The  opportunity for confidential information is                                                               
a  tricky one  that the  administration would  want to  carefully                                                               
work on  with the committee  to see how  that is authorized.   He                                                               
offered his  belief that  the language  itself in  uncodified law                                                               
does not extend the confidentiality  protections available to the                                                               
department for taxpayers.                                                                                                       
                                                                                                                                
CO-CHAIR FEIGE said  he does not think the  information that will                                                               
be discussed  under this will include  trade secrets.  It  is all                                                               
about how  to structure a  PILT or a property  tax so as  to take                                                               
care of the  expected impacts and expected future  needs of those                                                               
municipalities impacted by this project.                                                                                        
                                                                                                                                
REPRESENTATIVE SEATON  pointed out that the  deliberative process                                                               
of  advisory committees  within  an  administration is  sometimes                                                               
confidential.  He  said he wants to ensure this  statute will not                                                               
establish  a   deliberative  process   which  then   muzzles  the                                                               
municipalities.   Saying he knows  this is not the  intention, he                                                               
asked whether  something should be  included in this  language to                                                               
clarify that the deliberations of this board will be public.                                                                    
                                                                                                                                
MR. PAWLOWSKI  replied the administration  will be happy  to work                                                               
with the committee.   He said the  intent is to make  this a very                                                               
open process  of consultation with  the local governments  to put                                                               
forward the  best product possible  to support the  state through                                                               
impact   payments  and   provide   predictability  to   taxpayers                                                               
throughout the life of the project.                                                                                             
                                                                                                                                
REPRESENTATIVE SEATON offered his  appreciation that everyone has                                                               
the same  intent, but reiterated  it would be beneficial  to make                                                               
Section 58 clear in this regard.                                                                                                
                                                                                                                                
2:22:10 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  requested  further elaboration  regarding  the                                                               
difference between payment  in lieu of property  taxes and impact                                                               
aid, given  one might apply to  every place and some  might apply                                                               
to just where the impact is greater.                                                                                            
                                                                                                                                
MR. PAWLOWSKI  answered the  concept of  impact payments  is that                                                               
values  are  associated with  a  project  and the  infrastructure                                                               
being developed during  construction.  There are  also effects on                                                               
the  communities as  well  as needs  of the  state.   The  impact                                                               
payment concept is  to schedule a series  of predictable payments                                                               
during that time period so that  when the state and the producers                                                               
are running their economics in  their investment they can plan on                                                               
it because  that is upfront  cash prior  to operation.   The next                                                               
stage is the  payment in lieu of tax during  the operation of the                                                               
life of the project that on  the infrastructure is intended to be                                                               
designed as something that is  predictable for the parties, given                                                               
that  property taxes  is a  massive number  on this  project.   A                                                               
traditional  property tax  starts out  high and  then depreciates                                                               
and declines over time as  the value of the property depreciates.                                                               
The opportunity contemplated in  the Heads of Agreement, however,                                                               
is for  potentially escalating payments  -- starting off  low and                                                               
growing.   As municipalities think  about their needs and  as the                                                               
state thinks  about its  needs going forward,  it might  be found                                                               
that  an escalating  payment  is more  in  the state's  interest.                                                               
That needs to be hashed out  around the table and brought back to                                                               
the legislature for consideration and authorization.                                                                            
                                                                                                                                
2:24:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  inquired  whether  the  administration  has  any                                                               
intent to  morph this PILT  concept over to  existing oil-related                                                               
facilities.                                                                                                                     
                                                                                                                                
MR.  PAWLOWSKI hesitated  before responding,  but then  said that                                                               
the concept  is centered on  the definition of  infrastructure in                                                               
the  Alaska LNG  Project.    The reason  for  his hesitation,  he                                                               
explained,  is  there  are other  parties  potentially  involved,                                                               
meaning some  of the  local governments  have been  talking about                                                               
property tax on existing structure.   He said he does not want to                                                               
make an intent statement when he  knows other parties may want to                                                               
bring that up.                                                                                                                  
                                                                                                                                
2:25:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  requested  the  committee  receive  further                                                               
information  given recent  news  reports  about some  contentious                                                               
discrepancies  between  values  of existing  oil  infrastructure.                                                               
This is of  concern in regard to how the  committee resolves this                                                               
situation  in terms  of the  value on  the assets  that would  be                                                               
built  during the  construction and  throughout the  life of  the                                                               
Alaska LNG Project.   The concern with impact  payments is timing                                                               
and whether those payments will  fully cover the expense and true                                                               
impact  to those  communities  during that  timeframe,  so it  is                                                               
important for the committee to have good information.                                                                           
                                                                                                                                
MR.  PAWLOWSKI concurred,  saying it  is very  important for  the                                                               
state to collaboratively determine  the impacts on communities by                                                               
sitting around the  table with the communities,  rather than just                                                               
the  state  making  determinations.   Impact  payments  are  also                                                               
especially important  in that  communities like  the Municipality                                                               
of  Anchorage and  potentially the  Fairbanks North  Star Borough                                                               
may not  have a  direct taxing interest  on this  project because                                                               
the route may  go outside of their borders but  yet have distinct                                                               
municipal impacts.  Communities that  do not have a direct taxing                                                               
interest, such  as those  in Southeast  Alaska, have  an interest                                                               
through  the statewide  property tax  which goes  to the  general                                                               
fund.   While  at the  table,  the state  will play  the role  of                                                               
looking out for the interests of all of Alaska.                                                                                 
                                                                                                                                
CO-CHAIR FEIGE understood  that the initial concept  of the PILT,                                                               
as laid  out in the  Heads of Agreement, is  it will be  based on                                                               
the throughput of the pipeline.                                                                                                 
                                                                                                                                
MR. PAWLOWSKI replied that is the  initial concept that is put on                                                               
the table  for discussion and  the administration sees  plenty of                                                               
benefits around that.                                                                                                           
                                                                                                                                
2:27:18 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI resumed his sectional  analysis, noting Section 59,                                                               
page 53, line  26, through page 54, line 18,  is another piece of                                                               
uncodified law.  He reminded members  that Section 13 of the bill                                                               
creates the  Alaska affordable energy  fund to  provide resources                                                               
to  build infrastructure  for those  communities not  expected to                                                               
directly  benefit  from the  gas  moving  throughout the  project                                                               
corridor.  Section 59 empowers  the Alaska Energy Authority (AEA)                                                               
to work with  AGDC, the Alaska Industrial  Development and Export                                                               
Authority (AIDEA), and  DOR to develop regional  energy plans for                                                               
delivering various types of energy  sources to areas of the state                                                               
that do not have direct access to the gas pipeline.                                                                             
                                                                                                                                
MR.  PAWLOWSKI  specified that  Section  60,  page 54,  line  19,                                                               
through page  55, line 30,  gives direction  to DOR to  develop a                                                               
plan for municipalities, regional  corporations, and residents to                                                               
directly  participate in  investment in  the North  Slope natural                                                               
gas pipeline.  This plan, which  will be a challenge to DOR, will                                                               
be  brought back  to the  legislature under  AS 38.05.020(b)(11),                                                               
which  is the  contracts that  come back  to the  legislature for                                                               
approval that are negotiated under the DNR sections.                                                                            
                                                                                                                                
2:29:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR   recalled  there   was  another   piece  of                                                               
legislation  that was  the permanent  fund dividend  opportunity.                                                               
When SB  138 was amended  in the  other body, this  provision was                                                               
swept  in  for municipalities  and  regional  corporations.   She                                                               
asked  whether  any  municipality  or  regional  corporation  has                                                               
expressed an interest in being  a participant in the ownership of                                                               
this  project.   She further  asked whether  more information  is                                                               
available on the mechanics of how this will work.                                                                               
                                                                                                                                
MR.  PAWLOWSKI  believed  it premature  to  answer  [the  latter]                                                               
question,  saying  this  is  why  it  is  an  important  step  in                                                               
challenging DOR to  come up with a  plan to enable this.   At the                                                               
same time as DOR is developing  that plan, it will also work with                                                               
the communities  in the advisory group.   While he does  not know                                                               
the  degree  of  interest,  he  said he  can  see  synergies  and                                                               
opportunities to maximize value for  Alaskans by having those two                                                               
discussions in parallel, potentially led by DOR.                                                                                
                                                                                                                                
REPRESENTATIVE  TARR observed  that  page 55,  line 2,  paragraph                                                               
(2), states "through  the purchase of stock in  a publicly traded                                                               
corporation  that  invests".     She  inquired  whether  that  is                                                               
envisioned to be potentially the AGDC subsidiary.                                                                               
                                                                                                                                
MR. PAWLOWSKI  offered his understanding  that page 54,  line 29,                                                               
paragraph (1),  is to lay  out options for  DOR to consider.   He                                                               
offered his belief  that page 55, lines 2-5, is  not an intention                                                               
to take  the Alaska Gasline  Development Corporation public.   It                                                               
is to  put every option on  the table for DOR  to consider, which                                                               
is not an easy thing to do  given there are very clear and strict                                                               
rules about engaging individuals  in investment opportunities.  A                                                               
regional corporation  or municipality may have  a different level                                                               
of sophistication.  He reiterated  that the synergy of doing this                                                               
work  while  DOR  is engaging  the  municipalities  provides  the                                                               
opportunity for people to broaden  their thinking in this regard.                                                               
Because  this is  not  a  simple thing,  DOR  has  a fiscal  note                                                               
associated with the anticipated work that it will take.                                                                         
                                                                                                                                
2:32:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  understood there  is  not  at this  time  a                                                               
publicly traded  corporation associated with the  project that an                                                               
individual Alaskan,  corporation, or  municipality would  be able                                                               
to invest through.                                                                                                              
                                                                                                                                
MR. PAWLOWSKI  answered there are  four because Alaskans  can buy                                                               
shares  in  any of  the  corporations  involved in  this  project                                                               
today.  However, there is not a state entity.                                                                                   
                                                                                                                                
REPRESENTATIVE  TARR commented  that a  previous section  changes                                                               
AGDC's ability for subsidiaries, so  she would like to understand                                                               
whether the two sections are related.                                                                                           
                                                                                                                                
MR. PAWLOWSKI  offered his belief  that this  is not set  up that                                                               
way, but,  in theory,  it could  be read to  imply what  is being                                                               
said by Representative  Tarr.  For example, the  state could spin                                                               
off, say, the  equity option with TransCanada  through a publicly                                                               
traded  corporation.   However, that  would create  expenses that                                                               
would be inefficient for the state.                                                                                             
                                                                                                                                
2:33:23 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER opined  that Section  60 has  many defects                                                               
and is  fraught with challenge  and peril if the  committee fails                                                               
to get  it right.   For this provision to  stay in the  bill, the                                                               
committee  is  going to  have  to  spend  some resources  on  it.                                                               
Taking statute literally, he said  his attention is caught by the                                                               
language  on page  55, lines  22-23, which  states "the  means by                                                               
which an  individual may  qualify as a  resident for  purposes of                                                               
investing in an ownership interest."   In regard to municipality,                                                               
he asked whether this section  should state "Alaska municipality"                                                               
unless the intent is to open  this up to any municipality.  Given                                                               
that  [paragraphs  (a)(1)-(a)(7)]   specifically  state  what  is                                                               
wanted, he  asked whether  the committee  might want  to consider                                                               
adding  things  like  addressing  the  ability  of  those  equity                                                               
interests  to, say,  [meet] cash  calls  on the  project or  cash                                                               
calls for  expansion.  He said  he does not want  to give anybody                                                               
the impression that investing one's  permanent fund dividend will                                                               
result only in collecting money.   One way or the other there are                                                               
consequences.  The committee may  want to specify in this section                                                               
that depending  on the ownership  interest involved,  there could                                                               
be  tax  consequences where  a  person  could be  attributed  the                                                               
taxable income  allocable to that equity  interest without having                                                               
received a  penny in cash  distribution.  Because there  could be                                                               
huge  hidden tax  implications for  people, the  committee should                                                               
ensure that the report identifies  those concerns.  Regarding the                                                               
limitation  to an  Alaska  municipality,  Alaska corporation,  or                                                               
Alaska resident,  the committee  may want  the report  to address                                                               
possible  constitutional and  interstate commerce  issues related                                                               
to restricting [investment]  to Alaskans only.  If  Section 60 is                                                               
kept in the bill, he reiterated,  it needs to be fleshed out more                                                               
thoroughly.                                                                                                                     
                                                                                                                                
CO-CHAIR SADDLER  said he  understands people's  desire to  own a                                                               
piece of what  he thinks will be a profitable  enterprise for the                                                               
state.   He said he  thinks the  private interest is  subsumed in                                                               
the public  interest -- the  vision of  having money come  to the                                                               
State  of  Alaska, which  will  help  provide  for the  needs  of                                                               
Alaskans.  Additionally, he noted,  stock can be purchased in the                                                               
three  publicly  owned  companies  that will  have  the  majority                                                               
ownership of this pipeline.                                                                                                     
                                                                                                                                
2:37:24 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI appreciated the  aforementioned guidance on Section                                                               
60, saying constructive additions will  help DOR in the report it                                                               
prepares and  brings back to  the legislature  for consideration.                                                               
He recalled  the concept of  "mini bonds"  where in the  past the                                                               
state has  done a municipal  issuance in denominations at  a size                                                               
that is available for the public to purchase.                                                                                   
                                                                                                                                
MR. PAWLOWSKI  concluded his sectional analysis,  by pointing out                                                               
that  Section 61,  page 55,  line 31,  through page  56, line  5,                                                               
allows the Department of Natural  Resources and the Department of                                                               
Revenue to adopt regulations.   Sections 62-64, page 56, lines 6-                                                               
10, are the  effective dates; the tax sections  would take effect                                                               
1/1/15 and  the powers  that enable  the departments  to initiate                                                               
the negotiation process would happen immediately.                                                                               
                                                                                                                                
2:39:23 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI, at  the committee's  request,  reviewed the  flow                                                               
chart, or  decision tree, that  he had provided in  the committee                                                               
packet.  He began  at the top left of the  chart, noting the date                                                               
of January to  April 2014 is the introduction of  SB 138 in which                                                               
the administration is asking for  opportunity to enact "the three                                                               
P's":   the  state participating  in  the project,  a process  to                                                               
negotiate the  enabling contracts  to move this  project forward,                                                               
and setting  the general  percentage of the  state's share.   The                                                               
decision tree depicts a 25  percent share [for the state] because                                                               
that  is the  percentage  currently  in CSSB  138(FIN)  am.   The                                                               
legislature  is wrestling  with three  options for  the State  of                                                               
Alaska.   The first option  is the  state going it  alone, taking                                                               
the full 25  percent equity share.  The second  option is for the                                                               
state to  participate at 25  percent share, but  with TransCanada                                                               
as  a partner  per the  Memorandum of  Understanding (MOU).   The                                                               
third  option is  recognition  of the  opportunity  later in  the                                                               
process to re-assert  a 40 percent share of the  25 percent share                                                               
that TransCanada  is carrying on behalf  of the state in  the gas                                                               
treatment  plant  and the  pipeline.    The question  before  the                                                               
committee is whether  to pass enabling legislation.   If enabling                                                               
legislation  is  not passed,  the  state  has an  opportunity  to                                                               
continue with the abandonment of AGIA.   At that stage, the state                                                               
can  choose to  exercise  an  opportunity to  buy  the data  that                                                               
TransCanada and  the Alaska Pipeline Project  (APP) partners have                                                               
developed  during the  AGIA  time.   The value  of  this data  is                                                               
somewhere less than $130 million.                                                                                               
                                                                                                                                
2:42:56 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI continued his review,  specifying that if the state                                                               
goes forward with  the Alaska LNG Project, the  data collected by                                                               
TransCanada and  APP, as  well as  the data  developed by  BP and                                                               
Conoco  under the  Denali  Project, will  be  contributed to  the                                                               
effort.   That  would  take the  project  into the  Pre-Front-End                                                               
Engineering and Design (Pre-FEED) stage,  which is the stage that                                                               
the legislature  is looking at  enabling.  The timeline  for Pre-                                                               
FEED is May 2014 to December  2015.  The question confronting the                                                               
state is  the three options.   In the  first option of  the state                                                               
going it  alone, the state's  direct expenditure to support  a 25                                                               
percent share  during Pre-FEED is  roughly $108 million.   In the                                                               
second option  with TransCanada, the  state is paying  25 percent                                                               
of the  LNG plant and  TransCanada will  be paying 25  percent of                                                               
the pipeline and  gas treatment plant, which  reduces the state's                                                               
[direct] cost to $43 million  during Pre-FEED.  He clarified that                                                               
these direct  costs do not include  the appropriate contingencies                                                               
or agency costs  that advance the project, which  are included in                                                               
the fiscal notes.  [The  third option] envisions the [40 percent]                                                               
equity  option  being exercised  after  December  2015, with  the                                                               
state's direct cost again being at $43 million.                                                                                 
                                                                                                                                
MR.  PAWLOWSKI continued,  explaining that  after moving  through                                                               
Pre-FEED by  December 2015, the  question before  the legislature                                                               
will be  whether to stop or  to advance the project  to the stage                                                               
of  Front-End Engineering  and  Design (FEED).    If the  project                                                               
stops, the  legislature by  not enacting  the contracts  can exit                                                               
the  project.   In exiting  the project,  the state  is committed                                                               
under the  MOU to  pay TransCanada the  development costs  it has                                                               
incurred on behalf of the state,  which will be about $65 million                                                               
in Pre-FEED  plus $6 million  in allowance for funds  used during                                                               
construction (AFUDC).  That total  of $71 million is the off-ramp                                                               
of the state's risk in the  decision.  If the state moves forward                                                               
with the  project, the  next step  is the FEED  stage.   He noted                                                               
that the cost estimates in the  flow chart from this point onward                                                               
are broad ranges based on the understanding that is had today.                                                                  
                                                                                                                                
2:45:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  understood that exercising the  off-ramp, which                                                               
would generate  the payment to  TransCanada, can be  activated by                                                               
either the  state or TransCanada  deciding to  not go ahead.   He                                                               
asked whether  it is reasonable  to require that expense  only if                                                               
the state elects not to  go forward, positing that if TransCanada                                                               
decides not want to go forward  then it should bear some of those                                                               
costs.                                                                                                                          
                                                                                                                                
MR.  PAWLOWSKI  responded the  MOU  is  structured such  that  if                                                               
TransCanada exercises  one of  its several  options to  walk away                                                               
from  the project,  the state  would owe  TransCanada development                                                               
costs but none of  the AFUDC.  Thus, it would  be essentially a 0                                                               
percent interest  loan for  the state  through that  time period.                                                               
If the state  asks TransCanada to leave, the state  then owes the                                                               
AFUDC cost.                                                                                                                     
                                                                                                                                
2:47:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI asked what  timeframe the legislature has                                                               
between December 2015 and expiration of the MOU or HOA.                                                                         
                                                                                                                                
MR. PAWLOWSKI  replied the times in  the flow chart are  the best                                                               
that can be  done to predict timing.  The  HOA, Article 7.5, page                                                               
13, states "legislation in 'a'  2015 legislative session", rather                                                               
than "the" 2015 legislative session.   It is recognizing that the                                                               
amount of work on these  larger contracts will likely require one                                                               
or more engagements in 2015 with the legislature.                                                                               
                                                                                                                                
MR. PAWLOWSKI, responding to  Representative P. Wilson, explained                                                               
that AFUDC  is the  acronym for allowance  for funds  used during                                                               
construction, a concept in the  pipeline tariff-making world that                                                               
can be thought of as an interest expense.                                                                                       
                                                                                                                                
2:49:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR   cited  a  recent  report   by  legislative                                                               
consultant Roger Marks which states  that the aggressive timeline                                                               
to get Alaska gas to market  may not be ultimately in the state's                                                               
long-term interest.  She requested Mr. Pawlowski to comment.                                                                    
                                                                                                                                
MR. PAWLOWSKI  responded delays  in the  project are  material to                                                               
not just the  state but also the other investors  in the project.                                                               
Modeling  by the  state's consultant,  Black &  Veatch, estimates                                                               
that $800  million is the  impact on the  net present value  of a                                                               
delay.   A  broad number  of  projects are  currently looking  at                                                               
competing into the market.   The administration believes delay is                                                               
not  in the  state's  interest because  the  momentum behind  the                                                               
project matters for the signal it  sends the world that Alaska is                                                               
moving forward, building on the  success that has occurred in the                                                               
state's petroleum province over the last two years.                                                                             
                                                                                                                                
2:51:23 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER observed  that the MOU prohibits  the state from                                                               
selling  its equity  share to  a competitor  of TransCanada.   He                                                               
inquired whether the  state, under the MOU, could  sell its share                                                               
to any of the three producer companies.                                                                                         
                                                                                                                                
MR.  PAWLOWSKI replied  he does  not have  a commercial  attorney                                                               
present to whom  he could defer for an answer.   He explained the                                                               
administration has a large team that worked on these documents.                                                                 
                                                                                                                                
2:52:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON commented  this is not  going to  be an                                                               
easy task because  from the time the Pre-FEED  stage is finalized                                                               
in 2015 until  construction begins in 2019, there  will have been                                                               
three new and different legislatures working on the project.                                                                    
                                                                                                                                
MR.   PAWLOWSKI  answered   that   in  addition   to  three   new                                                               
legislatures  there will  also be  different administrations  and                                                               
administration personnel.   He agreed the  opportunity for change                                                               
during this process  is material.  However,  the partnership, the                                                               
companies,  and the  stability  of  AGDC, can  be  looked to  for                                                               
continuing  to  move  this  project  forward.    The  project  is                                                               
immensely challenging and is not easy for anybody involved.                                                                     
                                                                                                                                
REPRESENTATIVE  HAWKER remarked  that  the flow  chart shows  the                                                               
project commencing  in January 2014,  but in reality  this effort                                                               
commenced about June 2003.                                                                                                      
                                                                                                                                
2:54:44 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  resumed his review  of the flow chart,  saying the                                                               
numbers on the chart are daunting  for this major endeavor by the                                                               
state.   The state's  long-term outlay  will range  between $13.8                                                               
and $9.6 billion.   However, 75 percent of  the investment [$41.2                                                               
billion] is  being carried by  the other partners  -- ExxonMobil,                                                               
ConocoPhillips,  and BP.    The  administration believes  putting                                                               
that private sector at the table  with the state as a co-investor                                                               
offers the best  efficiency and chance for the  state to maximize                                                               
value.  The  administration has pushed for  a commensurate staged                                                               
process because  it is unknown  all the  way how this  project is                                                               
going to work out.  The  state is making commitments as the other                                                               
parties  make  commitments.    Diligent  steps  are  being  taken                                                               
together  and commensurate  investment is  increased as  more and                                                               
more diligence is done.                                                                                                         
                                                                                                                                
2:56:20 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE drew  attention to  the MOU,  Exhibit C,  Page 9,                                                               
Conveyance  of   Transporter  Alaska  LNG  Project   Interest  to                                                               
Shipper,  which  states, "Within  a  period  of  5 years  of  SOA                                                               
exercising  its  termination  right,  if SOA  participates  in  a                                                               
pipeline  project  to  commercialize  North  Slope  gas  that  is                                                               
'substantially  similar' to  the Alaskan  LNG Project  ...."   He                                                               
asked whether "substantially similar"  would include the in-state                                                               
bullet gasline.                                                                                                                 
                                                                                                                                
MR. PAWLOWSKI responded he would have  to talk to the partners in                                                               
the MOU,  but the intent when  this was being discussed  was that                                                               
it would not apply to the in-state gasline.                                                                                     
                                                                                                                                
CO-CHAIR FEIGE  understood it would  have to be a  large diameter                                                               
line as opposed to a smaller diameter line.                                                                                     
                                                                                                                                
MR. PAWLOWSKI  noted that  following the  aforementioned language                                                               
it states,  "conditions consistent with  those set forth  in this                                                               
Term Sheet,  except the cost of  debt and ROE [return  on equity]                                                               
to be negotiated based on conditions existing at the time."                                                                     
                                                                                                                                
REPRESENTATIVE HAWKER  posed a scenario  in which the  Alaska LNG                                                               
Project falters and  goes away, so the state reverts  to an AGDC-                                                               
only project  that is no longer  under the AGIA constraints.   In                                                               
this case,  he posited, it would  be highly likely that  the AGDC                                                               
project  would not  be  configured as  it is  today,  which is  a                                                               
restriction  to 500  million cubic  feet  per day.   The  project                                                               
might be  substantially larger  because that  would be  the right                                                               
size  project for  the time,  which could  be construed  to be  a                                                               
substantially similar  project.   Cautioning about  absolutes, he                                                               
said he  does not want  the take-away here  to be that  the state                                                               
will remain  restricted to an  AGDC project of under  500 million                                                               
cubic feet per day if the Alaska LNG Project goes away.                                                                         
                                                                                                                                
2:59:18 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER inquired whether DOR's opinion is that the                                                                     
Alaska Stand Alone Pipeline (ASAP), as currently configured, is                                                                 
not substantially similar.                                                                                                      
                                                                                                                                
MR. PAWLOWSKI replied correct.                                                                                                  
                                                                                                                                
CO-CHAIR SADDLER presumed that if the Alaska LNG Project fails                                                                  
to happen, the aforementioned five-year provision might counter                                                                 
the idea of increasing the ASAP line to a larger capacity line.                                                                 
                                                                                                                                
MR. PAWLOWSKI responded he will get back to the committee with                                                                  
an answer.                                                                                                                      
                                                                                                                                
[CSSB 138(FIN) am was held over.]                                                                                               
                                                                                                                                
3:00:11 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Resources Standing Committee meeting was adjourned at 3:00 p.m.                                                                 

Document Name Date/Time Subjects
HRES AKLNG Project Flow Chart 3.21.14 25%.pdf HRES 3/21/2014 1:00:00 PM
SB 138