Legislature(2007 - 2008)BARNES 124
03/19/2007 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB165 | |
| HB149 | |
| HB128 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 165 | TELECONFERENCED | |
| + | HB 128 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 149 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
March 19, 2007
1:05 p.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Vic Kohring
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 165
"An Act relating to providing field accommodations for big game
hunters."
- MOVED HB 165 OUT OF COMMITTEE
HOUSE BILL NO. 149
"An Act relating to the authority of the Department of
Environmental Conservation to require certain monitoring,
sampling, and reporting and to require permits for certain
discharges of pollutants; relating to criminal penalties for
violations of the permit program; and providing for an effective
date."
- MOVED CSHB 149(RES) OUT OF COMMITTEE
HOUSE BILL NO. 128
"An Act relating to allowable lease expenditures for the purpose
of determining the production tax value of oil and gas for the
purposes of the oil and gas production tax; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 165
SHORT TITLE: BIG GAME GUIDES AND TRANSPORTERS
SPONSOR(s): REPRESENTATIVE(s) LEDOUX
02/28/07 (H) READ THE FIRST TIME - REFERRALS
02/28/07 (H) RES
03/12/07 (H) RES AT 1:00 PM BARNES 124
03/12/07 (H) Heard & Held
03/12/07 (H) MINUTE(RES)
03/19/07 (H) RES AT 1:00 PM BARNES 124
BILL: HB 149
SHORT TITLE: POLLUTANT DISCHARGE PERMITS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/21/07 (H) READ THE FIRST TIME - REFERRALS
02/21/07 (H) RES, JUD
03/12/07 (H) RES AT 1:00 PM BARNES 124
03/12/07 (H) Heard & Held
03/12/07 (H) MINUTE(RES)
03/19/07 (H) RES AT 1:00 PM BARNES 124
BILL: HB 128
SHORT TITLE: OIL & GAS PRODUCTION TAX: EXPENDITURES
SPONSOR(s): REPRESENTATIVE(s) OLSON
02/12/07 (H) READ THE FIRST TIME - REFERRALS
02/12/07 (H) O&G, RES, FIN
02/22/07 (H) O&G AT 3:00 PM CAPITOL 124
02/22/07 (H) Heard & Held
02/22/07 (H) MINUTE(O&G)
03/01/07 (H) O&G AT 3:00 PM CAPITOL 124
03/01/07 (H) Moved CSHB 128(O&G) Out of Committee
03/01/07 (H) MINUTE(O&G)
03/05/07 (H) O&G RPT CS(O&G) 3DP 1NR
03/05/07 (H) DP: DOOGAN, RAMRAS, OLSON
03/05/07 (H) NR: SAMUELS
03/19/07 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
RICK METZGER
Akhiok, Alaska
POSITION STATEMENT: Testified on HB 165.
DICK ROHRER, Member
Big Game Commercial Services Board
Fairbanks, Alaska
POSITION STATEMENT: Explained the process that led to the
introduction of HB 165.
RICK ELLINGSON, Commercial Fisherman
Kodiak, Alaska
POSITION STATEMENT: Testified in support of HB 165.
PETE HANNAH
Kodiak, Alaska
POSITION STATEMENT: Testified in support of HB 165.
CAMERON LEONARD, Senior Assistant Attorney General
Natural Resources Section
Civil Division (Fairbanks)
Department of Law
Fairbanks, Alaska
POSITION STATEMENT: During hearing of HB 149, answered
questions.
LYNN TOMICH KENT, Director
Division of Water
Department of Environmental Conservation
Anchorage, Alaska
POSITION STATEMENT: During hearing of HB 149, answered
questions.
CONRAD JACKSON, Staff
to Representative Kurt Olson
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 128 on behalf of the sponsor,
Representative Olson.
JONATHON IVERSEN, Director
Anchorage Office
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 128.
JONNE SLEMONS, Acting Coordinator
Engineering Integrity Coordinator's Office
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During hearing of HB 128, answered
questions.
ROD MINTZ, Attorney at Law
K & L Gates
Anchorage, Alaska
POSITION STATEMENT: During hearing of HB 128, answered
questions in his capacity as an attorney for the Department of
Revenue and the Department of Law regarding production tax
matters.
JOHN NORMAN, Commissioner/Chair
Alaska Oil & Gas Conservation Commission
Department of Administration
Anchorage, Alaska
POSITION STATEMENT: During hearing of HB 128, answered
questions.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 1:05:31 PM. Representatives
Gatto, Johnson, Edgmon, Kawasaki, Kohring, Wilson, and Roses
were present at the call to order. Representatives Guttenberg
and Seaton arrived as the meeting was in progress.
HB 165-BIG GAME GUIDES AND TRANSPORTERS
1:05:58 PM
CO-CHAIR GATTO announced that the first order of business would
be HOUSE BILL NO. 165, "An Act relating to providing field
accommodations for big game hunters."
1:06:25 PM
RICK METZGER began by informing the committee that
Representative LeDoux sponsored HB 165 in response to his
urging. He related that the language of HB 165 was unanimously
approved by the Big Game Commercial Services Board.
1:07:28 PM
DICK ROHRER, Member, Big Game Commercial Services Board, said
that he concurs with everything that Mr. Metzger said during the
first hearing of HB 165. He related that Mr. Metzger first
brought his concerns to the Big Game Commercial Services Board
in December 2006. At that meeting all necessary parties were
gathered in the same place to agree on what was needed for Mr.
Metzger to rent his cabin. It was determined that the
transporter license did not exactly fit what Mr. Metzger desired
and that the Big Game Commercial Services Board could not change
a regulation as it needed to be a statutory change. At a
[later] teleconference it was determined that the simplest way
to address the situation was through an exemption from the Guide
Transporter statute requirements for those who own a private
cabin, lodge, or house that is located in the field.
1:10:15 PM
RICK ELLINGSON, Commercial Fisherman, related his support for HB
165. Mr. Ellingson opined that it is tough to make a living in
rural Alaska. He further opined that the [original] ruling by
the Big Game Commercial Services Board did not make sense and
thus he said he was encouraged with the introduction of HB 165
as it will put Mr. Metzger and a few others back in business.
1:11:45 PM
PETE HANNAH informed the committee that he is a private
landowner in Kodiak who supports HB 165.
1:12:08 PM
CO-CHAIR GATTO, upon determining no one else wished to testify,
closed public testimony.
1:12:45 PM
CO-CHAIR JOHNSON moved to report HB 165 out of committee with
individual recommendations and the accompanying fiscal notes.
There being no objection, it was so ordered.
HB 149-POLLUTANT DISCHARGE PERMITS
1:13:44 PM
CO-CHAIR GATTO announced that the next order of business would
be HOUSE BILL NO. 149, "An Act relating to the authority of the
Department of Environmental Conservation to require certain
monitoring, sampling, and reporting and to require permits for
certain discharges of pollutants; relating to criminal penalties
for violations of the permit program; and providing for an
effective date."
1:14:36 PM
REPRESENTATIVE GUTTENBERG expressed concern about the loss of
some of the research that might not be directly related to a
specific project. He asked if the loss of research could be a
loss to permitting or to other projects in the future.
1:16:46 PM
CAMERON LEONARD, Senior Assistant Attorney General, Natural
Resources Section, Civil Division (Fairbanks), Department of
Law, said that nothing in HB 149 will change or diminish the
Department of Environmental Conservation's (DEC) ability and
authority to do this kind of water body assessments and
monitoring. The legislation merely has to do with which
requirements, in connection with a particular project, belong in
permits versus outside of the permits.
1:17:24 PM
REPRESENTATIVE GUTTENBERG maintained that his concern is still
who will do it.
1:17:55 PM
REPRESENTATIVE WILSON moved that the committee adopt Amendment
1, which read [original punctuation provided]:
Page 4, line 4:
Following "pollutants":
Delete "listed"
Insert "as defined"
Page 4, line 10:
Following "(a)"
Insert "and (d)"
CO-CHAIR JOHNSON objected to Amendment 1 for discussion
purposes.
1:18:36 PM
MR. LEONARD stated that the changes in Amendment 1 are changes
that were reached after considerable discussion with the
Environmental Protection Agency (EPA) to address their concerns.
The first change on page 4, line 4, addresses EPA's request that
Alaska's term "waste material" be as broad as the EPA's term
"pollutants." Although Section 6 of the legislation inserts a
new subsection that would specify that, the EPA prefers that the
language say, "includes pollutants as defined in" rather than
"listed in".
1:19:37 PM
CO-CHAIR GATTO asked if there is any possibility that something
listed would be undefined.
MR. LEONARD explained that the EPA wanted to be clear that
Alaska's statute included those items listed as well as the
definition.
1:20:12 PM
MR. LEONARD then turned to the second portion of Amendment 1,
which addresses the "state of mind" necessary to pursue criminal
violations. He reminded the committee that negligent violations
of the Clean Water Act (CWA) can give rise to criminal charges,
although they do not have to. Alaska's statutes require
criminal negligence under [AS 46.03].790 and thus to satisfy EPA
and to show that the state's program is as stringent as EPA's,
new subsection (i) is inserted. This new subsection specifies
that for purposes of the Alaska Pollutant Discharge Elimination
System (APDES) program, simple negligence is sufficient. To
further clarify, the language "and (d)" was added to Section 8
in order to specify that the new program under subsection (i)
would also apply to oil spills, subsection (d), since such would
also be a violation of the CWA.
1:21:20 PM
MR. LEONARD, in response to Representative Guttenberg, stated
that the title of Section .790 is "Criminal penalties". He then
confirmed Co-Chair Gatto's understanding that [statute] had
simple negligence rather than criminal negligence in order to
cover class A. Mr. Leonard further confirmed that this would
also be under a class A misdemeanor. Therefore, no penalties
are being changed.
1:21:57 PM
REPRESENTATIVE SEATON asked whether this allows the state to
select a gross negligence standard or something other than
simple negligence.
MR. LEONARD replied no, adding that a higher state of mind than
EPA specifies cannot be required in order to have the program
approved. He specified that [APDES] could require a higher
state of mind if the desire is to pursue a felony charge or
other higher charge. For a simple misdemeanor charge, more than
negligence cannot be required and still meet EPA's approval
criteria.
1:22:48 PM
CO-CHAIR JOHNSON removed his objection to Amendment 1. There
being no further objection, Amendment 1 was adopted.
1:23:07 PM
REPRESENTATIVE SEATON expressed concern with regard to the scope
of things that will be left out of NPDES permits and thus not
available to the public.
1:24:59 PM
LYNN TOMICH KENT, Director, Division of Water, Department of
Environmental Conservation (DEC), related that revisions to the
regulatory water quality standards are public noticed for
comment, as well as all of the supporting science and
information driving a potential change to the water quality
standards. Therefore, basically anything the department has is
available to the public also.
1:25:39 PM
REPRESENTATIVE SEATON related his understanding that one of the
intents for taking this primacy is to keep things outside of the
permit requirement and thus it will not be available to third
parties. Representative Seaton asked if information will still
be available to third parties to propose additional revision of
regulations for those requirements made outside the permit or
does the information become public when the department decides
to revise the regulations.
MR. LYNN answered that any additional studies or additional
information requested of the permittee outside the context of a
permit is available for public review.
1:27:03 PM
CO-CHAIR GATTO, referring to the language "into any waters" on
page 3, line 1, clarified his understanding that the
aforementioned language only refers to surface waters. He asked
whether there is any value in adding the word "surface".
MR. CAMERON highlighted that the full phrase is "waters of the
United States", which is the language required in order to
ensure that Alaska's program is as inclusive as that of the
EPA's. The EPA was concerned, he related, that the former
language "surface waters" isn't exactly the same as "waters of
the United States".
CO-CHAIR GATTO questioned whether the language refers to
"surface water" or "subsurface waters."
MR. CAMERON reminded the committee that the federal definition
of "waters of the United States" also gets into wetlands, which
may or may not be included in the definition of "surface waters"
depending upon one's perspective. Mr. Cameron opined that the
department felt it had to use the EPA's terminology in order to
address their concerns. In further response to Co-Chair Gatto,
Mr. Cameron related his agreement that HB 149 allows the state
to deal with the federal government and take authority for
enforcement as well as the permitting program itself.
1:28:45 PM
MR. CAMERON, in response to Representative Seaton, said he
believes that adopting the federal definition as was done in the
regulations and using the terminology in HB 149 should not cause
confusion, except that the federal definition itself is subject
to ongoing litigation and recent decisions from the U.S. Supreme
Court. If one reads the statute and regulations in tandem, the
coverage of the program is clear.
1:30:08 PM
REPRESENTATIVE SEATON related his understanding that one of the
reasons [for HB 149] is to have less third-party suits for
information. He noted that the department does not track the
number of lawsuits threatened or filed and thus it does not know
how many third-party suits about information that would not have
been included under DEC's definition.
REPRESENTATIVE SEATON expressed his concern that there is a $5.8
million fiscal note and the state is not gaining. He related
his theory that when the state budget is reduced in future years
and there are less [staff] then it will result in the delay of
permit issuance.
1:31:43 PM
MS. KENT clarified that the program is envisioned and budgeted
as a $4.8 million program. She pointed out that DEC has already
been engaged in a permitting program and working with EPA on its
permitting program. The increase to the program was about $1.5
million which was the incremental amount that brought forward
the full resources necessary to implement NPDES in the state.
CO-CHAIR GATTO surmised that it is not a self-sustaining program
and thus still needs general funds.
MS. KENT related that currently the program has full funding
under the base budget for implementation of the NPDES. In
further response to Co-Chair Gatto, Ms. Kent opined that it
would be up to the legislature how the funding goes in the
future. She informed the committee that the DEC operates other
programs under a primacy mode and all the programs that it takes
on from the federal government are subject to ongoing federal
review to ensure sufficient funding to implement the program.
She then confirmed that [APDES] is funded in part by general
funds, federal funds, and fees. The fees for the program were
set by House Bill 361, which passed a number of years ago, that
allows the department to charge for direct cost of providing
services.
1:33:49 PM
REPRESENTATIVE SEATON related his understanding that the fees
are expected to almost double under NPDES primacy.
MS. KENT replied yes. The department's direct cost of
implementing the program in which the department writes, issues,
and performs compliance work results in an increase in the
department's direct costs by a factor of about 1.8.
MS. KENT, in response to a question from Representative
Guttenberg, related that at NPDES program approval, the
department will need to revise the existing fees. The approach
to the fees was established by House Bill 361 and that remains
in place. The change is in regard to the direct work that will
be done that supports the permitting and compliance, which will
cause the fees to increase.
1:35:49 PM
REPRESENTATIVE GUTTENBERG referred to the recommendations from
the work group on page 20 of the NPDES Workgroup Report. He
drew attention to the following language, "The large community
wastewater workgroup member does not think primacy will provide
significant benefits to this segment of the regulated community
and does not support primacy." He invited comment.
MS. KENT informed the committee that the large community
wastewater workgroup member was from the Municipality of
Anchorage (MOA). She related that the permit for Anchorage's
facility will remain with EPA and will not transfer over to the
state. Therefore, that member did not see any benefit to NPDES
primacy since it would not impact Anchorage's facility. In
further response to Representative Guttenberg, Ms. Kent related
that DEC did not make any distinction, for work group purposes,
regarding what is a large facility versus a small facility.
1:37:59 PM
REPRESENTATIVE GUTTENBERG asked if Fairbanks, Wrangell, and
Sitka are covered.
CO-CHAIR GATTO surmised that Representative Guttenberg is
interested in whether there is a fixed number that determines
coverage or non-coverage.
MS. KENT specified that all of the facilities with a discharge
to a surface water body will need a NPDES permit.
1:38:44 PM
MR. CAMERON related that the situation with MOA is unique in
that it enjoys a waiver from the requirement of providing
secondary treatment for its domestic wastewater. The waiver is
only available to large municipalities that discharge to marine
waters, and thus none of the Interior communities are eligible
for that waiver. In fact, MOA may have the only facility
enjoying that waiver.
MS. KENT recalled that four to five communities qualify for the
aforementioned waiver. She offered to provide the committee
with a list of those facilities [enjoying the waiver]. She then
pointed out that those facilities would still need to have a
NPDES permit, but the EPA would maintain the responsibility to
issue the permits and ensure compliance with those permits. The
department would continue to certify those permits much like it
already does with existing permits.
1:40:10 PM
REPRESENTATIVE SEATON asked if the fees for those facilities
would increase by a factor of 1.8 or would those fees remain at
the level the EPA and the state charge.
MS. KENT responded that the fees [for the facilities receiving a
waiver] would be the same as they are today since those fees are
based on the department certifying the permit.
1:41:23 PM
REPRESENTATIVE EDGMON commented that this legislation addresses
an enormous issue. He then asked whether HB 149 is all-
encompassing to the point that one could say that it deals with
the state's wastewater permitting program in its entirety.
MS. KENT answered that HB 149 is all-encompassing in terms of
wastewater discharges to waters of the U.S. Although the
[department] does have other state authorities that require
those discharging wastewater to the surface of the land or to
ground water to obtain an authorization from DEC, that program
is unaffected by these NPDES primacy efforts.
1:42:33 PM
REPRESENTATIVE EDGMON, referring to the March 19, 2007,
memorandum from Ms. Kent, highlighted that on the first page it
relates that the CWA allows penalties of up to $31,500 per day
per violation. Using the Pebble Mine as a backdrop, he inquired
as to the amount of penalties.
MR. CAMERON clarified that the department does not have the same
penalty amounts as EPA because under the state's existing
statutes the state can seek recovery in the amount of up to
$100,000 for the initial violation and not more than $10,000 for
each day after that.
REPRESENTATIVE EDGMON clarified that his question was regarding
placing HB 149 in relation to a project of the scope of the
Pebble Mine.
1:44:57 PM
REPRESENTATIVE EDGMON related his understanding that Section 2
seems to be straightforward in regard to requiring prior
authorization from the department for the discharge of solid or
liquid waste. However, Section 4(e)(4) includes the following
qualifier "if the discharge is incidental to the activity and
the activity does not produce a discharge from a point source".
Therefore, he inquired as to why a similar qualifier is not
included in Section 2. He also inquired as to whether [the
aforementioned qualifying language] came from the original work
group and is in addition to the EPA requirements.
MR. CAMERON explained that Section 2(a) is the general statement
that certain activities require authorization while Section 4(e)
specifies exceptions that are not covered under Section 2(a).
Section 4(e) specifies those activities that are exempt from the
requirement of obtaining an authorization unless they result in
a discharge into waters of the U.S. Therefore, discharges to
land or ground water would not need prior state authorization.
1:47:27 PM
REPRESENTATIVE EDGMON inquired as to who makes the determination
as to whether the discharge is incidental to the activity.
MR. CAMERON said that someone at DEC would have a judgment call
to make.
MS. KENT related that DEC's permit staff would make that
decision when someone asks whether an authorization from DEC is
necessary or from a public complaint in which someone questions
what someone else is doing.
1:48:12 PM
CO-CHAIR GATTO drew attention to page 2, line 25, which inserts
the language "publicly owned treatment works". He asked if that
language means only government owned.
MR. CAMERON pointed out that it is a term that is defined in
federal regulations to mean government owned, not privately
owned.
CO-CHAIR GATTO surmised then that if there was a privately owned
treatment works that was larger than a similar government owned
treatment works, there is an exclusion.
MR. CAMERON noted his agreement, and related that the department
tried to extend the scope of this exemption to include privately
owned treatment works that have been authorized by the
department. However, that would have gone beyond the exemption
under federal law and could not be approved by EPA.
1:49:09 PM
REPRESENTATIVE SEATON directed attention to page 3, line 19,
which addresses firing/rifle ranges and the language: ", unless
it results in a discharge into waters of the United States." In
a situation in which a skeet or trap range and the pellets go
into the water, he asked if these will be non-exempt and will
DEC require a NPDES for lead in those areas.
MS. KENT informed the committee that such facilities are
currently required to obtain an NPDES permit from EPA and this
[legislation] doesn't change the requirements for obtaining a
NPDES permit for a firing range.
1:50:23 PM
REPRESENTATIVE SEATON related his understanding that existing
statute exempts such facilities, but the new language on page 3,
line 19, changes that exemption to a non-exemption if the
facility [discharges into] the water.
MS. KENT reminded the committee that this portion of statute
includes the disposal of liquids and solid waste to the lands
and waters of the state. Therefore, the exemption was to remove
the requirement to obtain a state authorization for firing
munitions at a firing range. However, because EPA's NPDES
permit program requires an NPDES permit for firing into waters
of the U.S., the state NPDES does as well. Therefore, the
department maintained a carve-out such that a permit is not
required for a firing range that discharges to land. Still, a
permit under the NPDES program run by the state or the EPA does
require a NPDES permit.
1:51:47 PM
CO-CHAIR GATTO recalled the firing range in Eagle River and
reminded the committee that the lower end of the Eagle River is
next to the inlet. If munitions land in wetlands, which
ultimately end up in the waters of the U.S., "does that pretty
much nullify everybody from doing anything every time," he
asked.
MS. KENT related her understanding that the EPA required the
Eagle River Flats to apply for a NPDES permit for the range,
which she opined is still an active range. She said she
suspected that the EPA did not issue a permit, although it
required a permit application to be submitted.
1:52:49 PM
REPRESENTATIVE WILSON commented that in Sitka there is a firing
range over waters, which led to a change in the makeup of the
shot.
1:53:19 PM
CO-CHAIR JOHNSON moved to report HB 149, as amended, out of
committee with individual recommendations and the accompanying
fiscal notes. There being no objection, CSHB 149(RES) was
reported from the House Resources Standing Committee.
HB 128-OIL & GAS PRODUCTION TAX: EXPENDITURES
1:53:46 PM
CO-CHAIR GATTO announced that the final order of business would
be HOUSE BILL NO. 128, "An Act relating to allowable lease
expenditures for the purpose of determining the production tax
value of oil and gas for the purposes of the oil and gas
production tax; and providing for an effective date."
1:54:27 PM
REPRESENTATIVE SEATON moved that the committee adopt CSHB
128(O&G) for discussion purposes. There being no objection,
CSHB 128(O&G) was before the committee.
1:55:20 PM
CONRAD JACKSON, Staff to Representative Kurt Olson, Alaska State
Legislature, speaking on behalf of the sponsor, explained that
HB 128 was introduced in order to close the perceived loophole
in AS 43.55.163 that specifies the lease expenditures that are
not available for credit or deduction against the production
profits tax (PPT). The sponsor, he related, believes that it is
not appropriate for Alaskans to be held responsible for the
expenses of repair or replacement of property or equipment that
is improperly maintained or not maintained at all. The sponsor
does not intend to open up the entire PPT, he further related.
Mr. Jackson pointed out that CSHB 128(O&G) includes some minor
changes on page 3 such as the inclusion of the commissioner of
the Department of Natural Resources (DNR) and the entire Alaska
Oil and Gas Conservation Commission (AOGCC), and inclusion of a
provision that would address equipment that was not maintained.
He noted that the committee packet should include an amendment
that has been suggested by the Department of Revenue (DOR). He
indicated that the sponsor is amenable to the adoption of the
amendment.
1:58:19 PM
CO-CHAIR GATTO asked if the oil companies, in failing to
properly maintain [their equipment], did something "not right"
or something illegal.
MR. CONRAD deferred to Mr. Bullock with Legislative Legal
Services. He then related his understanding that under the PPT
if an oil company does not properly maintain a transit line, for
example, which creates the need for repair, those expenses would
ultimately be deductible from the PPT.
CO-CHAIR GATTO related his understanding that under the PPT
expenses, maintenance, and repairs are deductible. Furthermore,
replacement is probably deductible, he opined. Co-Chair Gatto
expressed his desire to be on firm legal ground regarding
whether what the oil companies did not do was a violation that
would cause the introduction of legislation removing the oil
companies' ability to take deductions.
2:00:58 PM
JONATHON IVERSEN, Director, Anchorage Office, Tax Divisions,
Department of Revenue, related DOR's support for HB 128. The
administration, he clarified, supports excluding these costs
from being deducted or from being allowed as credits. Although
the current law, depending upon the factual circumstances, would
provide the ability to exclude a cost that is attributable to
gross negligence, for example. Therefore, some or potentially
all of the costs [being targeted by HB 128] would be excluded
under the current law. Mr. Iverson related that DOR supports HB
128 because it clarifies the actual status of the law.
Furthermore, the legislation would add strength to any
regulation that DOR would write. If the legislature wants to
have a clear manner in which to exclude these costs, then it
should be done in the statute because regulations written under
the current law would be subject to legal challenge.
MR. IVERSEN then turned to DOR's interpretations of
[subparagraphs] (B) and (C) on page 3. At this point, DOR
interprets subparagraph (B) to address costs incurred to
maintain operational capability of facilities or equipment
during a shut down due to improper maintenance or practice.
Therefore, an auditor would completely exclude all operating
costs for equipment or facilities during a shut down when due to
improper maintenance or lack thereof. Subparagraph (C) on page
3, he related, would come into effect during times of diminished
production such as when production is reduced by half due to
improper maintenance while the costs of operation are only
reduced by one-third, for instance. In such a situation, the
portion of the reduction in operating costs that does not track
the reduction in production would be excluded. In other words,
an auditor would exclude an operating cost to the extent the
percentage reduction in production is greater than the
percentage reduction in operating costs when the production is
reduced due to failure to properly maintain the property. Mr.
Iversen noted that HB 128 incorporates one of DOR's early
suggestions [in paragraph (19) on page 3] to use the language
"taking into consideration". The aforementioned was desired in
the case the standards do not apply to the situation and thus
DOR is given more flexibility to have the discretion to consider
or give weight to any given practice, depending upon the
circumstances.
2:05:50 PM
CO-CHAIR GATTO highlighted the difficulty with the language
"improperly maintained" because "proper" versus "improper" will
have to be defined. He then posed a situation in which a
company saved $100 from improper maintenance and then spent $100
on fixing the improper maintenance. In such a situation, should
the company be penalized if it is a wash in money?
2:08:08 PM
REPRESENTATIVE ROSES, in terms of allowed deductions, asked if
the companies are allowed to depreciate the line. He further
asked if the companies take a depreciation off of their
corporate taxes or their PPT.
MR. IVERSEN answered that capital expenditures under PPT are
both "deducted" immediately and subject to a credit. Therefore,
there is not a depreciation type of expense under the net
profits scenario. In further response to Representative Roses,
Mr. Iversen specified that the line itself is not a depreciable
commodity, if there were no repairs or replacements.
REPRESENTATIVE ROSES posed a situation in which a company, due
to negligence, has to replace the pipe in the 18th or 19th year
of its 15- to 20-year [estimated life]. In such a situation,
would the entire amount of that repair not be allowed [as a
deduction] since in another year the pipe would have to have
been replaced. Representative Roses specified that his concern
is one of equitability since he recalled that the PPT included
language stating that any negligence [was not allowed as a
deduction].
2:09:57 PM
REPRESENTATIVE WILSON pointed out that a company for which it
was costly to maintain something and that company chose not to
maintain it for a while knowing that when it had to be fixed,
the cost of doing so could be deducted. On the other hand, if
such a repair cannot be deducted, the company may maintain it in
order to avoid more costly repairs later that would not be
deductible.
MR. IVERSON opined that those would be business-driven decisions
rather than tax-driven decisions. The equipment at issue was in
place prior to the enactment of the PPT, he noted.
REPRESENTATIVE WILSON asked if HB 128 would make a difference
from now on.
MR. IVERSON said that he believes HB 128 would make a difference
because it improves the incentives. As a policy matter, it
pushes the incentives toward proper maintenance and giving a
limit as to where the credits would be allowed and whether the
costs being discussed would be deductible.
2:12:45 PM
REPRESENTATIVE ROSES related his understanding that although
negligence already disallows a deduction, HB 128 provides
clarity. However, once it's retroactive the situation is
changed due to an occurrence rather than predicting it prior.
Therefore, Representative Roses said that he supported HB 128,
save the retroactivity provision.
2:14:32 PM
REPRESENTATIVE SEATON, returning to depreciation, posed a
situation in which something in the oil field is designed for a
useful life of 30 years. Under this provision if something
happens to it even when it lasted through its full design life,
would it be considered nondeductible because the company did not
expend a lot of money to obtain a lifetime beyond its expected
life.
MR. IVERSON clarified that under current law costs due to gross
negligence can be excluded. He then opined that it is really a
facts and circumstance type of determination, especially since
the life of technology is constantly changing. The
aforementioned, he further opined, is why DNR and the AOGCC are
involved so that they would have the ability to evaluate whether
a pipeline would reasonably be expected to last to a certain
age.
2:16:43 PM
CO-CHAIR GATTO commented that none of the committee members are
experts on pipelines, but everyone is an expert with regard to
maintenance and make choices on maintenance every day. He then
questioned whether anything could have been done to extend the
life of the pipeline to 35 years when it would have needed to be
replaced even with maintenance. Co-Chair Gatto asked whether
the state is going too far in penalizing a company for failing
to do a certain amount of maintenance not knowing what the
appropriate amount was.
MR. IVERSON reminded the committee that under the Pipeline
Systems Integrity Office (PSIO) within DNR, the quality
assurance programs required should address an ongoing
maintenance plan in which revisions to life expectancy and
related revisions to planned maintenance are incorporated.
2:18:31 PM
JONNE SLEMONS, Acting Coordinator, Engineering Integrity
Coordinator's Office, Division of Oil & Gas, Department of
Natural Resources, in response to Co-Chair Gatto, explained that
the Leak Monitoring and Engineering Integrity Coordinator's
Office (LMEICO) was not actually an emergency order, although it
may have had that appearance since it was initiated immediately
after the August shutdown of a portion of Prudhoe Bay. She
related that LMEICO was intended to be a long-term plan/project
and the PSIO replaces it in order to distinguish between the
scopes of the two programs, which are significantly different
from an administrative point of view.
2:19:56 PM
REPRESENTATIVE SEATON surmised then that if anything has to be
replaced and it did not have proper maintenance, then it may not
be deductible. He further surmised that the aforementioned will
be determined by the commissioners. Representative Seaton said,
"Whether it's pumps or valves, or well casings, or anything
else, if there was any possible way they could've extended the
life of that and not whether it's an emergency shutdown, but if
it just has to be replaced, then ... this calls into question
whether that's going to be deductible and creditable. Is that
correct?"
MR. IVERSON said it does call that into question, although how
far that determination is to go should be made clear by the
legislature on the record. He confirmed that improper
maintenance will be called into question, but it may not
necessarily only be in regard to the extension of the item's
useful life.
2:21:23 PM
REPRESENTATIVE SEATON clarified that the [legislation] isn't
necessarily addressing breakdowns. He related his understanding
that any time something is being replaced it would have a
capital credit when it is replaced because the item is worn out.
He asked if the deductibility and creditability of the capital
expenditure and operation money would be called into question,
if an item is showing wear and tear that could have been
maintained in order to extend the item's useful life.
MR. IVERSON responded that he believes that is correct with the
caveat that the issue is whether the item "achieves" its useful
life rather than extending its useful life.
2:22:37 PM
REPRESENTATIVE SEATON then posed a situation in which a facility
with a 30-year design life expectancy that exceeds that 30-year
design life, "we're now going to ... or we have the possibility
of disallowing the capital replacements or not."
MR. IVERSON said he thinks that is an option in either case, but
it would depend on the facts of any given case. The actual
useful life of an item may change depending on technology and
practices in the field.
2:23:42 PM
ROD MINTZ, Attorney, K & L Gates, informed the committee that he
is working with the Department of Revenue (DOR) and the
Department of Law (DOL) on production tax matters. With regard
to Representative Seaton's question, Mr. Mintz posed an example
of a facility with an expected useful life of 25 years that had
to be replaced after 23 years due to improper maintenance. He
said he understood Representative Seaton's question to be
whether in the aforementioned situation the legislation would
disallow the entire replacement costs although only two-twenty-
fifths of that would be attributable to the improper
maintenance. The current legislation could be read as having
that effect. However, the introductory language of the proposed
paragraph (19) refers to "that portion of the costs", which
could mean an allocation as to the portion of the costs that are
attributable to the improper maintenance versus the replacement
costs necessary in the ordinary course of events. Mr. Mintz
said that this is a situation in which it might be beneficial to
have some legislative clarification as to the intent of the
sponsors on this matter.
2:25:42 PM
REPRESENTATIVE SEATON surmised then that clarification is
necessary.
2:26:26 PM
REPRESENTATIVE ROSES recalled that early on the committee was
told that this language would help clarify the situation and
thus [the department] would not have to depend on negligence or
gross negligence to determine whether the situation under
discussion would be deductible. Representative Roses related
his understanding from Mr. Mintz that even if the language was
interpreted to mean an allocation as to the portion of the costs
attributable to the improper maintenance, the amount of
maintenance that contributed to the item not meeting its full
life would have to be determined. Would that be any less
difficult legally to define or defend as negligence or gross
negligence, he asked.
MR. MINTZ said that there are really two issues: the legal
standard and what the facts show. Under any legal standard, the
department will have to review the facts, consult with other
agencies, and apply the legal standard to the facts. There will
be controversy about that, especially when lots of money is at
stake. With regard to whether there is sufficient clarity as to
what the legal standard is, Mr. Mintz opined that the
legislation would clarify that there is a broader legal standard
in terms of disallowing costs than exists under the current law.
The current law essentially utilizes a standard of gross
negligence. If improper or lack of maintenance was due to
something lesser than gross negligence, such as imprudent
conduct or ordinary negligence, then it would be more difficult
to exclude that under the current standard than the standard
being proposed in HB 128. Therefore, if the desire is to make
the applicable standard more bullet proof, that would be
beneficial. The need to evaluate the facts under a particular
circumstance would remain, although there would be a better
standard in terms of the policy the legislature is interested in
implementing.
2:29:31 PM
REPRESENTATIVE ROSES asked if it would be difficult to prove
gross negligence in a situation in which someone uses water
instead of corrosion inhibitors.
MR. MINTZ reiterated the need to apply the standard to the
facts. He opined that there are surely situations in which the
conduct or failures and omissions on the part of a person are so
egregious that it would be easy to prove gross negligence.
However, gross negligence is certainly a narrower standard that
would apply to fewer cases than either ordinary negligence or
the standard proposed in HB 128.
2:30:38 PM
CO-CHAIR GATTO opined that the language "improperly maintained"
is difficult because there could be situations in which only a
section of the pipe is corroded. In such a situation, the
question becomes whether the pipe was improperly maintained over
its entire length or would the corroded portion only be subject
to the improper maintenance rule.
MR. MINTZ said that the question is the extent to which the
phrase "portion of the costs" is intended to provide an
allocation between the costs actually due to lack of maintenance
and the costs that would have been incurred in any event.
Again, he reiterated that the state could benefit from guidance
from the legislature as to what it intends.
2:32:02 PM
REPRESENTATIVE SEATON related his understanding that the
standard being implied in HB 128 is improper maintenance rather
than negligence. He pointed out that improper maintenance does
not need to be negligence. He inquired as to the "bullet-proof
relationship" between improper maintenance and negligence that
would be utilized in all cases.
MR. MINTZ stated that negligence is a very well-recognized
concept in the law while improper maintenance seems to be a new
concept for which he was not sure of the guidance available for
it. It seems that by adopting something other than a negligence
standard seems to indicate legislative intent to have a broader
standard. Furthermore, rather than reviewing the standard of
care the operator/producer is using, it reviews the results of
the maintenance practices or omissions. Therefore, Mr. Mintz
opined that it would be possible that costs would be excluded
under the improper maintenance standard but would not
necessarily be excluded under a negligence standard.
REPRESENTATIVE SEATON surmised then that improper maintenance
and negligence are not identical terms. Furthermore, improper
maintenance can cover more things than negligence and thus is a
much broader standard.
MR. MINTZ replied, "I don't know that I could quantify it as
being much broader or somewhat broader, but I do think it is
broader."
2:34:59 PM
REPRESENTATIVE GUTTENBERG highlighted that this state has a long
history of litigation with the oil industry and often simply to
define terms. He asked if the state's relationship with the oil
industry has resulted in definitions of the following terms:
"not maintained," "improperly maintained," "diminished
capacity," "standard practices of the industry," or "good
practices of the industry."
MR. MINTZ answered that as far as the tax law is concerned, the
state does not have those definitions. However, there is some
jurisprudence in regard to "good oil field practices" and
"reasonable producer standards." As to what standards exist
that would address this, he deferred to DNR and AOGCC
representatives.
2:36:49 PM
JOHN NORMAN, Commissioner/Chair, Alaska Oil & Gas Conservation
Commission (AOGCC), Department of Administration, explained that
the AOGCC is reviewing this from the viewpoint of the law of
general application that will reach into the years ahead,
although recent events may be driving this. If HB 128 passes,
AOGCC will do its best to implement it. Mr. Norman then offered
that there are basically four categories of behavior of an
individual or company. Those four categories are as follows:
an intentional or willful act; gross negligence or willful or
wanton conduct done in careless disregard to the consequences;
negligence; and strict liability in which no concern is given to
what led up to the incident. The first two categories, an
intentional act and gross negligence, are already included in
the legislation in Section 1(e)(6). The category of strict
liability is partially addressed in Section 1(e)(16). That
leaves the third category of negligence [in question]. He noted
his agreement with Mr. Mintz that an argument could be made that
the legislation disallows property that was not properly
maintained or that was negligently maintained. "Normally, in
gross negligence it often leaps out at you and the obvious cases
and situations will sort themselves out," he opined. He further
opined that such cases will be screened out by Section 1(e)(6).
He suggested that Section 1(e)(19) will be more difficult
because it seems to address ordinary negligence, although he
said he did not presume to know. Therefore, if the legislation
used the language "negligently maintained," the discussion would
be ended.
2:42:57 PM
MR. NORMAN suggested that if the intention is to penalize
negligent maintenance without imposing a strict liability, then
it might be best to use the term "negligence" for clarity. He
said that the words "good oil field practices" are preferred by
the AOGCC, and that it is his understanding that they are also
preferred by DNR and DOR. Those terms already appear in Alaska
law, specifically in AS 31.05.170(15) and in a number of places
in the state's regulations. He said that it is a more objective
and precise standard than one that says "standard practices of
the industry" which might invite a company to look at what
others in the oil field are doing and it is conceivable that the
prevailing number of operators there are all operating not in
accordance with good oil field practices. If they are all doing
it, they could argue that this is "standard practice" in this
field. He noted that there are a number of oil fields in the
world that do not practice what AOGCC would consider "good oil
field practices."
MR. NORMAN addressed the issue of replacement. He noted that
various components - compressors and gaskets, for example - have
a certain useful life, but that this is not necessarily exact.
Consequently, this could be inviting early replacement of
component parts that actually still have a longer life. When
the time comes to implement the bill's provisions by regulation,
AOGCC would strive to promulgate regulations in a manner that
does not discourage innovation, such as the pioneering of new
techniques and production methodologies. He said that this is
necessary because it sometimes takes years to figure out that
something does not work.
2:46:09 PM
MR. NORMAN advised the committee to re-think the policy being
established by Section 1, paragraphs (19)(A) and (B), because
operators are often reacting to an event. Paragraph (19)(A)
denies the cost of repair and replacement of property or
equipment that was not maintained or was improperly maintained.
Paragraph (19)(B) denies the cost of an operational shutdown of
the entire facility if it occurs as the result of improper
maintenance. He stated that AOGCC believes operators should be
allowed a certain amount of latitude in determining what is the
best way to respond to an event. For example, the safest and
most prudent way to handle a particular repair or replacement
might be to shut down the facility for a certain period of time.
However, under this new policy, an operator may instead elect to
keep everything running so as not to lose the deductibility of
the repair or replacement.
2:49:13 PM
MR. NORMAN pointed out that in partnership operating agreements,
the operating partners, as among themselves, do not normally
penalize an operating partner for simple negligence, because no
one would want to be an operator if, in effect, they are being
required to become an insurer of a perfect operation. He
requested that the legislature give AOGCC some guidance
regarding whether Section 1, paragraphs (6) and (16), mean
"negligence" or something broader than that, perhaps even
approaching strict liability.
2:50:09 PM
REPRESENTATIVE ROSES asked whether the term "good oil field
practices" is the measure that would be used in determining
intentional, wilful, or gross negligence.
2:50:36 PM
MR. NORMAN stated yes, it would certainly be a measure.
However, he said that what is looked for is the level of
culpability, or the degree of fault. For example, whether an
incident is not only a failure to follow good oil field
practices, but it is done in a knowing way and often with
careless disregard of the consequences. Occasionally in these
types of incidents, there will be memoranda to management with
management replying "Yes, we hear you, but we're opting to go
forward." He reiterated that usually gross negligence cases are
egregious violations that "jump out at you." He stated that
AOGCC's approach, unless directed otherwise by the legislature,
is to measure this type of incident against good oil field
engineering practice. He said that it is the operator's conduct
that identifies and brands the incident as gross negligence, as
opposed to just simple negligence where no one was aware that
this type of incident might occur.
2:52:41 PM
MR. NORMAN, in response to a question, noted that [the incident
which triggered this legislation] occurred in a transit line
exiting a treatment facility. He said that, in theory, this
line should have carried pipeline quality oil that would have
flowed on through and that is why this was a surprise, at least
on the one event that occurred. He related that there is
testimony by various operators that supports the notion that
maintenance is performed up to the anticipated length of useful
life. He stated that he did not know the facts in this
particular situation, and that if he did he would be unable to
comment because it would prejudge something that will ultimately
come before the AOGCC. However, he said that he can safely
state that it is less likely to find this level of corrosion in
a transit line as opposed to what is expected in a gathering
line. Foreseeability is always an element of negligence - if
something occurs and it is not foreseeable, then normally an
operator is not held to have been negligent.
2:54:17 PM
CO-CHAIR GATTO announced that CSHB 128(O&G) is being held over.
2:54:34 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:54 p.m.
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