Legislature(2015 - 2016)BARNES 124

02/10/2016 01:00 PM RESOURCES

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Audio Topic
01:03:09 PM Start
01:04:04 PM HB247
02:59:11 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 213 RESTRICT ACCESS ST. LAND;FINDINGS;NOTICE TELECONFERENCED
<Bill Hearing Canceled>
-- Public & Invited Testimony --
*+ HB 282 AGDC BOARD OF DIRECTORS TELECONFERENCED
<Bill Hearing Canceled>
-- Public & Invited Testimony --
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                       February 10, 2016                                                                                        
                           1:03 p.m.                                                                                            
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative David Talerico, Co-Chair                                                                                         
Representative Mike Hawker, Vice Chair                                                                                          
Representative Bob Herron                                                                                                       
Representative Craig Johnson                                                                                                    
Representative Kurt Olson                                                                                                       
Representative Paul Seaton                                                                                                      
Representative Andy Josephson                                                                                                   
Representative Geran Tarr                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Benjamin Nageak, Co-Chair                                                                                        
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 247                                                                                                              
"An Act  relating to confidential  information status  and public                                                               
record status of information in  the possession of the Department                                                               
of Revenue;  relating to interest  applicable to  delinquent tax;                                                               
relating  to disclosure  of  oil and  gas  production tax  credit                                                               
information;  relating to  refunds for  the gas  storage facility                                                               
tax  credit,  the  liquefied natural  gas  storage  facility  tax                                                               
credit, and  the qualified  in-state oil  refinery infrastructure                                                               
expenditures tax credit; relating to  the minimum tax for certain                                                               
oil and gas  production; relating to the  minimum tax calculation                                                               
for monthly  installment payments  of estimated tax;  relating to                                                               
interest  on  monthly  installment  payments  of  estimated  tax;                                                               
relating  to  limitations for  the  application  of tax  credits;                                                               
relating  to  oil and  gas  production  tax credits  for  certain                                                               
losses   and   expenditures;    relating   to   limitations   for                                                               
nontransferable oil and  gas production tax credits  based on oil                                                               
production  and  the  alternative  tax credit  for  oil  and  gas                                                               
exploration;  relating to  purchase  of  tax credit  certificates                                                               
from the oil  and gas tax credit fund; relating  to a minimum for                                                               
gross  value  at  the  point of  production;  relating  to  lease                                                               
expenditures  and tax  credits for  municipal entities;  adding a                                                               
definition   for  "qualified   capital  expenditure";   adding  a                                                               
definition for  "outstanding liability  to the  state"; repealing                                                               
oil  and   gas  exploration  incentive  credits;   repealing  the                                                               
limitation on  the application of  credits against  tax liability                                                               
for  lease   expenditures  incurred   before  January   1,  2011;                                                               
repealing provisions related to  the monthly installment payments                                                               
for  estimated tax  for oil  and gas  produced before  January 1,                                                               
2014;  repealing  the  oil  and gas  production  tax  credit  for                                                               
qualified  capital expenditures  and  certain well  expenditures;                                                               
repealing   the  calculation   for  certain   lease  expenditures                                                               
applicable before January 1,  2011; making conforming amendments;                                                               
and providing for an effective date."                                                                                           
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
HOUSE BILL NO. 213                                                                                                              
"An Act requiring  the commissioner of natural  resources to make                                                               
specific,  detailed   written  findings  before   restricting  or                                                               
prohibiting a traditional  means of access to  state land, water,                                                               
or  land  and  water  for a  traditional  outdoor  activity;  and                                                               
requiring  certain public  notice  of a  proposed restriction  or                                                               
prohibition  of a  traditional  means of  access  to state  land,                                                               
water, or land and water for a traditional outdoor activity."                                                                   
                                                                                                                                
     - BILL HEARING CANCELED                                                                                                    
                                                                                                                                
HOUSE BILL NO. 282                                                                                                              
"An Act relating to the board  of directors of the Alaska Gasline                                                               
Development Corporation; adding  legislators as nonvoting members                                                               
of  the board  of  directors of  the  Alaska Gasline  Development                                                               
Corporation; and providing for an effective date."                                                                              
                                                                                                                                
     - BILL HEARING CANCELED                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 247                                                                                                                  
SHORT TITLE: TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                                 
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
01/19/16       (H)       READ THE FIRST TIME - REFERRALS                                                                        
01/19/16       (H)       RES, FIN                                                                                               
02/03/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/03/16       (H)       Heard & Held                                                                                           
02/03/16       (H)       MINUTE(RES)                                                                                            
02/05/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/05/16       (H)       -- MEETING CANCELED --                                                                                 
02/10/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
RANDALL HOFFBECK, Commissioner                                                                                                  
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   On  behalf of  the  governor, assisted  in                                                             
introducing HB 247.                                                                                                             
                                                                                                                                
KEN ALPER, Director                                                                                                             
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   On  behalf  of  the governor,  provided  a                                                             
PowerPoint presentation to introduce HB 247.                                                                                    
                                                                                                                                
LENNIE DEES, Audit Master                                                                                                       
Production Audit Group                                                                                                          
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions related to HB 247.                                                                    
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:03:09 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  DAVID  TALERICO  called the  House  Resources  Standing                                                             
Committee meeting to  order at 1:03 p.m.   Representatives Olson,                                                               
Johnson, Hawker, Josephson, Seaton,  and Talerico were present at                                                               
the call  to order.   Representatives Herron and Tarr  arrived as                                                               
the meeting was in progress.                                                                                                    
                                                                                                                                
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
                                                                                                                                
1:04:04 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TALERICO  announced that the  only order of  business is                                                               
HOUSE BILL NO. 247, "An  Act relating to confidential information                                                               
status and public record status  of information in the possession                                                               
of the Department of Revenue;  relating to interest applicable to                                                               
delinquent tax; relating to disclosure  of oil and gas production                                                               
tax credit information;  relating to refunds for  the gas storage                                                               
facility tax  credit, the liquefied natural  gas storage facility                                                               
tax   credit,   and   the   qualified   in-state   oil   refinery                                                               
infrastructure expenditures  tax credit; relating to  the minimum                                                               
tax for certain  oil and gas production; relating  to the minimum                                                               
tax  calculation for  monthly installment  payments of  estimated                                                               
tax;  relating to  interest on  monthly  installment payments  of                                                               
estimated  tax; relating  to limitations  for the  application of                                                               
tax credits; relating  to oil and gas production  tax credits for                                                               
certain  losses and  expenditures;  relating  to limitations  for                                                               
nontransferable oil and  gas production tax credits  based on oil                                                               
production  and  the  alternative  tax credit  for  oil  and  gas                                                               
exploration;  relating to  purchase  of  tax credit  certificates                                                               
from the oil  and gas tax credit fund; relating  to a minimum for                                                               
gross  value  at  the  point of  production;  relating  to  lease                                                               
expenditures  and tax  credits for  municipal entities;  adding a                                                               
definition   for  "qualified   capital  expenditure";   adding  a                                                               
definition for  "outstanding liability  to the  state"; repealing                                                               
oil  and   gas  exploration  incentive  credits;   repealing  the                                                               
limitation on  the application of  credits against  tax liability                                                               
for  lease   expenditures  incurred   before  January   1,  2011;                                                               
repealing provisions related to  the monthly installment payments                                                               
for  estimated tax  for oil  and gas  produced before  January 1,                                                               
2014;  repealing  the  oil  and gas  production  tax  credit  for                                                               
qualified  capital expenditures  and  certain well  expenditures;                                                               
repealing   the  calculation   for  certain   lease  expenditures                                                               
applicable before January 1,  2011; making conforming amendments;                                                               
and providing for an effective date."                                                                                           
                                                                                                                                
CO-CHAIR TALERICO noted that Commissioner  Hoffbeck and Mr. Alper                                                               
will continue  their PowerPoint introduction  of HB 247  that was                                                               
begun on February 3, 2016.                                                                                                      
                                                                                                                                
1:04:51 PM                                                                                                                    
                                                                                                                                
RANDALL  HOFFBECK,  Commissioner,  Department of  Revenue  (DOR),                                                               
clarified  that  in discussions  over  the  last week  it  became                                                               
apparent that  the study  being done by  the Institute  of Social                                                               
and Economic  Research (ISER)  will be more  high level  than the                                                               
expectation  he  had  left  the  committee  with  at  the  2/3/16                                                               
meeting.  He  said an executive summary from ISER  is expected by                                                               
2/11/15, a  draft report by  2/15/16, and that Gunnar  Knapp from                                                               
ISER is  willing to testify  before the committee on  the report.                                                               
The report,  he explained,  really is  looking at  the governor's                                                               
fiscal plan in general and  the relative impacts of the decisions                                                               
that would be made on taxes  versus cuts in employees versus cuts                                                               
in capital versus using portions  of the earnings versus reducing                                                               
the dividend,  and the relative  impacts that each of  those have                                                               
on the state's economy.   The report, he continued, doesn't drill                                                               
down into  the competitiveness of oil  and gas based on  which of                                                               
the credits remain and which ones don't.                                                                                        
                                                                                                                                
1:06:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   HAWKER  offered   his   appreciation  for   this                                                               
clarification.   He said the  impact analysis that ISER  had said                                                               
it would provide  on all these alternatives - such  as impacts on                                                               
the number  of jobs  and total incomes  by the  sector, industry,                                                               
region, and  distributional impacts -  had led him to  think that                                                               
the  report was  going to  address  his concerns  as a  committee                                                               
member, rather  than being  at a  high level.   His  concerns are                                                               
about what the  economic impacts will be of  the changes proposed                                                               
in  HB 247  on the  state's competitiveness,  productivity, jobs,                                                               
economy, and people's lives.   He  asked who will do this for the                                                               
administration since it is not ISER.                                                                                            
                                                                                                                                
COMMISSIONER HOFFBECK  replied that at  some level ISER  is going                                                               
to do that  but it won't be  drilled down to the  point of saying                                                               
that if a  specific credit is reduced or eliminated  what kind of                                                               
competitive imbalance that  may create for a  company and whether                                                               
the company  will invest and  what that has in  long-term impacts                                                               
on production  in the  future.   It will  be more  an issue  of a                                                               
specific  tax may  affect  a different  region  differently.   In                                                               
general, it will be more at the  level of how $100 million in new                                                               
taxes would affect the economy.                                                                                                 
                                                                                                                                
1:08:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER remarked  that this seems to  be relying on                                                               
the ISER  study that Commissioner  Hoffbeck said wasn't  going to                                                               
do this.   He asked whether ISER will be  examining the aggregate                                                               
effects and giving an impact analysis of the effects of HB 247.                                                                 
                                                                                                                                
COMMISSIONER HOFFBECK responded he believes  that it will only be                                                               
to  the extent  of a  general statement  on taxes  and that  $100                                                               
million in taxes would have this  kind of effect generally on the                                                               
economy.  It will not drill down  into the details of the bill on                                                               
a specific credit and what the impact  would be.  It will be more                                                               
of an overview of general tax policy.                                                                                           
                                                                                                                                
REPRESENTATIVE  HAWKER  inquired  whether  Commissioner  Hoffbeck                                                               
thinks   that  that   is  an   adequate  economic   analysis  for                                                               
legislators to be able to make a valid judgement on HB 247.                                                                     
                                                                                                                                
COMMISSIONER  HOFFBECK  answered  he  doesn't  believe  the  ISER                                                               
report will  be sufficient for  legislators to make  the decision                                                               
based on  that particular report.   He said  [the administration]                                                               
did  not make  the decisions  in a  vacuum -  there were  over 30                                                               
meetings with  the various industry  players and those  that were                                                               
loaning against the  credits.  He pointed out that  [DOR] has the                                                               
raw data  that underlies  the credits on  where the  credits have                                                               
been spent and what the  results of those expenditures have been.                                                               
Good data was  had in putting the bill  together.  Unfortunately,                                                               
however,  most of  the  data is  in a  format  that [DOR]  cannot                                                               
readily share  with the committee,  but some of  that information                                                               
will come out when industry representatives testify.                                                                            
                                                                                                                                
1:10:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  related that he had  not been anticipating                                                               
that  the ISER  study would  be  able to  drill into  competitive                                                               
advantages and disadvantages by individual  areas of the state or                                                               
individual  oil  companies  and how  they  proceeded  with  their                                                               
business.   A general orientation  cannot be expected  to provide                                                               
the  specific impacts  on those  elements because  [ISER] doesn't                                                               
have the balance  sheet or investment detail  that the individual                                                               
oil  companies  have  and  he  expected  to  get  that  from  the                                                               
individual companies.   He expressed his hope  that the companies                                                               
will  be specific  to  each  one of  these  credits because  each                                                               
credit impacts different companies in quite different ways.                                                                     
                                                                                                                                
REPRESENTATIVE JOSEPHSON  agreed with Representative Seaton.   He                                                               
said he attended  as many of Senate Working Group  meetings as he                                                               
could last  fall and that  industry attended all of  the meetings                                                               
it was  invited to, which  may have been all  of them.   He noted                                                               
[the  legislature]  just  renewed [a  consulting  contract]  with                                                               
enalytica.  He offered his  understanding that opportunities have                                                               
been scheduled for industry to tell the committee its view.                                                                     
                                                                                                                                
1:12:25 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  TALERICO asked  whether,  other than  the ISER  report,                                                               
anything  more  will  be  forthcoming  that  is  a  modeling-type                                                               
report.    He  presumed  that industry  could  also  provide  the                                                               
committee with more of a  structured-type model of how this would                                                               
all function.                                                                                                                   
                                                                                                                                
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
replied that  later in  the presentation he  will talk  about the                                                               
economic  impacts as  well as  how  the various  sectors will  be                                                               
impacted.  However,  Co-Chair Talerico's question is  a lot more,                                                               
and is sort of subjective as  to how specific changes on specific                                                               
sectors  are  possibly  going   to  influence  industry  decision                                                               
making.   That is  beyond what [the  administration] was  able to                                                               
do,  beyond  what  was  learned  directly  from  talking  to  the                                                               
participants who  will hopefully be coming  before the committee.                                                               
He said he is sure that  the consultants hired by the Legislative                                                               
Budget  and  Audit Committee  will  be  offering their  thoughts.                                                               
[The administration]  did not go  to outside  consulting services                                                               
specifically  to  parse into  the  individual  provisions of  the                                                               
bill.                                                                                                                           
                                                                                                                                
1:13:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER remarked:                                                                                                 
                                                                                                                                
     It's your bill,  you're asking us to  pass judgement on                                                                    
     a major change in state's  tax policy.  This isn't just                                                                    
     a  little  tweak  of  tax  credits,  this  is  a  major                                                                    
     economic  shift in  the  way we  approach  oil and  gas                                                                    
     taxation in this state.   And you're simply offering it                                                                    
     to  us  without  any  advocacy,  any  explanation,  any                                                                    
     economic  ... impact  analysis of  the consequences  of                                                                    
     the  legislation that  you are  proposing.   And you're                                                                    
     saying, "Ok, you guys figure it  out on your own."  And                                                                    
     if that's the  case, that's great because  then I don't                                                                    
     think you get the right to rebut what we do.                                                                               
                                                                                                                                
COMMISSIONER HOFFBECK responded that he can't totally disagree                                                                  
with the aforementioned.  He walked the committee through the                                                                   
process of how [the administration] got to where it is:                                                                         
                                                                                                                                
     Last  year  you   saw  the  first  cut   of  the  first                                                                    
     indication  of the  impacts that  the oil  and gas  tax                                                                    
     credits had ... on the  budget issues when the governor                                                                    
     vetoed  the  $200 million  in  the  credits last  year,                                                                    
     essentially  to start  the discussion  on  what it  was                                                                    
     that  we  could  afford  going   forward  in  a  credit                                                                    
     program. ...  That created the series  of meetings that                                                                    
     we  had over  the summer,  including the  meetings that                                                                    
     Senator Giessel sponsored, to try  and just really give                                                                    
     the  full  understanding of  the  credits  and who  was                                                                    
     using  them  and  how  they were  being  used.  ...  It                                                                    
     started  honing in  on just  how big  of a  pie did  we                                                                    
     have?   How much revenue do  we have?  And  how much of                                                                    
     the credits  would fit within  that revenue pie?   That                                                                    
     became the  balance of what credits  could we maintain,                                                                    
     which   ones  we   simply   couldn't,   how  we   could                                                                    
     accommodate as many of the  concerns ... as we possibly                                                                    
     could on the  people that we had talked to  and came up                                                                    
     with a balance  of ... this is what we  feel is what we                                                                    
     have available to offer for  credits. ... We weren't in                                                                    
     the  discussions saying  whether credits  were good  or                                                                    
     bad or  whether credits  were [a  good or  bad policy].                                                                    
     What we  were trying to  do was  retain as many  of the                                                                    
     credits  as   we  possibly  could  under   the  current                                                                    
     economic situation the  state was in.  So  that was one                                                                    
     of the driving factor of the discussion.                                                                                   
                                                                                                                                
1:16:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  asked why  [the administration]  chose not                                                               
to hire the services of outside consultants.                                                                                    
                                                                                                                                
MR.  ALPER responded  there are  a number  of reasons,  the first                                                               
being that he  is very proud of DOR's Tax  Division staff and the                                                               
people  at the  Department  of Natural  Resources  (DNR).   These                                                               
employees  have had  "many years  of experience  working in  this                                                               
field  and we  relied on  their  counsel and  their thoughts  and                                                               
their  analysis."    A  lot  of what  is  being  done  is  number                                                               
crunching  that  doesn't  necessarily  require  industry-specific                                                               
experience.  He continued:                                                                                                      
                                                                                                                                
     We  are  constrained.   We  don't  have the  money  for                                                                    
     outside  consulting services  that  we  might have  had                                                                    
     several years ago  as part of the  larger fiscal issues                                                                    
     of the State of Alaska.   If you go back, Mr. Chairman,                                                                    
     to previous  major oil and gas  legislation that's been                                                                    
     before  this body,  although the  administration's come                                                                    
     in with  a lot  of outside  services, really  it's been                                                                    
     quantitative  services:   this is  how much  money this                                                                    
     change  would be  if you  ... did  that different,  the                                                                    
     dollar amount would change to  that.  No one was really                                                                    
     speculating  on  what  changes in  behavior  might  be.                                                                    
     They were modeling what the  impact would be if certain                                                                    
     behaviors  A, B,  or C  were to  occur, not  saying the                                                                    
     likelihood of any of them to  occur.  We could pin down                                                                    
     with  some certainty  what the  dollar  value of  these                                                                    
     changes  is, but  what  we don't  believe  we have  the                                                                    
     ability to  predict, which  no one  has the  ability to                                                                    
     predict, is how any specific  player in the industry is                                                                    
     going to react to these changes.                                                                                           
                                                                                                                                
1:18:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON inquired whether  data and presentations by                                                               
DOR and Econ  One for Senate Bill 21 were  utilized [for HB 247].                                                               
He further inquired as to how  involved was DNR in developing the                                                               
proposed policy and changes in HB 247.                                                                                          
                                                                                                                                
MR.  ALPER answered  that the  modeling from  Senate Bill  21 was                                                               
important in  that it created  the new model  as to what  the new                                                               
tax structure  is.  The changes  proposed in HB 247  are built on                                                               
the  base of  Senate  Bill  21.   The  tax  rate, the  per-barrel                                                               
credit, the  new-oil-specific benefits are unchanged  in the bill                                                               
before the  committee.  None of  the modeling for Senate  Bill 21                                                               
predicted an additional amount of  new activity, that wasn't part                                                               
of  the conversation.    Likewise, [DOR]  is  not predicting  new                                                               
activity  or less  activity through  this process.   He  said DOR                                                               
conversed with  DNR throughout  as there are  pieces of  the bill                                                               
and pieces  of existing  law that  tie in  more closely  to DNR's                                                               
operations than  others.  For  example, DNR is very  connected to                                                               
the Exploration Tax  Credit system which has something  of a pre-                                                               
approval process relating to data  submission requirements.  Over                                                               
the  fall,  DNR presented  multiple  times  to Senator  Giessel's                                                               
working group  about how much  value DNR perceives from  the data                                                               
that  it gets.   In  response to  that, even  as the  Exploration                                                               
Credits  begin to  sunset  this  summer, [DOR]  tried  to find  a                                                               
mechanism in this legislation to  continue to ensure that DNR can                                                               
have that data for the function  of its own planning purposes and                                                               
marketing of Alaska's  resources to the world.   He said Director                                                               
Feige [of DNR's  Division of Oil & Gas] is  a close colleague and                                                               
he and  Director Feige  spoke many  times about  this bill  as it                                                               
worked its way through the development process.                                                                                 
                                                                                                                                
1:21:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  understood that  DOR's presentation  is on                                                               
the bill's  impact on  the state budget,  the resources  that the                                                               
state does or doesn't have, and how  to pay for those.  It is not                                                               
to  supersede and  say  what the  impact is  on  the industry  or                                                               
individual players, but the impact on the budget.                                                                               
                                                                                                                                
COMMISSIONER HOFFBECK  replied that the motivating  factor behind                                                               
having to make  a change was the  impact on the budget.   But, he                                                               
pointed out, a  tremendous amount of work was  done directly with                                                               
the participants  who use  these credits  and loan  against these                                                               
credits  to  find  out  what   the  impact  on  those  particular                                                               
individuals would be before the  specific selection of components                                                               
within the bill  was put together.  For [DOR's]  purposes that is                                                               
more robust than  what a consultant would  tell [the department].                                                               
There is not  a way to present that information  to the committee                                                               
in this  forum because  most of  that information  is proprietary                                                               
information.                                                                                                                    
                                                                                                                                
1:22:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  proffered  that   these  credits  are  an                                                               
investment  of state  dollars and  he  hopes that  [DOR] has  Net                                                               
Present   Value  calculations   on  what   the  value   of  those                                                               
investments would  be over  the life  of a field.   The  state is                                                               
investing hundreds  of millions of  dollars and he would  like to                                                               
know whether  that is a  good investment  for the state  based on                                                               
the Net Present Value of the impact that is going to occur.                                                                     
                                                                                                                                
COMMISSIONER HOFFBECK  inquired whether Representative  Seaton is                                                               
meaning the Net  Present Value of what has  already been invested                                                               
or what will be invested in the future.                                                                                         
                                                                                                                                
REPRESENTATIVE SEATON clarified that if  [the state] is making an                                                               
investment of $100  million through this kind of a  credit, he is                                                               
meaning to get a feel of what  is that Net Present Value going to                                                               
yield back to the state over time.                                                                                              
                                                                                                                                
COMMISSIONER  HOFFBECK responded  there are  two ways  to address                                                               
that.  One, DOR  can look at the history of  the credits that the                                                               
state  has already  paid and  what the  Net Present  Value impact                                                               
effect of  those credits are.   He said  DOR has hesitated  to do                                                               
that  because certain  pieces are  still  unknown.   Some of  the                                                               
credit expenditures are  on fields that are  still in development                                                               
so it is hard to say what  the Net Present Value of those credits                                                               
are  until such  time as  some of  these fields  come online  and                                                               
actually start  to produce.   As far as  the go forward,  he said                                                               
DOR can certainly  within its data see where it  would be best to                                                               
spend that $100  million because the history can be  seen of what                                                               
has  occurred up  to  this point  in time  and  which fields  are                                                               
progressing  and which  ones aren't.   Unfortunately,  that again                                                               
gets into that granularity of the  data that is difficult for DOR                                                               
to bring forward to the committee.                                                                                              
                                                                                                                                
MR. ALPER added  that the Tax Division has over  the last several                                                               
months  developed  a  lifecycle  field  modeling  structure  that                                                               
didn't formerly  exist.   He said  it was in  many ways  built in                                                               
honor of  Mr. Janak  Mayer of  enalytica, the  Legislative Budget                                                               
and Audit  Committee's consultant, who developed  a similar model                                                               
in  looking at  field  costs and  present  values during  various                                                               
pieces of oil  legislation.  So, for a typical  50 million barrel                                                               
field,  DNR can  now  say  what the  upfront  cost  is, what  the                                                               
upfront credits are, and what the  state can expect to get in the                                                               
backend  from production  taxes, royalties,  and the  like, given                                                               
various cost  and price options.   And then from that  there is a                                                               
cash flow to the  state - a Net Present Value.   The division has                                                               
run  some  scenarios in  response  to  specific requests  and  is                                                               
prepared to share  that model and its results  with the committee                                                               
if asked.   Where it gets  hard is to talk  about specific actual                                                               
fields because that  gets into the internal decision  making of a                                                               
specific company.                                                                                                               
                                                                                                                                
1:25:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER charged  that  Mr. Alper  just threw  this                                                               
back at  enalytica.  He stated  enalytica is here to  provide the                                                               
legislature independent analysis of  what [the administration] is                                                               
doing, not to  make the case for [the  administration's] bill and                                                               
work for [the administration].                                                                                                  
                                                                                                                                
MR. ALPER apologized and stated:                                                                                                
                                                                                                                                
     We're not  expecting enalytica to  do our work  for us.                                                                    
     What I  just said was  we tried  to copy some  of their                                                                    
     methodology and  some of their modeling  which we found                                                                    
     to be  very insightful and  very robust.  And  there is                                                                    
     no  great  magic  to  it  as long  as  the  analyst  in                                                                    
     question  has the  mathematical  skills to  be able  to                                                                    
     build the  model.  And  we built  a model that  in many                                                                    
     ways replicated  what they had previously  done for the                                                                    
     legislature.                                                                                                               
                                                                                                                                
1:26:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  asked whether  he is correct  in recalling                                                               
that in earlier testimony it  was said that the motivating factor                                                               
behind the construction of HB 247 was the impact on the budget.                                                                 
                                                                                                                                
COMMISSIONER HOFFBECK answered:                                                                                                 
                                                                                                                                
     The  motivation  to  go  down this  path  and  look  at                                                                    
     credits was the  budget.  The motivation was  not to go                                                                    
     in and  redefine oil and  gas taxes and  credits within                                                                    
     the State  of Alaska.   It was just a  recognition this                                                                    
     was  a  very  large  expenditure  that  the  state  was                                                                    
     carrying, that  we needed  to see  whether there  was a                                                                    
     way that we could reduce  some of that liability during                                                                    
     tight budget times.                                                                                                        
                                                                                                                                
1:27:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER returned  to earlier  testimony that  last                                                               
year's $200  million veto  was motivated by  the belief  that the                                                               
state  just didn't  have  that money  to spend;  it  was a  money                                                               
motivated and budget  focused veto alone.  He  recounted that the                                                               
veto  had  profound  consequences  on  the  ability  of  Alaska's                                                               
working  industries to  secure  financing, to  the  fact that  an                                                               
entire consortium  of international  bankers withdrew  money that                                                               
was on the  table for Alaska's industry and  literally threw them                                                               
into  the tizzy  that the  administration  had to  deal with  all                                                               
summer.   He  asked  whether the  administration had  anticipated                                                               
that kind of consequence when making that budget decision.                                                                      
                                                                                                                                
COMMISSIONER  HOFFBECK  replied  the administration  expected  it                                                               
would have some collateral effects.   For some of the more stable                                                               
financing situations where the project  was a long ways along and                                                               
driving  towards the  finish  line,  the administration  probably                                                               
didn't recognize that  those funds would be pulled  back as well.                                                               
It took  several conversations with  the industry to  explain the                                                               
process  that  the credits  were  still  good.   Then  they  felt                                                               
comfortable  and   essentially  started  to  loan   again.    "We                                                               
recognized it  would have some  impact," he  said.  "There  is no                                                               
doubt about that."                                                                                                              
                                                                                                                                
1:29:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER returned  to an  earlier statement  by Mr.                                                               
Alper that  the administration  is not  predicting new  or lesser                                                               
activity  through  the  enactment  of this  bill.    However,  he                                                               
argued, it  seems there is  evidence that  a $200 million  cut to                                                               
the  tax program  had profound  ripples.   As just  acknowledged,                                                               
there  were   consequences  on  industry,  some   of  which  were                                                               
unanticipated.   He asked whether  [the administration]  is truly                                                               
now not predicting  new or lesser activity or that  there will be                                                               
consequences of  passing HB 247.   He further asked  whether [the                                                               
administration] cares about the  consequences, wants to know what                                                               
they  are,   and  what  [the   administration]  thinks   will  be                                                               
precipitated through this bill on the economy.                                                                                  
                                                                                                                                
MR. ALPER  responded that the  governor's veto was not  the first                                                               
step in  a process,  the conversation began  earlier in  the 2015                                                               
session.  He explained:                                                                                                         
                                                                                                                                
     The governor  published an op-ed that  talked about our                                                                    
     credit spend  being out of  alignment with  our greatly                                                                    
     reduced production  tax revenue, that suddenly  we were                                                                    
     spending more.   There's a  lot less elasticity  in the                                                                    
     credit  spend than  there is  in the  revenue when  the                                                                    
     price  of oil  goes down.   Therefore,  instead of  the                                                                    
     credits being a reinvestment of  some portion of a very                                                                    
     large  revenue stream,  had  actually  grown to  become                                                                    
     larger than  the revenue stream.   So the idea  was put                                                                    
     on the table we needed  to do something different.  The                                                                    
     veto was not  the ideal method of  solving the problem,                                                                    
     simply,  but it  was  the only  tool  available to  the                                                                    
     governor  at that  moment.   As  I said  in my  earlier                                                                    
     presentation, this is a two-step  process.  The credits                                                                    
     are  earned  because  of industry  activity.    They're                                                                    
     claimed,   they  get   audited,   they   get  given   a                                                                    
     certificate;  a certificate  is a  paper asset.   Those                                                                    
     certificates are  then owned  by companies,  which they                                                                    
     could  either use  against tax  liability if  they have                                                                    
     tax liability; they could sell  them to another company                                                                    
     who   might  have   tax  liability;   or,  with   funds                                                                    
     available,  sell them  back to  the state  - have  them                                                                    
     repurchased  through the  tax  credit fund.   What  the                                                                    
     governor  did was  veto  and cap  the  amount of  money                                                                    
     available to the tax credit  fund and didn't in any way                                                                    
     change the credits  available on the street.   In doing                                                                    
     so, there's  a certain uncertainty because  the credits                                                                    
     that belong to people are  suddenly - who are expecting                                                                    
     to  get paid  back -  aren't  going to  get paid  back.                                                                    
     What we're  attempting to do  with this  legislation is                                                                    
     actually  create  a  little bit  more  certainty.    If                                                                    
     there's fewer  credits being earned but  we're going to                                                                    
     ensure that  the amount  being earned  is in  line with                                                                    
     the  funds available,  then at  least when  people make                                                                    
     their  decisions  they  can have  some  certainty  that                                                                    
     they'll  be able  to get  paid back  on their  credits.                                                                    
     What  makes  me nervous  is  the  possibility of  there                                                                    
     being  hundreds  of  millions   of  dollars  of  credit                                                                    
     certificates  out  there   without  there  being  funds                                                                    
     available to buy  them back.  I think  that causes more                                                                    
     of  a ripple  effect  and uncertainty  in the  industry                                                                    
     than simply trying to pare back on the program itself.                                                                     
                                                                                                                                
1:32:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER stated:                                                                                                   
                                                                                                                                
     That  was  the governor's  own  budget  that had  those                                                                    
     credits in  it.   ... Those  were not  legislative ads,                                                                    
     those were the governor's  own budget that he committed                                                                    
     to  the  industry,  to the  banking  industry,  to  the                                                                    
     expectations of  what the word  of this  government was                                                                    
     going to be, and then he  reneged on it.  But, frankly,                                                                    
     this bill we've  got in front of us,  the governor also                                                                    
     campaigned  very strongly  on  not  touching the  taxes                                                                    
     under Senate  Bill 21,  and we're here  doing that.   I                                                                    
     can understand  the need  to reassess.   But  again, if                                                                    
     you're going to reassess ...  I would like to know what                                                                    
     you  think the  consequences  are going  to  be on  the                                                                    
     economy   of   the   state   of   Alaska,   jobs,   our                                                                    
     competitiveness in  the world, an analysis  of what you                                                                    
     think is  a fair  share, how  much government  take are                                                                    
     you expecting, how  much do you think is  a fair share.                                                                    
     ... What I keep hearing is  that we're not going to get                                                                    
     that, we're supposed to figure it out on our own.                                                                          
                                                                                                                                
COMMISSIONER HOFFBECK answered:                                                                                                 
                                                                                                                                
     Again, I think that some  of that information will come                                                                    
     out  when the  producers testify.   The  decisions that                                                                    
     were made  on this bill were  done not in a  vacuum, in                                                                    
     discussions  with the  people that  use these  credits.                                                                    
     ... We talked very openly  ... they shared with us what                                                                    
     the  impact of  these various  credit changes  might be                                                                    
     and that largely  framed some of the  decisions that we                                                                    
     made on ...  what's still in the bill.   Hopefully that                                                                    
     information  comes  out  in that  testimony.    And  as                                                                    
     Director Alper  said, we  can provide  some information                                                                    
     based on  past practice on  ... what the impact  of the                                                                    
     credits have been,  but we're going to  present it with                                                                    
     the caveat  that I think  the jury's still out  on some                                                                    
     of that.   And so  if we come in  and say that  the Net                                                                    
     Present Value  on a  barrel of  oil is  X and  then ...                                                                    
     somebody brings in a much  larger field all of a sudden                                                                    
     that could change  dramatically.  We just  want to make                                                                    
     sure ... that  we don't draw too hard of  a line in the                                                                    
     sand with that information.   That's one of the reasons                                                                    
     we haven't been actively  floating out that information                                                                    
     ... it's early.                                                                                                            
                                                                                                                                
1:34:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  recounted  that  in  2013  the  legislature                                                               
passed a  bill repealing tax  credits for other  industries, such                                                               
as the  film industry  tax credit,  which began  the conversation                                                               
about whether  the State of  Alaska could afford all  the credits                                                               
and  industry incentives  that  had  been put  in  statute.   She                                                               
surmised that  this wouldn't be  the only industry  credit that's                                                               
under consideration right now.                                                                                                  
                                                                                                                                
COMMISSIONER HOFFBECK  replied "exactly correct," and  added that                                                               
last year  there was a  fairly substantial bill that  removed the                                                               
film tax  credit from the statutes  and with many of  the similar                                                               
conversations.                                                                                                                  
                                                                                                                                
1:35:21 PM                                                                                                                    
                                                                                                                                
CO-CHAIR   TALERICO  requested   Mr.  Alper   to  continue   [the                                                               
administration's]  PowerPoint  presentation,  "Oil  and  Gas  Tax                                                               
Credit  Reform, HB  247," which  he had  begun presenting  at the                                                               
2/3/16 committee meeting.                                                                                                       
                                                                                                                                
MR.  ALPER  recapped slides  1-22,  noting  that [on  2/3/16]  he                                                               
discussed the first two of  the presentation's four sections:  1)                                                               
the  history of  how  the  tax credit  system  developed and  the                                                               
system's aggregate  cost, and  2) how  the different  features of                                                               
the bill  would work, such as  the changes that would  be made to                                                               
exploration, to  the Cook Inlet  system, and to the  minimum tax.                                                               
He explained that today he will  discuss the third section of the                                                               
presentation  which  is  a  sector  specific  analysis.    Before                                                               
addressing slide  23 he noted  there is  not a lot  of government                                                               
take  in  the bill,  it's  primarily  a reduction  in  government                                                               
outlay.   The only  place that  government take  is substantially                                                               
impacted is in the sections regarding the minimum tax.                                                                          
                                                                                                                                
1:36:59 PM                                                                                                                    
                                                                                                                                
MR. ALPER turned to slide  23, "Bill Impact:  Example Scenarios,"                                                               
to outline  how the  changes proposed  in HB  247 would  impact a                                                               
North Slope major producer.  He  said very little would happen to                                                               
a North  Slope producer.   If oil prices  are high, at  the level                                                               
they've  been in  recent history,  there is  no change.   The  35                                                               
percent  base tax  rate of  Senate Bill  21 is  in place  and the                                                               
sliding  scale  per-barrel  credit  is   in  place  if  that  oil                                                               
production  is  eligible for  the  Gross  Value Reduction  (GVR);                                                               
there are  no changes  made to those  fundamental aspects  of the                                                               
system.   If the  prices drop below  approximately $85  a barrel,                                                               
that's  the  point   at  which  the  minimum   tax  is  typically                                                               
triggered;  it varies  from producer  to producer  based on  that                                                               
producer's  individual economics.   But  in that  world they  are                                                               
currently  paying a  4 percent  minimum tax  under existing  law.                                                               
The bill  would increase that minimum  tax to 5 percent.   That 1                                                               
percent increase in the minimum  tax reflects roughly $50 million                                                               
in revenue  in the fiscal note.   If there is  an extended period                                                               
of very low prices, as is the  case right now, a second aspect of                                                               
the  change to  the North  Slope  major producer  would kick  in.                                                               
[Currently,] once  a major producer  goes negative for  one year,                                                               
the producer  can use the  percentage of its operating  loss, the                                                               
Operating Loss Credit,  to offset taxes and go  below the minimum                                                               
tax and  pay at  a zero  level until the  producer works  its way                                                               
through its Operating  Loss Credit.  House Bill  247 would harden                                                               
the floor - it would make it  so that these credits can't be used                                                               
to reduce  the payments below the  minimum tax.  The  minimum tax                                                               
would need  to be paid  at the 4  percent, or, if  that provision                                                               
survives, at 5  percent.  The credits remain  alive, the producer                                                               
in question  would carry  those credits  forward to  a subsequent                                                               
calendar year  when hopefully prices have  recovered sufficiently                                                               
that the  producer has  tax liability and  can use  its operating                                                               
loss to offset its tax liability in a future year.                                                                              
                                                                                                                                
1:38:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER recalled  Mr. Alper's  prefacing statement                                                               
as being  that HB 247  would have very  little impact on  a North                                                               
Slope major producer.                                                                                                           
                                                                                                                                
MR. ALPER  offered his belief  that the sentence in  question was                                                               
completed with  "at the prices we've  seen in recent years."   At                                                               
higher  prices there's  no  impact (indisc.--sound  interruption)                                                               
producers and that he then  highlighted what the specific impacts                                                               
would  be as  prices are  lower, both  mildly lower  or as  it is                                                               
right now in an extended period of very low prices.                                                                             
                                                                                                                                
REPRESENTATIVE HAWKER  noted that the committee  doesn't have the                                                               
impacts from  [the administration].   He asked whether  Mr. Alper                                                               
would change his  opinion on the bill if it  is documented by the                                                               
producers  that there  would be  significant impacts  on a  North                                                               
Slope major producer.                                                                                                           
                                                                                                                                
MR.  ALPER responded  that there  is another  change in  the bill                                                               
(indisc.--sound interruption)  that would impact  large companies                                                               
coming to do work in  Alaska that aren't current major producers,                                                               
similarly sized companies who don't  currently exist here.  Those                                                               
companies would  be prevented  from being able  to cash  in their                                                               
credits;  they would  have  to  hold them  and  use them  against                                                               
future  tax liability.   Right  now,  the existing  law for  many                                                               
years  has been  that the  large  producers cannot  get cash  for                                                               
their credits and must carry them  forward.  The hardening of the                                                               
floor is tied  intimately with the idea that they  can't get cash                                                               
for their credits, that they have  to carry them forward, and the                                                               
bill is  saying that now the  major producers are being  asked to                                                               
carry them forward another year and  not use them to offset their                                                               
minimum tax payments.  The  administration believes strongly that                                                               
people should pay the minimum tax;  if there is a minimum tax the                                                               
minimum tax should  actually be the number that's paid.   What is                                                               
being attempted  to do here  is prevent situations  where certain                                                               
credits could  be used to  reduce payment below the  minimum tax.                                                               
"If a multi-billion  dollar company sits before us  and says that                                                               
that's going to fundamentally  consequentially harm their ongoing                                                               
operations, I look forward to  hearing that testimony," Mr. Alper                                                               
said.  "But we're talking about  a relatively small number in the                                                               
broader scope  of this  bill, we're talking  about the  4 percent                                                               
minimum tax."                                                                                                                   
                                                                                                                                
REPRESENTATIVE HAWKER  remarked that the  aforementioned response                                                               
finally got to the answer he was looking for.                                                                                   
                                                                                                                                
1:41:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON inquired  whether the  third bullet  on                                                               
slide 23 is  the provision where under current law  a North Slope                                                               
producer  could essentially  pay no  taxes and,  through the  Net                                                               
Operating   Loss   Credit,  the   State   of   Alaska  would   be                                                               
inadvertently  paying  for  the  production  without  seeing  any                                                               
revenue except perhaps from royalty.                                                                                            
                                                                                                                                
MR.  ALPER answered  that royalties,  corporate  income tax,  and                                                               
property tax are  not impacted by this bill and  are not impacted                                                               
by  these  credits in  any  way.    Modeling  has been  done  for                                                               
scenarios  in which  oil  prices  stay at  a  fixed  price for  a                                                               
certain number  of years.   What starts  happening in  the second                                                               
and third year  of lower prices is that  there's enough Operating                                                               
Loss  Credits from  the major  producers  that they  are able  to                                                               
completely offset their minimum tax.   He posed a scenario for an                                                               
oil price of $50, the price  predicted in fiscal year 2016 by the                                                               
Revenue   Sources  Book,   which   is  about   $40  gross   after                                                             
transportation  cost.    About 160  million  taxable  barrels  is                                                               
produced  from the  North Slope  every year.   That's  about $6.5                                                               
billion  worth of  value, that's  what the  oil is  worth at  the                                                               
wellhead.  A  4 percent minimum tax  is $250 million.   In a pure                                                               
minimum tax that's  the production tax revenue  DOR would expect.                                                               
Currently  this  year  DOR  is   expecting  $150  million.    The                                                               
difference  between those  two is:   about  $50 million  is being                                                               
offset  by the  Small Producer  Credit being  used to  reduce tax                                                               
liability  below the  minimum tax  and another  $50 million  from                                                               
Operating  Loss Credits  from  major producers.    If low  prices                                                               
continue for a  couple of years, that number will  reduce to zero                                                               
and DOR would expect to get nothing from the production tax.                                                                    
                                                                                                                                
COMMISSIONER HOFFBECK  noted that  there is another  provision in                                                               
the  bill that  deals with  new oil,  which may  be the  one that                                                               
Representative  Josephson  is  more  concerned  about  and  could                                                               
actually drive  the credits to  something greater than  the value                                                               
of the loss.                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON surmised that is  where it gets into the                                                               
stacking phenomena.                                                                                                             
                                                                                                                                
COMMISSIONER HOFFBECK offered a  correction, stating that that is                                                               
another circumstance.                                                                                                           
                                                                                                                                
MR.  ALPER added  that the  stacking provisions  are not  so much                                                               
relevant  on the  North Slope  anymore because  of the  so-called                                                               
"spending-based credit" - the Capital  Expenditure Credit - which                                                               
was  repealed through  Senate  Bill 21.    Also, the  Exploration                                                               
Credit will sunset this summer.   So, it is unusual that the same                                                               
project would be getting two  credits for the same expenditure in                                                               
the North Slope today.                                                                                                          
                                                                                                                                
1:44:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  inquired  about  how  and  when  the  Net                                                               
Operating Loss  Credit is  calculated.  As  an example,  he noted                                                               
that  one  oil company  doing  business  in Alaska  does  publish                                                               
public reports  and this company's consolidated  income statement                                                               
shows a  loss of $67  million, but  the adjusted earnings  show a                                                               
positive earnings of $482 million.                                                                                              
                                                                                                                                
MR. ALPER  replied that  the Alaska production  tax code  is very                                                               
much a cash flow based tax.   The entire sector - the North Slope                                                               
as  a whole,  Cook  Inlet as  a  whole -  is  commingled for  tax                                                               
purposes:   how much did  the company earn  and how much  did the                                                               
company  spend, and  that  includes not  just  operations of  the                                                               
company's  current  field,  but,  for example,  investment  in  a                                                               
future  field  on   the  North  Slope  counts   towards  the  tax                                                               
calculation.    Not  considered,  however,  is  depreciation  for                                                               
example, which is  a factor of the federal tax  code that impacts                                                               
corporate  income taxes  but doesn't  impact Alaska's  production                                                               
tax.  He offered his belief  that it doesn't include other taxes,                                                               
noting that  current code  (AS 43.55.165(e)) has  a long  list of                                                               
all  the ineligible  deductions, such  as lobbying  expenditures,                                                               
spill  cleanup  from  lack of  deferred  maintenance,  and  other                                                               
things added as part of the  production profits tax (PPT) and the                                                               
2007 bill,  Alaska's Clear  and Equitable Share  (ACES).   It's a                                                               
calculation  of allowable  expenses from  actual revenue,  that's                                                               
the loss.   There aren't these  adjustments that are seen  in the                                                               
federal  tax code  with the  biggest and  most obvious  one being                                                               
depreciation.  The Operating Loss  Credit is a flat multiplier, a                                                               
percentage of that number.  In  calendar year 2015 that number on                                                               
the North  Slope was  45 percent.   So, a  company that  shows it                                                               
spent $100 million more than it  earned would have a $100 million                                                               
operating loss.   The company would earn a  $45 million Operating                                                               
Loss  Credit  that,  in  the aforementioned  scenario  of  a  few                                                               
minutes ago, could be used to  reduce its taxes below the minimum                                                               
tax to the extent of that $45 million.                                                                                          
                                                                                                                                
1:46:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked whether  any credits that  a company                                                               
earns  from the  State of  Alaska, other  than the  Net Operating                                                               
Loss  Credit, count  into that  cash  flow or  are accounted  for                                                               
separately.                                                                                                                     
                                                                                                                                
MR. ALPER deferred to Mr. Lenny Dees for a definitive answer.                                                                   
                                                                                                                                
LENNIE DEES, Audit Master, Production  Audit Group, Tax Division,                                                               
Department  of Revenue  (DOR), responded  that other  credits are                                                               
not  counted  in that  particular  loss  calculation.   The  loss                                                               
calculation is  done by what  are called segments;  for instance,                                                               
the North  Slope oil and  gas production is a  particular segment                                                               
for a  company.   That loss calculation  only takes  into account                                                               
the revenues  from the oil  and gas  that's produced and  sold by                                                               
that particular company  for that segment, less  the annual lease                                                               
expenditures  for  that particular  segment.    The annual  lease                                                               
expenditures for that segment are  comprised of the operating and                                                               
capital   expenditures.     To  the   extent  that   those  lease                                                               
expenditures exceed  the revenues for that  particular segment, a                                                               
company would have a net operating loss for that segment.                                                                       
                                                                                                                                
1:48:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON inquired  whether  the  35 percent  credit                                                               
against  lease expenditures  counts into  the revenue  picture or                                                               
lowers expenses before the loss is calculated.                                                                                  
                                                                                                                                
MR.  DEES  answered  that  the  35 percent  is  the  value  of  a                                                               
deduction for a company regardless of  whether there is a loss or                                                               
profit for that  particular segment.  For instance,  if a company                                                               
has a positive  production tax value, which is  when the revenues                                                               
exceed  the  lease  expenditures,   the  impact  of  those  lease                                                               
expenditures  on the  taxes  is calculated  such  that for  every                                                               
dollar of lease expenditure that the  company spends it gets a 35                                                               
percent deduction against  the actual taxes that will  be due for                                                               
that  particular segment.    But,  if a  company  doesn't have  a                                                               
positive production tax value, i.e.  it has a net operating loss,                                                               
the  35 percent  is  then  applied to  the  excess  of the  lease                                                               
expenditures over the  revenues to determine the  credit for that                                                               
particular segment.                                                                                                             
                                                                                                                                
COMMISSIONER HOFFBECK  offered to  put together some  slides that                                                               
show the  calculations because it is  easier to see them  then it                                                               
is to explain them.                                                                                                             
                                                                                                                                
REPRESENTATIVE SEATON said that would be helpful.                                                                               
                                                                                                                                
MR. ALPER pointed out that the  back pages of the December [2015]                                                               
Revenue Sources Book  have a stylized, simplified  version of the                                                             
production  tax calculation  in  the aggregate  for fiscal  years                                                               
2015, 2016, and 2017.  From these  it can be seen how the barrels                                                               
are calculated,  and then  the per-barrel  spending, and  how the                                                               
different elements of the calculation work through.                                                                             
                                                                                                                                
1:50:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON commented  that Commissioner  Hoffbeck has                                                               
come up  with a great idea.   For example, the  Econ One analysis                                                               
was presented in  slides, graphs, and modeling that  were easy to                                                               
see.   Being able  to look  at pictures is  helpful and  he would                                                               
therefore  recommend that  Commissioner  Hoffbeck  and Mr.  Alper                                                               
show the committee  in graphs and slides what they  are trying to                                                               
explain.                                                                                                                        
                                                                                                                                
MR.  ALPER   agreed  to  provide   the  aforementioned   type  of                                                               
presentation when  the administration is next  invited before the                                                               
committee.                                                                                                                      
                                                                                                                                
1:51:53 PM                                                                                                                    
                                                                                                                                
MR.  ALPER  resumed his  presentation,  turning  to slide  24  to                                                               
address  the  bill's  impacts  on  North  Slope  new  or  smaller                                                               
producers.    He  explained  that  these  are  the  companies  in                                                               
production  and  operating fields  that  aren't  the three  major                                                               
producers.   These companies, for  the most part, came  to Alaska                                                               
in the  last 10  years or  so.   At higher  oil prices  where the                                                               
underlying tax system  of Senate Bill 21 remains  in place, these                                                               
companies  won't  have   any  change.    They   will  have  their                                                               
production, Gross  Value Reduction,  taxation, and $5  per barrel                                                               
credit; for the  most part those new fields are  eligible for the                                                               
Gross Value Reduction,  the new oil benefit from  Senate Bill 21.                                                               
He  continued,  noting  that  prices below  $85  barrel  will  be                                                               
material to these companies.   Under the structure of current law                                                               
the per-barrel  credit for  new oil can  reduce tax  liability to                                                               
zero,  as opposed  to legacy  oil where  the minimum  tax, the  4                                                               
percent floor, kicks  in and must be paid.   House Bill 247 would                                                               
add  the 4  percent  minimum tax  to so-called  new  oil, to  oil                                                               
eligible for the  Gross Value Reduction, and  therefore the newer                                                               
and smaller  producers would  be asked  to pay  a minimum  tax on                                                               
their production.   Another impact  on these companies,  he said,                                                               
is  one  of the  more  technical  provisions.   Currently,  if  a                                                               
company has an  actual operating loss, the  Operating Loss Credit                                                               
isn't  tied to  the loss,  it ties  to the  loss as  additionally                                                               
subtracted from  by the  Gross Value  Reduction, thus  creating a                                                               
larger loss, a  paper loss, which has led  to circumstances where                                                               
[the State  of Alaska]  has paid  Operating Loss  Credits greater                                                               
than 100 percent  of the amount of  the loss.  Under  HB 247 that                                                               
ability would  be lost  by those companies  - the  Operating Loss                                                               
Credit would be limited to the size of the actual loss.                                                                         
                                                                                                                                
1:53:58 PM                                                                                                                    
                                                                                                                                
MR. ALPER  moved to slide 25  to discuss the bill's  impacts on a                                                               
North Slope new  project developer, an entity that is  not yet in                                                               
production  and  has  a  project  or discovery  that  is  in  the                                                               
development phase.   He explained  that these companies  earn the                                                               
Net Operating  Loss Credits as  a normal part of  their business.                                                               
The annual cycle is that  every year [DOR] gets applications, the                                                               
companies  prove up  their expenditures,  and DOR  writes them  a                                                               
check.   Under HB 247  the 35  percent Net Operating  Loss Credit                                                               
would continue to be earned  without change.  However, what could                                                               
change is  the method by which  those credits are paid  back, and                                                               
there is a fork  in the road in that it depends  on the nature of                                                               
the company.   A large  multi-national company, which  is defined                                                               
in the bill  as having annual revenues in excess  of $10 billion,                                                               
would  no longer  be eligible  to get  cash for  its credits  and                                                               
would have  to hold onto  its certificates until the  future year                                                               
when it  is in production and  has a tax liability  and can fully                                                               
offset future  tax liability  against the  loss credits  that the                                                               
company has earned during the development stage.                                                                                
                                                                                                                                
REPRESENTATIVE HAWKER  asked whether  this provision  would apply                                                               
only to  multi-national companies  or to both  multi-national and                                                               
domestic corporations.                                                                                                          
                                                                                                                                
MR. ALPER replied that a  large American company with $10 billion                                                               
worth  of  annual  revenue  that doesn't  operate  in  any  other                                                               
country would fall  under this provision.   The specific language                                                               
in the  bill says global revenues  in the prior calendar  year in                                                               
excess of $10 billion.                                                                                                          
                                                                                                                                
1:55:47 PM                                                                                                                    
                                                                                                                                
MR. ALPER  returned to  slide 25 of  his presentation  to address                                                               
the  alternative fork  in  the road,  explaining  that a  smaller                                                               
company  that  doesn't  meet  that threshold  would  be  able  to                                                               
continue  to  get  cash  rebates   for  its  tax  credits.    The                                                               
limitation  that would  be imposed  by  HB 247  is to  put a  $25                                                               
million  per company  per  year cap  on the  amount  of State  of                                                               
Alaska cash  that it can  get.  Amounts  in excess of  that would                                                               
have  to be  carried  forward  to a  subsequent  year  and it  is                                                               
possible that it  could take multiple years to use  up the credit                                                               
depending on the size of the  project.  The number of $25 million                                                               
was  not pulled  out  of  thin air,  it  is  from historic  state                                                               
statute that was put  in place with the PPT bill  in 2006.  Prior                                                               
to  2006  there  was  no  ability for  the  State  of  Alaska  to                                                               
repurchase credits.  In 2006 the  ability to do so was added with                                                               
a specific cap  at $25 million per company  that was subsequently                                                               
eliminated with the passage of the ACES bill in 2007.                                                                           
                                                                                                                                
1:56:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  inquired whether there have  been small                                                               
companies  that  have  sought  more  than  $25  million  for  new                                                               
development.   If  the  answer  is yes,  he  further inquired  as                                                               
whether it would be an  example of what Representative Hawker was                                                               
talking about  where there could  be some observable  slowdown of                                                               
the incentive to develop a new project.                                                                                         
                                                                                                                                
MR. ALPER confirmed  that [the State of Alaska]  has paid credits                                                               
well in  excess of $25  million to individual companies  within a                                                               
year, small companies  as well.  When the definition  of small is                                                               
less than $10 billion a  year in annual revenue, that's different                                                               
than the  mom and  pop grocery  store down  the street  and, yes,                                                               
[the  State of  Alaska]  has spent  well in  excess  of that  per                                                               
company  and it  is reasonable  to say  that corporate  decisions                                                               
might be made differently if a  limitation is put on that, if the                                                               
State of Alaska  is no longer going to be  spending more than $25                                                               
million per company per year.                                                                                                   
                                                                                                                                
1:57:57 PM                                                                                                                    
                                                                                                                                
MR. ALPER  moved to slide  26 to discuss  the bill's impact  on a                                                               
Cook  Inlet existing  producer.   He explained  that this  is the                                                               
person who is  producing oil or gas, selling the  oil through the                                                               
refinery, and/or selling  the gas through the  local utilities or                                                               
the liquefied natural gas (LNG)  plant in Cook Inlet.  Currently,                                                               
Cook Inlet existing producers pay very  low or in most cases zero                                                               
taxes because of the Cook Inlet tax  cap.  In those cases where a                                                               
company is  required to pay the  17 cent per thousand  cubic feet                                                               
(MCF) gas  tax, that  tax is often  offset nearly  completely, or                                                               
completely, by the Small Producer Credit  in Cook Inlet.  So, the                                                               
State of  Alaska receives very  little, if any, tax  revenue from                                                               
Cook Inlet, yet those companies  that are currently in production                                                               
and  not  paying  taxes  are  eligible  for  the  current  credit                                                               
repurchase  through  the  capital   and  well  lease  expenditure                                                               
programs.  [The  State of Alaska] pays these  companies for 20-40                                                               
percent of  their capital and  well spending regardless  of their                                                               
profitability or  whether or not they  are paying taxes.   As the                                                               
bill is  written, repeal of  those credits means simply  that the                                                               
producer  that  doesn't  have  operating   loss  is  not  earning                                                               
refundable  credits;  the producer  would  continue  to pay  zero                                                               
taxes and  the tax caps under  current law would remain  in place                                                               
through the end of 2021.                                                                                                        
                                                                                                                                
1:59:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON related that a  member of the other body                                                               
applauded the effort  in toto but said  the administration should                                                               
reverse this  proposition and tax the  production while retaining                                                               
the credits  because the net  effect to Alaskans would  be better                                                               
doing  that.    He  asked  whether this  is  something  that  the                                                               
administration has thought about.                                                                                               
                                                                                                                                
MR. ALPER  responded that the administration  hasn't specifically                                                               
modeled  it, but  has talked  about it.   To  put the  numbers in                                                               
perspective, he  pointed out  that the  entire wellhead  value of                                                               
all oil  and gas  production from  the Cook  Inlet last  year was                                                               
about $800-$900  million.  He  said he doesn't know  offhand what                                                               
the profitability of  that is and what the production  tax or the                                                               
net profits  tax implication would  be.  This  specific provision                                                               
eliminating those spending  credits is $150 million or  so out of                                                               
the fiscal note.   The administration is  not necessarily opposed                                                               
to talking about reintroducing the  Cook Inlet tax or eliminating                                                               
the Cook  Inlet tax caps;  it's not part  of the bill  before the                                                               
committee.    If  the  administration was  to  go  there,  simply                                                               
repealing the  cap language  would likely  be insufficient.   The                                                               
underlying tax regime  in Cook Inlet is something of  a hybrid of                                                               
multiple  existing taxes  and  would  require some  modification.                                                               
The administration would need to  work on a specific proposal for                                                               
a new Cook Inlet tax regime.                                                                                                    
                                                                                                                                
2:00:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  recalled that as  recently as five  or six                                                               
years ago the  communities reliant on Cook Inlet  gas were having                                                               
blackout  drills in  expectation of  not having  adequate gas  to                                                               
keep  the   heat  and  lights   on  in  the  middle   of  winter.                                                               
Legislation was  passed that  specifically targeted  and intended                                                               
to  promote  exploration  and development  and  to  increase  and                                                               
provide  energy security  in Southcentral  Alaska.   He  inquired                                                               
whether the administration can tell him  and give him any kind of                                                               
assurance that the  consequences of implementing HB 247  as it is                                                               
being  presented will  not cause  the industry  to revert  to the                                                               
practices  it had  before those  legislative  changes were  made.                                                               
Regarding the word  practices, he explained that it  was not like                                                               
anybody intended,  it just didn't  work economically in  the Cook                                                               
Inlet.   The legislature  made economic  changes, the  Cook Inlet                                                               
Recovery Act recovered  the inlet, so he is  asking for assurance                                                               
that an analysis has been  done that shows these proposed changes                                                               
will not  cause the inlet to  revert to the status  it was before                                                               
and put  his community back  at risk  of blackout drills  and not                                                               
having enough energy for heat and lights in winter.                                                                             
                                                                                                                                
COMMISSIONER HOFFBECK  answered that  the dynamics of  Cook Inlet                                                               
are dramatically different today than  five years ago when it was                                                               
a market looking for  gas and no gas behind the  pipe to fill the                                                               
pipe.   The incentives that were  put in place worked.   There is                                                               
now  gas  behind  the  pipe  and several  fields  are  not  being                                                               
developed simply because they lack  a market to spend the capital                                                               
to finish the development.  He  said he cannot give the assurance                                                               
that  ten years  from  now  Southcentral won't  be  back in  that                                                               
situation.  But  he can say that  right now that is  not an issue                                                               
and there  is additional gas  that can  be brought online  in the                                                               
near future  when a  market exists.   Qualifying  that he  is not                                                               
trying  to be  too  cavalier,  he asked  whether  victory can  be                                                               
declared and  move onward.   Maybe the particular set  of credits                                                               
that  were in  place  for the  time they  were  in place  worked.                                                               
Things are  at a  stable point  now.  Maybe  five years  down the                                                               
road credits  might have to  be introduced if  it is seen  that a                                                               
shortage is on  the horizon, but to continue to  pay credits at a                                                               
point in  time where, quite  frankly, the credits might  be going                                                               
to  pay  for an  export  project  at a  time  when  the State  of                                                               
Alaska's  budget  is  tight  is  something  [the  administration]                                                               
doesn't see as being the proper use of state resources.                                                                         
                                                                                                                                
2:04:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER stated  the  aforementioned is  disturbing                                                               
because  investments  requiring  long lead  times  are  involved.                                                               
It's like turning an aircraft carrier,  the wheel is spun but the                                                               
carrier doesn't  turn on a dime  and that is what  is being dealt                                                               
with in regard to these Cook Inlet  oil fields.  He said he would                                                               
love to  declare victory and go  home, but is asking  to be shown                                                               
some evidence that victory can be  declared.  At the last meeting                                                               
he was  asked to trust  the administration  and while trust  is a                                                               
wonderful thing, when  it comes to the economics  here he doesn't                                                               
know that he wants to put his community at risk on faith.                                                                       
                                                                                                                                
COMMISSIONER HOFFBECK  replied that [DOR]  will work with  DNR to                                                               
put something together.                                                                                                         
                                                                                                                                
REPRESENTATIVE HAWKER requested that in  addition to DNR he would                                                               
like to  receive assurance from Southcentral  utilities that they                                                               
feel  comfortable there  will be  adequate  gas remaining  behind                                                               
their pipes for the foreseeable future.                                                                                         
                                                                                                                                
COMMISSIONER HOFFBECK  agreed that  would be good  testimony, but                                                               
noted he  is not the one  who can get those  utilities before the                                                               
committee.                                                                                                                      
                                                                                                                                
CO-CHAIR  TALERICO said  he will  see what  can be  done in  this                                                               
regard.                                                                                                                         
                                                                                                                                
2:05:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON requested  that the  analysis include  the                                                               
price of  gas because  at the time  the legislature  went forward                                                               
with the  credits gas producers  were losing money  producing the                                                               
gas.   Since then the  Regulatory Commission of Alaska  (RCA) has                                                               
changed the structure so that now  gas produced in the Cook Inlet                                                               
is the  most profitable gas  in the  whole U.S., and  people will                                                               
invest when they  can make a profit.  Heavy  subsidies are needed                                                               
when a regulation  is in place that means something  will be sold                                                               
at a loss, and  that's the situation Cook Inlet was  in.  He said                                                               
he would therefore  like to see those coincident  timings of when                                                               
the  credits came  in as  well as  when the  gas price  went from                                                               
$2.25 to $7.00 per MCF, meaning  that it became profitable.  This                                                               
needs  to be  investigated as  a subsidy,  he continued,  because                                                               
[the State of  Alaska] is subsidizing these  companies, these new                                                               
developments, and if the only use  for that gas is export then it                                                               
must  be looked  at  very strenuously  to  see if  it  is in  the                                                               
state's  best interest  to  be subsidizing  and  the state  maybe                                                               
losing  the  entire net  value  as  well  as its  royalty  value,                                                               
corporate income tax, and any  small amount of production tax for                                                               
a  company  to export  and  make  profit  overseas.   He  further                                                               
requested that the analysis be put into a graphic format.                                                                       
                                                                                                                                
COMMISSIONER  HOFFBECK agreed  to  include those  numbers in  the                                                               
analysis, but cautioned  that it will be very  difficult to parse                                                               
what was a credit effect versus a price effect.                                                                                 
                                                                                                                                
MR. ALPER  added that some of  these issues were talked  about in                                                               
the Senate  Working Group presentations.   There  was definitely,                                                               
frankly, a political dynamic in Cook  Inlet.  The RCA at the time                                                               
was rejecting  supply contracts that  had higher prices  to them.                                                               
That  led to  the  producers doing  less work,  and  some of  the                                                               
supply shortages were  due not necessarily to lack of  gas but to                                                               
lack of work done  to develop that gas.  He  allowed that this is                                                               
a disputable  concept, but  said those  issues have  largely been                                                               
resolved not just through Alaska's  tax credit system but through                                                               
the increase in the price of  gas, suddenly it is more economical                                                               
to produce gas in the Cook Inlet.   He noted that he earlier gave                                                               
the  number of  $800-$900  million  as the  entire  value of  the                                                               
annual production from Cook Inlet.   A number he gave during last                                                               
week's presentation to the committee  was that about $400 million                                                               
was paid in tax credits by the  State of Alaska to Cook Inlet oil                                                               
and gas  explorers and developers.   So,  a little bit  less than                                                               
half of the  entire value of the entire resource  was paid by the                                                               
State of Alaska through tax credits last year.                                                                                  
                                                                                                                                
2:08:25 PM                                                                                                                    
                                                                                                                                
MR. ALPER  turned to slide 27  to discuss the bill's  impact on a                                                               
Cook  Inlet new  field  developer.   He  explained  that the  Net                                                               
Operating  Loss  Credit  is currently  being  received  by  those                                                               
individuals who  are not operating, aren't  yet selling resource.                                                               
The Net Operating Loss Credit is  25 percent in [Cook Inlet], but                                                               
that  is   typically  stacked,  meaning  it   could  be  received                                                               
alongside  either the  20 percent  Capital Credit  or 40  percent                                                               
Well Lease Expenditure Credit.   Typically an expenditure will be                                                               
one or  the other.   The  companies will  try to  get as  much as                                                               
possible  into the  40  percent category,  of  course, and  those                                                               
expenses  which  might  not  qualify  for  the  40  percent  will                                                               
typically qualify for  the 20 percent.  So a  weighted average in                                                               
the  30-35  percent  range  is   typical  stacked  with  the  Net                                                               
Operating Loss Credit.   That means 50-60 percent of  the cost of                                                               
a  new field  development  is being  directly  subsidized by  the                                                               
State of Alaska  through the refundable tax  credit program under                                                               
current law.   With  the repeal  of the  Cook Inlet  credits, the                                                               
Capital and Well  credits, the State of Alaska  would continue to                                                               
support  that activity  but at  a  reduced level  of 25  percent,                                                               
which  is the  Cook Inlet  Net Operating  Loss.   He returned  to                                                               
something he said earlier about  reinstituting the tax, noting if                                                               
that were  to happen that's one  of the oddities out  there - the                                                               
Cook Inlet's  underlying tax  is the 35  percent tax  from Senate                                                               
Bill 21, but the Cook Inlet  Net Operating Loss is the 25 percent                                                               
from ACES,  so it is  something of a  hybrid system.   Limited by                                                               
that  25 percent  Net Operating  Loss Credit  there would  be the                                                               
same fork in the  road that he described for the  North Slope:  a                                                               
large company,  national or multi-national,  with $10  billion of                                                               
annual revenue  would have  to hold its  credits for  use against                                                               
future tax liability; a smaller  company would be limited by that                                                               
$25 million  per company  per year  cap and  would have  to carry                                                               
forward numbers  in [excess] of  that.  Typically the  Cook Inlet                                                               
projects are smaller  in scale than the North  Slope projects, so                                                               
more of the companies operating in  Cook Inlet are likely to fall                                                               
into  that  $25  million  cap  situation,  whereas  some  of  the                                                               
newcomers coming to the North Slope  are more likely to fall into                                                               
the $10 billion situation.                                                                                                      
                                                                                                                                
2:10:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON inquired  whether that  $25 million  [cap]                                                               
would hurt those companies that are not large and are not small.                                                                
                                                                                                                                
MR.  ALPER  responded that  currently  in  Cook Inlet  a  company                                                               
investing $100  million a  year, which  is a  good-sized company,                                                               
would at the  end of the year  get a $50-$60 million  credit.  If                                                               
HB 247  passes and  the company  did the  exact same  activity it                                                               
would get  a $25 million credit.   So, it would  hurt the company                                                               
to  the extent  that it  would  be getting  $25-$35 million  less                                                               
state dollars  for its project.   To the extent which  that makes                                                               
that project  feasible or more  or less profitable  is impossible                                                               
to say without looking at individual specific projects.                                                                         
                                                                                                                                
REPRESENTATIVE  HERRON  returned to  slide  25  to ask  the  same                                                               
question.   He said  there are  people who  are not  large multi-                                                               
national  but  they're  definitely  not  smaller,  and  this  new                                                               
limitation  would   definitely  hurt   barrels  going   into  the                                                               
pipeline.                                                                                                                       
                                                                                                                                
MR.  ALPER answered  by posing  a scenario  in which  a mid-sized                                                               
company  is spending  $400 million  a  year on  the North  Slope,                                                               
thereby earning  $127 million from  the 35 percent  Net Operating                                                               
Loss Credit.  If that company  could only cash in $25 million per                                                               
year, it  would mean the rest  of the credits would  roll forward                                                               
into the  next year and  the next year.   If the company  were to                                                               
keep  investing $400  million  a  year and  it  becomes a  multi-                                                               
billion dollar  project - yes, there  would be a big  stack-up of                                                               
deferred credits that  might become a large  future liability for                                                               
the State  of Alaska or  those credits  start to sunset  after 10                                                               
years.   He posed another scenario  in which under current  law a                                                               
company  spends $2.5  billion on  a  major project  on the  North                                                               
Slope that  takes 10 years.   While that is great  for barrels in                                                               
the pipeline,  jobs, and economic development,  that $2.5 billion                                                               
at 35  percent is  $875 million  - the State  of Alaska  would be                                                               
writing $875 million in checks to  that company in advance of the                                                               
first  dollar that  the State  of Alaska  received in  production                                                               
taxes, corporate  income taxes, or anything  else, although maybe                                                               
a little bit of property tax.  The  intent of HB 247, he said, is                                                               
to simply constrain the State of  Alaska's cash flow to what is a                                                               
feasible number given its fiscal realities.                                                                                     
                                                                                                                                
2:13:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER opined  that  over  the years  discussions                                                               
have  occurred throughout  the Capitol  about  the importance  of                                                               
having a tax  structure that levels the playing  field, of giving                                                               
every company equal  access and ability to do work  in the state.                                                               
He maintained that  HB 247 is clearly defining a  prejudice and a                                                               
discrimination against bigger companies, which  may or may not be                                                               
a good  thing.  If  it's good  to discriminate against  those big                                                               
companies and  it is wanted that  they have to use  their credits                                                               
only against their  own future tax liability, then  why not apply                                                               
that to  everybody?   Equal footing would  be that  all companies                                                               
use the credits  offered by the state to offset  their own future                                                               
earnings.   He  posed a  scenario in  which a  big multi-national                                                               
company  that operates  almost  exclusively  in southwest  Africa                                                               
decides to  invest a small amount  of capital on a  small project                                                               
in  Alaska and  asked  why  it would  be  wanted to  discriminate                                                               
against  that   investment.    Throwing   statutory,  intentional                                                               
discrimination into  Alaska's tax code seems  problematic, so, he                                                               
asked, why not  just have everybody use  the certificates against                                                               
their  future liability  and save  the State  of Alaska  the cash                                                               
that [the administration] is concerned about.                                                                                   
                                                                                                                                
2:15:33 PM                                                                                                                    
                                                                                                                                
MR. ALPER disagreed that there's  some inherent discrimination in                                                               
this.  He continued:                                                                                                            
                                                                                                                                
     There's  existing discrimination  in current  law -  if                                                                    
     you  want to  call it  that -  that says  if a  company                                                                    
     produces  more than  50,000 barrels  per day  in Alaska                                                                    
     they're  not  eligible  to  get   cash  for  their  tax                                                                    
     credits.  Those companies  must hold those certificates                                                                    
     and carry them  forward.  That was written  to apply to                                                                    
     basically  three  companies  - the  major  North  Slope                                                                    
     producers.   The expectation was those  companies would                                                                    
     have relatively large tax  liabilities and would offset                                                                    
     their  credits against  their liability.   But  if they                                                                    
     don't, which  is the circumstance  we're in  right now,                                                                    
     they're forced to carry them  forward.  But part of the                                                                    
     rationale there, I believe, is  that these are by their                                                                    
     nature  large companies  with balance  sheets and  bank                                                                    
     accounts  and  diversified investment  portfolios  that                                                                    
     they  could afford  better than  a  smaller company  to                                                                    
     hold the tax credit  certificate on their balance sheet                                                                    
     and get  the value for  it later rather than  coming to                                                                    
     the state for cash. ...  What we realized in discussing                                                                    
     possible   future   liability,   and   some   of   this                                                                    
     conversation   started  when   we   were  before   this                                                                    
     committee talking  about [the Arctic  National Wildlife                                                                    
     Refuge  (ANWR)] during  the  previous  session, is  the                                                                    
     large  companies who  don't operate  in  Alaska are  in                                                                    
     many ways very  similar to the large  companies that do                                                                    
     operate in  Alaska - they're global,  diversified, have                                                                    
     bank  balances,  balance sheets  -  and  we don't  need                                                                    
     necessarily to  be writing  checks to  those companies.                                                                    
     They can  hold those  credits on their  balance sheets.                                                                    
     It's the  smaller company, especially the  company that                                                                    
     might be forming  itself for the purpose  of an Alaskan                                                                    
     investment that's going to have  the more imminent cash                                                                    
     flow need  and that's why  if we were going  to protect                                                                    
     to a limited  extent state cash for  credits, we wanted                                                                    
     to limit it  those who most likely were going  to be in                                                                    
     need of that  cash in the short term.   So we created a                                                                    
     line that  said "if  you aren't  in this  large company                                                                    
     category then you can get the  cash, but if you are you                                                                    
     can wait."  That was the  decision we made and we chose                                                                    
     a number.   I  don't believe that  number is  carved in                                                                    
     stone, but the theory behind it, I believe, is sound.                                                                      
                                                                                                                                
2:17:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  asked whether  this is  to also  address the                                                               
issue of a company that is  not well resourced that then goes out                                                               
of business  prior to  having a  tax liability  and the  state is                                                               
left having given the credits to the company.                                                                                   
                                                                                                                                
MR. ALPER responded that the  State of Alaska doesn't want anyone                                                               
to go  bankrupt to save the  state tax credit money.   That would                                                               
be  an unfortunate  reality.   Bankruptcies are  awkward for  all                                                               
concerned  and the  state  is  facing some  smaller  ones in  the                                                               
industry right now.  To a  certain extent, if the benefit package                                                               
gets too generous,  if the State of Alaska is  paying too large a                                                               
percentage  of things,  it is  possible that  certain inefficient                                                               
decisions might  be made,  that more  speculative or  less likely                                                               
for  success  projects  might  be   funded  due  to  a  company's                                                               
expectation that  its risk is  much smaller because the  state is                                                               
going to  pay close to  two-thirds of  its money and  the company                                                               
could take that  loss.  It is reasonable to  say that perhaps the                                                               
projects  that  do go  forward  are  the  ones that  have  better                                                               
fundamentals and are more likely to result in success.                                                                          
                                                                                                                                
COMMISSIONER  HOFFBECK  added  that   this  doesn't  do  anything                                                               
directly to  protect the State of  Alaska from having to  pay the                                                               
credits  if a  company goes  bankrupt.   He explained  that if  a                                                               
company has  earned the credits,  the credits become an  asset of                                                               
whoever is doing the bankruptcy  proceedings; the State of Alaska                                                               
cannot stop from paying the credits if a company earns them.                                                                    
                                                                                                                                
REPRESENTATIVE SEATON noted that bankruptcy  is an issue and is a                                                               
real issue  for Alaska  suppliers.   For example,  Buccaneer went                                                               
bankrupt.    Suppliers  sold  fuel to  Buccaneer,  were  paid  by                                                               
Buccaneer,  and Buccaneer  burned the  fuel.   Then suddenly  the                                                               
bankruptcy court  comes back  to the  suppliers saying  that they                                                               
got paid within 90 days of  when Buccaneer decided to declare for                                                               
bankruptcy and  now the suppliers  must return to  the bankruptcy                                                               
court the money that was paid  for the fuel that Buccaneer burnt.                                                               
The same thing  occurred with the services provided  in the Homer                                                               
harbor where  the dockage had  to be  refunded.  He  announced he                                                               
has  an  amendment  on  the  bankruptcy issue  that  he  will  be                                                               
bringing forward when the committee gets to amendments.                                                                         
                                                                                                                                
2:20:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON,  addressing  the   high  amounts  of  the                                                               
credits, stated that the credits  are predicated on the idea that                                                               
it is much more expensive to  do projects in Alaska than anyplace                                                               
else in the U.S.   Because the credits would lower  the cost of a                                                               
project going forward, Alaska would  then get a competitive final                                                               
investment  decision because  the credits  would equalize  costs.                                                               
He related that  last summer Hilcorp testified  before the Senate                                                               
Working  Group  that  it  had worked  out  procedures  that  have                                                               
lowered  its costs  to the  same  as in  the Lower  48.   Hilcorp                                                               
further  testified that  it was  moving those  procedures to  the                                                               
North  Slope  and  anticipated having  equivalent  costs  on  its                                                               
activities there.  At some point  in time, he opined, the credits                                                               
must be looked  at, and how much is being  given, and whether the                                                               
credits are  promoting inefficiencies in companies;  the State of                                                               
Alaska  shouldn't  be subsidizing  inefficiencies.    He said  he                                                               
would  like to  see it  addressed  as to  how much  the State  of                                                               
Alaska  is  offsetting or  subsidizing  and  how much  is  really                                                               
necessary with some of the  technical and new company innovations                                                               
that are coming.                                                                                                                
                                                                                                                                
2:22:01 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TALERICO pointed  out that a small company can  be a $50                                                               
million investment or a $400  million investment or upwards of $2                                                               
billion if  the company  is not  going to  bring in  $10 billion.                                                               
The time  value to the money  that a company invests  is critical                                                               
to  that company  continuing forward,  more so  than an  attached                                                               
number.   Given  [the  administration's]  earlier statement  that                                                               
there may be flexibility in the  proposed number, he urged that a                                                               
percentage basis  be considered rather  than a number  because it                                                               
is hard to define a certain number when there is such a big gap.                                                                
                                                                                                                                
MR. ALPER agreed that the time  value of money is substantial and                                                               
material  and that  the  talk  is about  asking  people to  defer                                                               
receiving cash from the state  for potentially a number of years.                                                               
He said the corollary to that  is the status quo of continuing to                                                               
spend  half  a billion  dollars  year  towards  a program  in  an                                                               
environment  where  the State  of  Alaska's  annual general  fund                                                               
revenue is  less than $2  billion, down  approximately two-thirds                                                               
from what it  was a couple of  years ago.  All  these factors are                                                               
what's before  the legislature to  weigh as members look  at this                                                               
bill and other legislation moving forward.                                                                                      
                                                                                                                                
2:23:58 PM                                                                                                                    
                                                                                                                                
MR. ALPER moved to slide 28  to discuss the bill's impacts on the                                                               
Interior/Frontier area explorer.  He  explained he is limiting it                                                               
to the  explorer because there is  no real production yet  in the                                                               
Interior/Frontier areas.   Explorers are currently  receiving the                                                               
65  percent   credit  for  exploration  and   50-60  percent  for                                                               
development.  What does that mean?   It's a stack of things.  The                                                               
Exploration  Incentive Credit  is about  40 percent  and the  Net                                                               
Operating Loss Credit  is at 25 percent, and  these explorers are                                                               
eligible for  both.  Once  past the exploration phase  it becomes                                                               
more  of  a development  activity  where  there is  the  weighted                                                               
average  of the  Well and  Capital Expenditure  credits of  30-35                                                               
percent stacked  with the  25 percent  Net Operating  Loss Credit                                                               
for  the 50-60  percent.   [Under  HB 47]  the  Capital and  Well                                                               
credits would go away; so,  under the development phase, projects                                                               
in  the Frontier  areas would  only  receive the  25 percent  Net                                                               
Operating Loss  Credit, which  is comparable  to what  the change                                                               
would  be in  Cook Inlet.   However,  under a  provision inserted                                                               
into the exploration statutes as  an amendment to Senate Bill 21,                                                               
the exploration credits  extend through 2022.   So, the qualified                                                               
expenditures  of companies  in the  Frontier areas  of the  state                                                               
where  new production  is wanted,  and many  of which  are Native                                                               
corporations, will  get paid  by the  State of  Alaska at  the 65                                                               
percent rate  for at least another  five or six years  while they                                                               
prove up their exploration.                                                                                                     
                                                                                                                                
2:25:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  noted that Senate Bill  21 provides for                                                               
the State of  Alaska to pay 65  cents on the dollar  to the folks                                                               
in the Nenana  Basin for their efforts.   He said he  has been to                                                               
presentations  by these  folks and  thinks they  are earnest  and                                                               
honest about  their prospects.   He understood that  there hasn't                                                               
yet been any production.                                                                                                        
                                                                                                                                
MR. ALPER  replied correct.   He recounted that  in presentations                                                               
before Senator  Giessel's working group, Doyon,  Limited, sounded                                                               
like it  is in  something approaching  active development  and is                                                               
hoping to bring  some production online.   Modeling was presented                                                               
showing that  even though  the State of  Alaska supports  it with                                                               
credits at  this level and  even though  the taxes are  quite low                                                               
due  to caps  in other  statute for  the Interior,  the State  of                                                               
Alaska  will receive  royalties that  will more  than offset  its                                                               
investment.   However, he  pointed out,  the prevalence  of state                                                               
land is  not as widespread  in the  Frontier areas.   The central                                                               
North Slope  is state land and  so are large areas  of Cook Inlet                                                               
where  the oil  and gas  development  has been,  which means  the                                                               
State of Alaska  receives the royalty.  But, for  a major project                                                               
on privately held land or  corporation land, even if that project                                                               
would be eligible for hundreds  of millions of dollars in credit,                                                               
there  might not  be any  material amounts  of revenue  coming in                                                               
simply because  the State  of Alaska  doesn't get  the royalties,                                                               
someone else does.                                                                                                              
                                                                                                                                
2:27:16 PM                                                                                                                    
                                                                                                                                
MR. ALPER reviewed the bill's  revenue impacts outlined on slides                                                               
29-30.  Qualifying that it is  a rough estimate because there are                                                               
so many moving  parts, he said [the  administration] believes the                                                               
bill is worth about $500 million  in the fiscal year 2017 budget.                                                               
Of that  $500 million, approximately  $200 million [per  year] in                                                               
credit certificates  would not be  issued, things  that currently                                                               
result  in credits  being  issued  that are  no  longer going  to                                                               
exist.  This is primarily from  the repeal of AS 43.55.023(a) and                                                               
(l), the  Capital Expenditure and  the Well Lease  Expenditure in                                                               
the non-North Slope areas; those  are worth roughly $150 million.                                                               
The  remaining $25-$50  million worth  of credits  would be  from                                                               
elimination of the so-called loopholes  - the ability to increase                                                               
the size of  an operating loss and a few  other minor provisions.                                                               
Regarding the second  set of $200 million [per  year] in credits,                                                               
he  said [the  administration] could  legitimately be  accused of                                                               
kicking the can  down the road.  There are  $200 million worth of                                                               
certificates that  are going to be  earned, that are going  to be                                                               
held, but  are simply not going  to be cashable this  year.  They                                                               
are going to be used against  some future year's tax liability in                                                               
a year where hopefully there is  more tax revenue.  These are the                                                               
entities that fall  under the repayment capped at  $25 million or                                                               
the $10 billion large company cap.   That gets it to $400 million                                                               
with the  rest being $100  million in additional revenue.   About                                                               
$50 million  of that  $100 million comes  from raising  the floor                                                               
from 4  percent to 5  percent.   About another $50  million comes                                                               
from hardening the floor -  preventing certain credits from being                                                               
able to be used to reduce payments  below the minimum tax.  A bit                                                               
of additional money,  probably less than $25  million, comes from                                                               
the  increase in  interest rate.   That  number would  increase a                                                               
little bit over  time, but because it is  mostly tax assessments,                                                               
delinquent taxes,  it is money that  would find its way  into the                                                               
Constitutional Budget Reserve once  it is eventually paid, rather                                                               
than the general fund.                                                                                                          
                                                                                                                                
2:29:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  surmised that  if a constituent  was to                                                               
ask him  what the historic cut  is under this proposal,  it would                                                               
be more  accurate for him  to say  $300 million rather  than $500                                                               
million because the other $200 million  will be paid by the State                                                               
of Alaska  if there is  a future tax  liability, which is  a huge                                                               
contingency.                                                                                                                    
                                                                                                                                
MR. ALPER  agreed that that  is a legitimate  point to make.   He                                                               
concurred that the  net effect would be about $300  million.  The                                                               
immediate effect  when talking about balancing  the budget that's                                                               
before the legislature this session  is $500 million, meaning the                                                               
impact on the fiscal year 2017 budget.                                                                                          
                                                                                                                                
2:30:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  inquired as  to what the  total government                                                               
take on  industry would be  in the fiscal  year 2017 budget  as a                                                               
percent  rate  of  expected  revenues   based  on  the  currently                                                               
projected low oil price scenario.                                                                                               
                                                                                                                                
MR. ALPER  answered that  remodeling has not  been done  of total                                                               
government take  including tax credits  in the current  low price                                                               
scenario.  He said there is  a bit of an unusual circumstance now                                                               
because the  minimum tax does  lead to some very  high government                                                               
take  calculations.   For a  company  losing money  and paying  a                                                               
minimum  tax  it  creates  an infinite  government  take  on  the                                                               
production tax.   However,  the tax credits  are something  of an                                                               
offset  to  that that  haven't  previously  been built  into  the                                                               
government take calculations.  He said  he would like to get back                                                               
to the committee on  that as he is very curious.   It's only fair                                                               
to look  at the change in  government take, both on  the tax side                                                               
and on  the credit side, in  the aggregate.  The  conversation on                                                               
government take is  a little bit misleading when  tax credits are                                                               
not  included in  the  conversation, he  continued.   During  the                                                               
hearings on Senate  Bill 21, tax credits were  not discussed when                                                               
government take  was being discussed.   The baseline  number, the                                                               
consensus number, on  Senate Bill 21 was an  expectation of total                                                               
government take  in the 65-68  percent range across a  wide range                                                               
of prices,  but today's prices  are outside that  expected range.                                                               
Mr. Alper  allowed he doesn't  know to what extent  those numbers                                                               
have moved given current reality and he would like to find out.                                                                 
                                                                                                                                
2:32:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER asked  whether he heard Mr.  Alper say that                                                               
the intent  of this  bill is  to take an  industry that  today is                                                               
actually losing  money and impose  an infinite increase  in taxes                                                               
on them by basically saying  "you're losing money but we're going                                                               
to raise your taxes."                                                                                                           
                                                                                                                                
MR. ALPER  replied these  are large  companies that  operate over                                                               
multi-year cycles.   Their business model, as  he understands it,                                                               
expects highs  and lows and things  are very much in  a low swing                                                               
right now.   A small increase  in the minimum tax  would increase                                                               
their down  at this moment  of the cycle  and that could  be said                                                               
without hesitation.                                                                                                             
                                                                                                                                
REPRESENTATIVE  HAWKER concluded  that the  short answer  is yes,                                                               
[the  administration]  intends  to increase  taxes  on  companies                                                               
already losing money in the state of Alaska.                                                                                    
                                                                                                                                
MR. ALPER responded yes.                                                                                                        
                                                                                                                                
2:33:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  noted that DOR recently  completed the 2008                                                               
ACES production  tax credit  and that  DOR has  seven more  to go                                                               
that  are overdue.   He  understood that  [the Tax  Division] cut                                                               
back  one of  its master  tax auditors  and didn't  look for  any                                                               
additional  people for  oil  and  gas audits.    He inquired  how                                                               
things are going  to get done on these proposals  if the division                                                               
is already seven years behind.                                                                                                  
                                                                                                                                
MR.  ALPER answered  he  doesn't like  to think  of  it as  being                                                               
behind.   [The Tax Division] is  on target and hasn't  missed any                                                               
deadlines, he said.   While closer to the  statute of limitations                                                               
than he  is comfortable with,  [the division] has zero  intent of                                                               
missing  any deadlines  and everything  will be  done before  the                                                               
deadline.  [The  division] is also on an active  program to speed                                                               
up  somewhat.    Qualifying  he isn't  sure  what  Representative                                                               
Olson's  audit master  question is  exactly about,  he said  that                                                               
during  the last  legislative session  one audit  master position                                                               
was cut in the current year's  budget.  That position was held by                                                               
a person  who was promoted  and became a deputy  commissioner and                                                               
[the  division] chose  not  to  refill the  position.   An  audit                                                               
master position  is being eliminated  in the current  budget, but                                                               
that person has really not  been working on production tax issues                                                               
and has  been functioning in  more of an economic  research role.                                                               
The core audit  staff doing the day-to-day work  of reviewing the                                                               
information  from  companies,  being in  communication  with  the                                                               
companies, doing  all the calculations  and making sure  that the                                                               
numbers add  up, is  a solid  core group  of workforce  that [the                                                               
division] is not looking to cut.                                                                                                
                                                                                                                                
2:34:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON understood  the 2008  audit generated  $285                                                               
million.                                                                                                                        
                                                                                                                                
MR. ALPER  replied $265  million in  assessments and  pointed out                                                               
that not  all of that was  paid, some is under  dispute right now                                                               
through the appeals process with one or more of those producers.                                                                
                                                                                                                                
REPRESENTATIVE OLSON  surmised a lot  of money is hanging  out on                                                               
the other seven audits.                                                                                                         
                                                                                                                                
MR. ALPER offered his belief that  just as DOR has gone through a                                                               
learning curve on what  is and isn't legal in the  world of a net                                                               
profits tax, so are the companies.   He said he expects that over                                                               
time the  audits will go cleaner  and faster as all  of the bugs,                                                               
rules,  and procedures  get worked  out.   Once DOR  has rejected                                                               
something a  couple of times  industry is going to  stop claiming                                                               
it again.  While he is not exactly  sure how much money is on the                                                               
table,  he  said he  will  be  able to  talk  to  this and  other                                                               
committees before  the end of  this session about the  2009 audit                                                               
completions  and those  numbers, as  well as  DOR's strategy  for                                                               
accelerating its audit process and catching up on these audits.                                                                 
                                                                                                                                
2:36:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON understood  that  this  is not  unusual                                                               
historically  in Alaska  and  has  been the  history  of oil  and                                                               
royalty debates since 1977.  For  example, the ARCO tax period in                                                               
the  1980s wasn't  resolved until  the 1990s,  which was  several                                                               
hundred  million  dollars, and  Amerada  Hess  which was  over  a                                                               
billion dollars.                                                                                                                
                                                                                                                                
MR. ALPER answered, "It's a  litigious industry and ... there's a                                                               
lot  of  vague transactions  that  are  prone to  differences  in                                                               
interpretation."   It's a complicated topic.   The aforementioned                                                               
cases were more  multi-year lawsuits that resulted  in large back                                                               
payments.   The  money  in these  two lawsuits,  as  well as  the                                                               
current tax assessments in which  [DOR] says a company owes money                                                               
for short-paying its  taxes in a prior year, is  not general fund                                                               
money and  does not  balance the  budget.   The entirety  of that                                                               
money goes  to the Constitutional  Budget Reserve.  If  the money                                                               
in question results from a  royalty shortfall, which was the case                                                               
for a lot of the  older lawsuits, the appropriate percentage goes                                                               
to the  permanent fund  and the  remaining to  the Constitutional                                                               
Budget Reserve.   He pointed  out he doesn't  want to hope  for a                                                               
couple billion dollars because that  means people were abusive in                                                               
their tax filings.   Rather, he wants to hope  that the number is                                                               
zero and  everything is  buttoned down just  right.   However, if                                                               
there is  a large amount  of money that  comes to the  state it's                                                               
not going to have any immediate impact on the budget deficit.                                                                   
                                                                                                                                
2:37:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON asked  whether  it is  advantageous to  the                                                               
state to  have it take  seven years,  given [the state]  would be                                                               
making 11.5 or 12 percent interest.                                                                                             
                                                                                                                                
MR. ALPER replied the interest  rate through January 1, 2014, was                                                               
11  percent.   With  the effective  date of  Senate  Bill 21  the                                                               
interest rate,  including on old  things, reset to  the statutory                                                               
rate  of 3  percent over  the federal  discount rate.   It  moves                                                               
every quarter and this current quarter  is 4 percent.  He said he                                                               
doesn't want to  speculate on industry behavior, but  when it was                                                               
11 percent and  DOR assessed the tax, companies tended  to pay it                                                               
and then go through the  protest process because if companies got                                                               
paid back  they got paid  back with interest.   Now it's  more in                                                               
their interest to not pay  the assessment and protest because the                                                               
additional cost of more time is only 4 percent.                                                                                 
                                                                                                                                
REPRESENTATIVE  OLSON understood  that almost  two-thirds of  the                                                               
2008 audit was interest.                                                                                                        
                                                                                                                                
MR.  ALPER responded  no, about  $150 million  was tax  and about                                                               
$115 million was interest, roughly 40 percent.                                                                                  
                                                                                                                                
REPRESENTATIVE  OLSON  asked whether  the  interest  goes to  the                                                               
Constitutional Budget Reserve (CBR).                                                                                            
                                                                                                                                
MR. ALPER answered  yes, the entirety of the payment  goes to the                                                               
CBR and  there is a process  for that.   The CBR is also  used to                                                               
pay refunds if  there is an assessment and an  appeals process in                                                               
which the company  wins or a settlement is made  somewhere in the                                                               
middle.  The CBR also pays reversed tax assessments.                                                                            
                                                                                                                                
2:39:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  paraphrased Mr. Alper's  earlier statement                                                               
as being  "that the oil and  gas industry in the  state of Alaska                                                               
was ... 'litigious.'"   He said one definition  of litigious that                                                               
he came across  defines it as being "unreasonably prone  to go to                                                               
law to settle disputes."  He  asked whether Mr. Alper believes it                                                               
is unreasonable  for the  oil and  gas industry  in the  state of                                                               
Alaska to have legitimate challenges with assessments of taxes.                                                                 
                                                                                                                                
MR. ALPER  replied he was  not specifically limiting  his comment                                                               
to Alaska.   The industry  engages in very large  transactions in                                                               
very diverse  areas all over  the world and oftentimes  there are                                                               
disputes over valuation.  Saying  he doesn't want to question the                                                               
dictionary  definition  or  the reasonableness  of  anything,  he                                                               
noted that  everyone has the  right to the legal  process whether                                                               
the simplest  citizen, or  the largest company,  or the  State of                                                               
Alaska itself; that's why the legal process exists.                                                                             
                                                                                                                                
REPRESENTATIVE HAWKER  asked whether  Mr. Alper believes  the oil                                                               
and gas  industry is unreasonably prone  to go to law  to resolve                                                               
those disputes.                                                                                                                 
                                                                                                                                
MR. ALPER responded no, he does  not believe that anyone is being                                                               
unreasonable.                                                                                                                   
                                                                                                                                
REPRESENTATIVE JOSEPHSON  stated that what  he heard was  "it's a                                                               
litigious business"  and that he  thinks Mr. Alper  was referring                                                               
to both sides.                                                                                                                  
                                                                                                                                
MR. ALPER thanked Representative Josephson for clarifying.                                                                      
                                                                                                                                
2:41:15 PM                                                                                                                    
                                                                                                                                
MR. ALPER drew attention to slide 30, "Revenue Impact," noting                                                                  
that DOR's fiscal note is a little bit unusual.  He explained:                                                                  
                                                                                                                                
     We are able to highlight  $500 million in the immediate                                                                    
     year,  but our  forecast of  future tax  credit expense                                                                    
     tends to  decline as you  go into  the out years.   And                                                                    
     that's not  necessarily tied  to actual  expectation of                                                                    
     less  credits being  spent, it's  actually tied  to our                                                                    
     production  forecast.     We  can  only   forecast  oil                                                                    
     production if  we know the project  has been sanctioned                                                                    
     and is going to happen.   We tend to add projects as we                                                                    
     get  closer to  the present.    ... We  are looking  at                                                                    
     things three  and four  years from  now; we  don't know                                                                    
     what wells are  going to be drilled;  likewise we don't                                                                    
     know what credits  are going to be earned.   So there's                                                                    
     a  natural  tendency for  our  estimate  of tax  credit                                                                    
     spending to increase as you  get closer to the present.                                                                    
     So when you look at the  fiscal note before you ... you                                                                    
     will  see smaller  numbers as  far as  the savings  and                                                                    
     expenditure.  Those numbers are  pegged to our official                                                                    
     forecast  of tax  credit spend,  which  is the  Revenue                                                                  
     Sources   Book,  reduced   by  $50   million.     We're                                                                  
     essentially saying that we expect  to reduce our credit                                                                    
     spend to ... $50-$100 million  per year in future years                                                                    
     from whatever the  number would be as we  get closer to                                                                    
     the  present.   ...  Our forecast  only includes  known                                                                    
     projects.   We  have  a  very conservative  forecasting                                                                    
     methodology and  it's not for  this committee  and this                                                                    
     hearing,  but we  could discuss  the  evolution of  our                                                                    
     forecasting  methodology;  it's  actually  gotten  much                                                                    
     more conservative in recent years.   Most new projects,                                                                    
     anything  that  folks might  talk  about  and has  come                                                                    
     before this  committee when you  speak to  industry and                                                                    
     say "we  want to  do A,  B, or  C," those  are projects                                                                    
     that haven't  been sanctioned yet,  are not yet  in our                                                                    
     credit forecast,  and if they  were to  actually happen                                                                    
     would increase the expected spend given current law.                                                                       
                                                                                                                                
2:43:07 PM                                                                                                                    
                                                                                                                                
MR. ALPER moved to slides 31-32, "Implementation Cost," noting                                                                  
that in the transition, most of the changes in HB 247 have an                                                                   
effective date of July 1,  2016, meaning until that point current                                                               
law remains in place.   He defined "honoring existing credits" as                                                               
meaning  that $700  million  in  tax credits  is  expected to  be                                                               
claimed this  fiscal year but  only $500  million is going  to be                                                               
paid.   That's the limitation  of the appropriation, so  there is                                                               
going to be  $200 million hanging past at the  end of fiscal year                                                               
2016.  He  said [DOR] is estimating $425 million  in credits that                                                               
would under  normal circumstances be  paid next year.   These are                                                               
almost entirely  credits earned in  the past calendar year  - the                                                               
companies spent  the money,  did the projects,  and are  going to                                                               
file their taxes  in March and claim all of  these credits.  Then                                                               
there  is whatever  would  be earned  in the  first  half of  the                                                               
present  calendar year  before the  effective date  of the  bill.                                                               
That  gets to  a number  somewhere past  $800 million,  leaving a                                                               
little  bit of  room for  unanticipated circumstances.   Rounding                                                               
up, $1  billion would be put  into the tax credit  fund to ensure                                                               
there's  adequate funds  to clear  the deck  of whatever  credits                                                               
might be earned prior to the  effective date.  The fiscal note is                                                               
a bit unusual  in that the operating budget has  $74.3 million in                                                               
it, a number  that comes out of a statutory  formula.  The fiscal                                                               
note adds  $926.6 million, which  is the difference  between that                                                               
number and  $1 billion,  for the so-called  transition fund.   It                                                               
would be an appropriation from  the Constitutional Budget Reserve                                                               
into the oil and gas tax credit fund.                                                                                           
                                                                                                                                
2:44:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON recounted that  the governor has said these                                                               
tax  proposals   are  mostly  written   in  pencil   because  the                                                               
legislature is  going to weigh in  on it.  He  requested that Mr.                                                               
Alper inform the committee as to  which places are written in pen                                                               
and which places are must haves.                                                                                                
                                                                                                                                
MR. ALPER  replied, "I think  the governor says it's  all written                                                               
in pencil."   The intent,  the goal,  he continued, is  to reduce                                                               
the amount  of money that the  State of Alaska spends  every year                                                               
from the  current multiple hundreds  of millions of dollars  to a                                                               
more  manageable  number  in  line with  the  State  of  Alaska's                                                               
available  resources.   He  said  he has  complete  faith in  the                                                               
ability of the committee and the  rest of the legislature to come                                                               
up with  a solution that  does not need  to be exactly  what [the                                                               
administration] is proposing.                                                                                                   
                                                                                                                                
2:45:43 PM                                                                                                                    
                                                                                                                                
MR. ALPER  turned to slide 32  to continue his discussion  of the                                                               
implementation cost.  This is a  bit larger than the fiscal notes                                                               
that will be seen on some  of the other smaller revenue bills, he                                                               
pointed out,  because a lot  of reprogramming is involved.   [The                                                               
Tax Revenue Management  System (TRMS)] is a  very complicated tax                                                               
system; it works very  well to do the work but  it's a little bit                                                               
hard coded,  so when a change  is made it requires  bringing back                                                               
the programmers to recode things  - for changing the way balances                                                               
are handled, which credits exist,  how different transactions get                                                               
posted.  He  said [DOR] has requested the company  that built the                                                               
system to  come up with  an estimate  of implementing HB  247 the                                                               
way  it is  written.   Because  there is  not yet  a number,  the                                                               
amount of $1.5  million is a placeholder; DOR  expects the number                                                               
will be  different and  expects that  it will be  lower.   Once a                                                               
real number is received from  the contractor DOR will come before                                                               
whichever committee  the bill is  in front  of at that  moment to                                                               
adjust that  number.  These  are one-time  funds that would  be a                                                               
capital  appropriation  or  a  supplemental  appropriation.    No                                                               
additional resources  or staff  will be  needed to  implement and                                                               
manage the ongoing tax program once the changes are made.                                                                       
                                                                                                                                
2:47:09 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  HOFFBECK  addressed  slides  33-34,  both  entitled                                                               
"Closing the  Budget Gap."   He explained the slides  outline the                                                               
New Sustainable  Alaska Plan and  where these  various components                                                               
[shown in  red] fit into two  parts of the three-part  plan.  The                                                               
first  part uses  investment earnings  and existing  taxes, which                                                               
gets to $4.2-$4.3  billion of the $5.2 billion goal.   The second                                                               
part hits in spending reductions at  the rate of $400 million for                                                               
the coming fiscal year; not paying  the credits is a reduction in                                                               
the State of Alaska's expenditures.   This also fits in the third                                                               
part, the  new revenue component,  at $100 million, which  is the                                                               
hardening  of the  cap and  the increasing  of the  [minimum tax]                                                               
rate from 4 percent to 5 percent.                                                                                               
                                                                                                                                
2:48:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  returned to the $1  billion capitalization                                                               
of the  oil and gas tax  credit fund.  He  said it is shown  as a                                                               
fiscal  year 2017  appropriation already  requested [fiscal  note                                                               
identifier:  HB247-DOR-OGTCF-1-27-16] and  that [page  1] of  the                                                               
fiscal note states,  "Initial version showing funding  to Oil and                                                               
Gas Tax [Credit] Fund.  This  will be reflected in the Governor's                                                               
amended appropriation  bill".   He inquired as  to where  that $1                                                               
billion is in the appropriation process  and whether it is in the                                                               
supplemental appropriation bill.                                                                                                
                                                                                                                                
MR. ALPER responded he doesn't have  the document in front of him                                                               
and  doesn't  recall  if  it's  going to  be  in  the  governor's                                                               
supplemental  bill.   He  said he  wrote some  of  that text  but                                                               
cannot  recall the  specific sentence  being referred  to, so  he                                                               
wants to look back  at it.  He said his  expectation is that it's                                                               
a  fiscal  note that's  attached  to  the  bill  so it  would  be                                                               
contingent on the  passage of a version of the  bill because that                                                               
is usually  how these things  are structured.   He added  that he                                                               
hasn't  seen the  governor's  supplemental  bill, the  governor's                                                               
amended appropriation bill, to know if that's in there.                                                                         
                                                                                                                                
REPRESENTATIVE HAWKER  agreed that the fiscal  note is requesting                                                               
the  $1  billion  fund  gap,  but said  he  is  confused  by  the                                                               
statement at  the bottom  of the  fiscal note  that this  will be                                                               
reflected in the governor's amended appropriation bill.                                                                         
                                                                                                                                
COMMISSIONER HOFFBECK stated that [DOR] will clear that up.                                                                     
                                                                                                                                
2:50:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  requested  the committee  be  provided  a                                                               
presentation on the Gross Value  Reduction and what that does for                                                               
a  net  present  value  calculation for  the  State  of  Alaska's                                                               
investment.  For example, if the  State of Alaska is investing in                                                               
a new field, what the expected  investment would be over time and                                                               
the CBR  or permanent  fund discount  rate, and  what is  the net                                                               
present value  both offsetting production tax  and offsetting all                                                               
revenues that the  general fund would receive.  He  said he would                                                               
like this presentation so that  when the committee is considering                                                               
these  tax  credit investments,  members  will  know whether  the                                                               
State of Alaska will be making  or losing money over the totality                                                               
of the project.                                                                                                                 
                                                                                                                                
MR.  ALPER responded  that [DOR]  envisions some  scenario drill-                                                               
down in  the more math  oriented presentation that it  expects to                                                               
bring before the committee next.                                                                                                
                                                                                                                                
2:51:56 PM                                                                                                                    
                                                                                                                                
MR. ALPER  turned to  the sectional  analysis outlined  on slides                                                               
35-44, saying  he will concentrate  on the sections that  are the                                                               
most essential to the core changes  that would be made by HB 247.                                                               
He explained that  Section 7 [slide 35] proposes  to increase the                                                               
interest rate  tied to the  Federal Reserve Discount Rate  from 3                                                               
percent to  7 percent  above the  Federal Reserve  Discount Rate.                                                               
This  splits   the  difference  between  the   historic  pre-2014                                                               
interest rate  and what  was put  in place  by passage  of Senate                                                               
Bill 21.   Section 8  [slide 36] would provide  a confidentiality                                                               
waiver - the  ability to talk about specific  spend by individual                                                               
companies.   Section 8 would  turn certain  information currently                                                               
considered taxpayer  proprietary and make it  public information.                                                               
He  noted that  Section  17  [slide 37]  is  one  of the  "mother                                                               
sections" of the bill and describes  the minimum tax and how it's                                                               
calculated.   Section 17  defines the credits  that, if  the bill                                                               
passes, will  no longer  be able  to reduce  payment below  the 4                                                               
percent  level.    Additionally,  Section  17  would  remove  the                                                               
ability to  move the Per-Taxable-Barrel Credit  around from month                                                               
to  month,  instead turning  it  into  more  of a  truly  monthly                                                               
calculation so  as to protect the  State of Alaska from  the need                                                               
for large tax refunds at the end of the year.                                                                                   
                                                                                                                                
2:53:25 PM                                                                                                                    
                                                                                                                                
MR. ALPER explained  that Section 18 [slide 38]  would impose the                                                               
minimum tax on  the Gross Value Reduction eligible  oil, new oil.                                                               
He noted  this is  something that doesn't  currently exist  - new                                                               
oil can pay as low as zero.   Section 20 [slide 39] would add the                                                               
10-year  sunset on  credit certificates.   Because  the State  of                                                               
Alaska  would  be  deferring  a  lot of  payment,  that  10  year                                                               
provision is material and is  something that should be discussed.                                                               
Section 22  relates to DNR's needs  and would ensure that  as the                                                               
exploration credits  expire DNR will  be able to  receive seismic                                                               
and downhole  data well logs  for its own planning  and strategic                                                               
purposes.   This would be  done by tying [the  data requirements]                                                               
to  other  credits  rather  than   to  the  exploration  credits.                                                               
Section  26 [slide  40] talks  about  who is  suddenly no  longer                                                               
eligible to receive cash for their  tax credits - the $10 billion                                                               
limit, the  $25 million per year  limit.  This section  amends AS                                                               
43.55.028(e), which is  current law on other  restrictions on who                                                               
can get  cash - specifically the  50,000 barrel a day,  the large                                                               
current producer exemption.  Section  27 [slide 41] is the Alaska                                                               
hire restriction on  credit rebate.  Section 37  [slide 42] would                                                               
clean  up the  situation wherein  a municipal  utility selling  a                                                               
small amount  of production becomes  eligible for  sometimes very                                                               
large  credits  because   of  the  way  that   law  is  currently                                                               
interpreted.  Most  of the rest of it is  conforming.  Section 39                                                               
[slide 43] would  add a definition for  "outstanding liability to                                                               
the state."  Right now if a  company owes taxes it cannot get its                                                               
credits  -  [DOR] pays  their  taxes  out  of the  credit  first.                                                               
Section 39  would broaden this  to also pay other  liabilities to                                                               
the  state, such  as royalties  and the  like, and  to do  this a                                                               
definition  is needed  of "outstanding  liability to  the state."                                                               
Section  44  [slide 44]  is  a  retroactive effective  date  just                                                               
applying to  Section 17,  which is  the floor  hardening section.                                                               
Because  of the  specific  situation with  major producers  using                                                               
operating loss credit to reduce  their minimum tax payments, [the                                                               
administration]  wants that  to  take effect  this  year so  [the                                                               
State  of Alaska]  can recapture  some  of that  money that  it's                                                               
going  to  again lose  at  the  end  of  January.   [Section  45]                                                               
provides for an immediate effective  date for transition language                                                               
and [Section 46] provides an effective  date of July 1, 2016, for                                                               
the rest of the bill.                                                                                                           
                                                                                                                                
2:56:35 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TALERICO noted  there is confusion among  the people who                                                               
are actually working in the  Frontier Basin, and that Mr. Alper's                                                               
presentation clearly  says the Frontier  Basin is  still eligible                                                               
for the 65 percent  tax credits until 2022.  He  said he has been                                                               
approached by  several operators  who have  said those  expire on                                                               
July 1, 2016, and  he wants to be assured that  he can tell those                                                               
operators that those would be extended to 2021 or 2022.                                                                         
                                                                                                                                
MR. ALPER said  that in some ways two different  things are being                                                               
talked about.   There was a Frontier Basin  Credit, a specialized                                                               
credit that  was modeled in  many ways  on the Cook  Inlet Jackup                                                               
Rig  Credit which  passed as  part of  a Frontier  incentive bill                                                               
during the  2012 session.   That credit,  which is 80  percent of                                                               
certain  expenditures  with  certain  limits to  the  first  well                                                               
[drilled] in  the four or six  basins, is expiring July  1, 2016.                                                               
However,   the  underlying   Exploration   Incentive  Credit,   a                                                               
statewide credit  of 40 percent,  has been  specifically extended                                                               
for the  Frontier basins through  2022.  The 80  percent Frontier                                                               
Basin Credit  has never been claimed  or used and is  going away.                                                               
Those explorers  in the Frontier basins  will be able to  get the                                                               
Exploration Credit stacked  with an Operating Loss  Credit with a                                                               
total State of Alaska contribution of 65 percent.                                                                               
                                                                                                                                
2:58:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  offered his  understanding that  HB 247                                                               
actually extends or replaces credits  and asked whether Mr. Alper                                                               
considers any  of the  bill's features as  being generous  to the                                                               
industry in that respect.                                                                                                       
                                                                                                                                
MR. ALPER replied he doesn't  want to answer broadly because it's                                                               
an open-ended question.  He said  no, the bill doesn't extend any                                                               
credits.   There are  credits in current  law that  have existing                                                               
sunsets of  July 1, 2016:   the bulk of the  exploration credits,                                                               
the Frontier  Basin credits,  the Jackup Rig  Credit.   The Small                                                               
Producer  Credit  begins  a  slow  sunset in  May  2016.    Under                                                               
previous legislation,  Senate Bill 21,  an amendment was  made on                                                               
the   House  floor   that   extended   the  exploration   credits                                                               
specifically in the areas outside  the North Slope and Cook Inlet                                                               
to January 1, 2022, and HB 247 would simply maintain that.                                                                      
                                                                                                                                
[HB 247 was held over.]                                                                                                         
                                                                                                                                
2:59:11 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Resources Standing Committee meeting was adjourned at 2:59 p.m.                                                                 

Document Name Date/Time Subjects
HB247 ver A.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Sponsor Statement.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HB 247
HB247 Sectional Analysis.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Fiscal Note #1-DNR-DOG-01-11-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HB 247
HB247 Fiscal Note - FUNDCAP-OIL & GAS TAX CREDIT FUND-2-1-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Fiscal Note - DOR-TAX-2-1-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB 247 Production Tax Credits FY07-FY25 Excel Table_Figure 8-4_Fall 15 RSB.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB 247 Oil Credit Bill - Key Features 2-2-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HSE RES 2.9.16 - Impacts of Alaska fiscal options-Summary of preliminary conclusions-Gunnar Knapp.pdf HRES 2/10/2016 1:00:00 PM