Legislature(1993 - 1994)
05/08/1994 05:00 PM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE STATE AFFAIRS STANDING COMMITTEE
May 8, 1994
5:00 p.m.
MEMBERS PRESENT
Representative Al Vezey, Chairman
Representative Pete Kott, Vice Chairman
Representative Bettye Davis
Representative Gary Davis
Representative Harley Olberg
Representative Jerry Sanders
Representative Fran Ulmer
MEMBERS ABSENT
None
COMMITTEE CALENDAR
SB 377: "An Act relating to state agency fiscal
procedures, including procedures related to the
assessment and collection of certain taxes; and
providing for an effective date."
HELD IN COMMITTEE
WITNESS REGISTER
TOM WILLIAMS, Alaska Tax Counsel
BP Exploration
P.O. Box 196612
Anchorage, AK 99515
Phone: 564-5955
POSITION STATEMENT: Opposed CSSB 377(FIN)am and the proposed
HCSCSSB 377(STA)
TOM THERIOT, Manager
Alaska Interest Organization
Exxon Company of America
P.O. Box 196601
Anchorage, AK 99519
Phone: 564-3778
POSITION STATEMENT: Opposed CSSB 377(FIN)am
PREVIOUS ACTION
BILL: SB 377
SHORT TITLE: STATE AGENCY FISCAL PROCEDURES
SPONSOR(S): FINANCE
JRN-DATE JRN-PG ACTION
04/13/94 3633 (S) READ THE FIRST TIME/REFERRAL(S)
04/13/94 3633 (S) FINANCE
04/13/94 3650 (S) FIN WAIVED UNIFORM RULE 23
04/14/94 (S) FIN AT 09:00 AM SENATE FIN 518
04/20/94 (S) RLS AT 06:45 PM FAHRENKAMP
ROOM 203
04/21/94 (S) FIN AT 10:00 AM SENATE FIN 518
04/21/94 (S) RLS AT 02:15 PM FAHRENKAMP
ROOM 203
04/21/94 3839 (S) FIN RPT CS 6DP 1DNP SAME TITLE
04/21/94 3839 (S) FN TO SB & CS PUBLISHED(ADM)
04/21/94 3839 (S) ZERO FN TO SB & CS PUBLISHED
(REV)
04/22/94 3870 (S) RLS RPT 3CAL 1NR 4/22/94
04/22/94 3876 (S) READ THE SECOND TIME
04/22/94 3877 (S) FIN CS ADOPTED Y12 N8
04/22/94 3877 (S) AM NO 1 MOVED BY KERTTULA
04/22/94 3882 (S) QUESTION: AM NO 1 GERMANE?
04/22/94 3883 (S) AM NO 1 GERMANE Y17 N3
04/22/94 3883 (S) AM NO 1 ADOPTED Y14 N6
04/22/94 3883 (S) AM NO 2 MOVED BY DONLEY
04/22/94 3884 (S) AM NO 2 FAILED Y9 N11
04/22/94 3884 (S) ADVANCED TO THIRD READING UNAN
CONSENT
04/22/94 3884 (S) READ THE THIRD TIME
CSSB 377(FIN) AM
04/22/94 3884 (S) PASSED Y16 N4
04/22/94 3885 (S) EFFECTIVE DATE PASSED Y17 N3
04/22/94 3885 (S) Pearce NOTICE OF
RECONSIDERATION
04/22/94 3885 (S) TAKE UP RECON ON SAME DAY
WITHDRAWN
04/22/94 3937 (S) RECON TAKEN UP SAME DAY
Y18 N2
04/22/94 3937 (S) PASSED ON RECONSIDERATION
Y16 N4
04/22/94 3938 (S) EFFECTIVE DATE SAME AS PASSAGE
04/22/94 3941 (S) TRANSMITTED TO (H)
04/27/94 3746 (H) READ THE FIRST TIME/REFERRAL(S)
04/27/94 3747 (H) STA, O&G, JUDICIARY, FINANCE
05/07/94 (H) STA AT 08:00 PM CAPITOL 102
ACTION NARRATIVE
TAPE 94-57, SIDE A
Number 000
CHAIRMAN AL VEZEY called the meeting to order in the
Butrovich Room at 5:07 p.m. Members present were
REPRESENTATIVES KOTT, SANDERS, G. DAVIS and ULMER.
REPRESENTATIVES BILL HUDSON AND JEANNETTE JAMES joined the
committee table.
(REPRESENTATIVE OLBERG joined the meeting at 5:08 p.m.)
SB 377 - STATE AGENCY FISCAL PROCEDURES
TOM WILLIAMS, ALASKA TAX COUNSEL, BP EXPLORATION, testified
in opposition to CSSB 377(FIN)am and the proposed HCSCSSB
377(STA). He said,
"I was Commissioner of Revenue for Alaska from 1979 to 1982.
In my work for the state, I was the actual draftsman of
almost all of the tax regulations that underlie the
outstanding disputes over past taxes. I joined BP in 1987 -
five years after leaving government service. During those
five years I worked as an attorney in private practice on
real estate and banking matters, and as general counsel for
an Alaska Native Corporation.
"I am here today to testify on behalf of BP against the
proposed retroactive changes to the statute of limitations
that appear as sections 1, 8, 9 and 14 of the Senate's
version of SB 377, and as sections 1, 2, 3 and 7 of the
Administration's proposed House CS for SB 377 that Attorney
General Botelho gave the committee yesterday afternoon.
These retroactive changes are substantially the same in both
versions.
"Because oil and gas taxes are not very familiar to those
who don't specialize in them, let me take a few moments to
review how the process currently works. Today, the North
Slope should produce about 1.6 million barrels of oil.
Almost half of that oil is BP's. By the end of next month,
we will have to pay production tax on our oil. When we do,
we will also file tax returns explaining how we calculated
the amount of our tax. Then the ball is in the state's
court. The Department of Revenue has the right to audit our
tax returns, and they do. If the auditors believe BP should
have paid more tax than we actually did, they give us a bill
for the extra tax, plus interest. This bill for additional
tax is called an assessment. That's all an assessment is -
a bill for additional tax.
"When a taxpayer gets this bill or assessment, he has
several choices. He can pay the whole bill. He can dispute
the whole assessment by filing an appeal. Or he can pay
some of the assessment and dispute the rest. Alaska's tax
laws and regulations require taxpayers to pay any portion of
the tax bill that they do not contest.
"Now getting an assessment or tax bill doesn't necessarily
mean that you actually owe the additional money. Auditors
being human, they can make mistakes just like anyone else.
And BP has received assessments in the past where there were
arithmetic errors - in one case the total amount of the
assessment was $2 million more than the sum of the
individual parts. Other times the auditors may have misread
the tax laws and regulations and made a claim that is
incorrect or not allowed.
"Whatever the nature of a mistake in an assessment, a
taxpayer has the right to ask the state to correct the
error. The way a taxpayer asks for the correction is to
file an appeal. If the mistake is a simple one - say the
auditor added two plus two and wrote down five instead of
four - the taxpayer should ask for an informal conference
because it shouldn't take much to show the mistake to the
department and get it corrected. In fact, BP has usually
requested informal conferences when we appeal in order to
try to iron out the computational errors, such as the $2
million mistake I mentioned a moment ago.
"It has probably been suggested to at least some of you by
the Administration that BP has asked for these informal
conferences in order to drag out the appeal and postpone the
time we have to pay up. Let me state clearly now for the
record that BP asked for informal conferences, often with
encouragement from the department itself, in order to first
work out these computational items and other simple matters,
so that any more difficult underlying issues can then be
presented and dealt with on their own, without distractions
from these side issues.
"After the simple matters are addressed in the informal
conference, the taxpayer can ask for a formal hearing on the
more difficult questions, such as whether the auditors
misread the tax statutes and regulations. If the assessment
was clean in terms of math errors and the like, the taxpayer
can bypass the informal conference and go directly to formal
to address questions of legal interpretation and sound tax
policy. After the formal hearing, the Department's hearing
officer writes a decision. The Commissioner of Revenue then
reviews that decision. If the Commissioner approves the
decision, it is formally issued, and becomes the official
department position on the matter. At that stage, the
taxpayer has 30 days to appeal the decision to court. So
that, in outline, is how this tax appeals works.
"Now how does the statute of limitations fit into this
scheme? While the statute may seem complicated, it really
isn't if you remember just two simple rules - three years to
audit, six years to collect. The Department has three years
from the filing of a tax return in which to audit it and
send the taxpayer a bill for any additional tax that the
auditors think should have been paid. Then it has six years
from the time it sends that bill, in which to go to court if
necessary to collect it. The six year statute is satisfied
if, within the six years, the Department considers and
decides a tax appeal and the appeal gets into court. In
other words, when the appeal does get into court, it becomes
a `judicial proceeding' of the type that the six-year
statute talks about. So, let me restate the two simple
rules about the statute of limitations - three to audit, six
years for the Department to hear and decide the appeal.
"Now I would like to talk about what SB 377 and the
Administration are proposing with respect to the statute of
limitations. One is to change the three-year audit statute
so that, even after the three years are up, the auditors can
raise new and unrelated issues and increase their claims
without limit for more tax at any time so long as the
Department has not finished its consideration of the appeal
and issued its formal hearing decision. The second is to
change the six-year statute so that the clock for the six
years isn't running while the tax assessment is being
appealed within the Department of Revenue or in court.
"Think about what this means. The six-year statute
currently sets a time limit on how slowly the Department can
consider and decide a tax appeal. It has to get its work
done on the appeal in those six years. But under SB 377 and
the Administration's proposed House CS, the six-year clock
won't be running while the Department considers the appeal.
So the Department will, under this legislation, be free to
take 10 years, 15, 20, maybe even half a century, to make a
final decision. And, under the change proposed to the
three-year statute, at any point during all that time while
the Department is thinking about the appeal, it can change
its mind about what the tax laws meant years ago when that
taxpayer originally filed its return. This changing of the
Department's mind during the course of an extended
protracted tax appeal, is one of the most pernicious
problems Alaska has with its present tax system. And
because of tax confidentiality, it is one of the most
difficult to explain to the public with real life examples.
In effect, this revisionism in tax policy makes it
impossible for a taxpayer to know what the correct amount of
tax is when he has to file the return and pay the tax.
Absolutely, impossible.
"Really? you ask. Yes, really. Suppose I go the
Commissioner Rexwinkel and say, here's what's happening with
my oil, what I'm selling it for, what I'm trading it for,
what others are selling their oil for. And I ask him, how
do I compute my tax liability? How much do I owe? And
suppose he gives me an answer. Is that the correct and
final answer? No, it's not -at least not in our experience.
He's just the commissioner.
"There are a number of issues where taxpayers, in our
experience, including us and our predecessor Sohio, went to
the Department while I was commissioner, and they were told
how to deal with an issue. They were given answers, by me,
and by other people who were policy-makers in the Department
of Revenue at that time. And basically the taxpayers
followed the answers they were given. Although the auditors
now admit that what taxpayers were told was really the
policy of the Department back then, they claim that they are
not bound by prior policy, that it was a mistake, and they
can correct it and impose their new and very different tax
policy back through time to the periods when the
Department's original policy was different.
"Let me give you just one real-life example of this. It's
from last year's ARCO tax decision by the Alaska Supreme
Court. Under the separate accounting tax statute, taxpayers
were specifically allowed a tax deduction for interest on
money they borrowed to build the pipeline. The regulations
specifically allowed it, too. But the auditors claimed that
the interest was deductible only if the pipeline company
itself had actually borrowed the money. If the parent
company borrowed the money first and then lent it to the
pipeline company, they claimed the interest wasn't
deductible. Nothing in the regulation required this
strained reading, where the mere form of a deal would
dictate the tax substance. So in 1985, Commissioner Mary
Nordale, with Bruce Botelho as her Deputy Commissioner,
amended the regulation to make it absolutely clear that the
interest was deductible regardless of whether it was the
parent company, the pipeline company or some other
affiliated company that first borrowed the money to build
the pipeline. But that still wasn't the end of it. In 1986
or `87 the auditors began claiming that only part of the
interest was deductible, even though they admitted that all
of it was paid on money borrowed to build the pipeline.
They argued that a ratio should be applied to the interest,
based on ARCO's share of cost of the pipeline versus ARCO's
total assets. Such a ratio was used under separate
accounting, to limit the deductible interest on any money
ARCO borrowed to develop Prudhoe Bay - it was prescribed in
the statute, in the regulations, and the details for
calculating it were set out on the tax form. But there was
nothing like that ratio anywhere in the statute, regulations
or the tax form with respect to pipeline interest. The
auditors simply made it up, or their consultants helped
them. And ARCO had to appeal this all the way to the Alaska
Supreme Court before it was finally overturned. The ARCO
case is published in the Pacific Reporter, and you can find
it, if your interested, across the street. The full record
in the case is open to the public now, and if you're really
interested, you can probably go to the courts, they
probably still have the files in the case and you could
look through and confirm this for yourselves. I am not
making it up.
"And after all this, have the auditors finally stopped on
the pipeline-interest issue? No. I can't go into details
because of confidentiality, but since the ARCO case, they
have begun raising a new theory to limit BP's deductible
pipeline interest to something less than what we actually
paid.
"This story illustrates a subtle change over the last 10 to
15 years in the State's objective in auditing tax returns.
Instead of trying to audit and determine the correct amount
of tax, the objective has become one of trying to find the
largest possible amount of tax that can be claimed,
regardless whether it has any relation to the right amount
of tax or not. All that matters is that there at least be
some slim reed of rationalization to support the claim.
That way, if a company settles its tax disputes with the
State, it will have to pay something - maybe only five cents
on the dollar - to settle that claim. But, even at a nickel
on the dollar, those are nickels that wouldn't be collected
if the claim hadn't been made.
"Now the state itself has been giving indications that his
change has been happening. A few years back, Bruce Botelho
as Deputy Attorney General told a Senate committee that some
of the claims for past taxes were long shots in terms of
winning, but the dollars involved were so large the State
couldn't just back off and abandon them. And Bill
Floerchinger, who was Director of Oil Tax Audits and then
Assistant Revenue Commissioner under the Cowper
Administration, testified to the legislature that the
assessments had `a lot of water' in them - a gripping
metaphor for something big with little substance to it.
"The proposed changes to the statutes of limitations would
ratify this process and enshrine the authority to continue
it for all tax periods before this year. Even if this is
legal-and we contend it isn't - is this fair, is this wise
tax policy? I don't think so. Neither does the
Administration, because they want to cut it off for taxes
beginning this year. They must recognize the need for
certainty about the tax has to be satisfied if the oil
companies and others are going to make investments here in
the future. That's why their proposal for the future is a
rule that gives the Department five years to audit and make
its claim for more tax, and after that the tax claim cannot
be increased.
"But I ask you this, if their proposal for the past is such
poor policy that even they don't want it for the future, why
should it be allowed for any tax period, past or future? I
don't think it should. Enacting it just for the past does
not mean that Alaska will escape from the effects for the
future. Because enacting the retroactive changes sends this
message to all investors - if the state wants your money
badly enough, it will do anything, even change its laws
retroactively, in order to get it. That's pretty ominous to
someone thinking about putting real money here. It scares
them. It scares us.
"Now what about the Administration's claim that this
retroactive legislation is necessary to keep nearly $3
billion in tax claims from falling off the table? Are the
oil companies walking away from all responsibility for that
money because of a technicality?
"To answer that, let me point out that for some taxpayers,
including BP, the tree-year periods and the six-year periods
have already run out. It's not that they are about to run
out. The already have. Those events have happened, and
there is no way to legislate them away, any more than you
could legislate that the earth is flat.
"So things have happened that have legal consequences and
effects. Exactly what those consequences and effects are,
is a matter of dispute. We say that the three-year statute
prevents the state from raising new claims after that time.
The auditors raised them anyway. Whether those claims can
legally be raised, is a question that is now before the
Alaska Supreme Court, in the Exxon case.
"Similarly, for some of the assessments against BP and
others, more than six years have run since those assessments
were issued. We say the statute means what it say, and it's
too late for the state to collect the money it billed in
those assessments. The State says the clock under the
present law should be stopped during the time our appeal is
going on. Courts in other states have read similar
limitations on collection as having an implied `time out'
provision as the State contends. Again, this is a matter
for the Alaska courts to decide, they have not decided it so
far, but presumably they will in the future.
"Now just because our legal position is that the late claims
could not be made and that the oldest assessments cannot be
collected, does not mean we think we should pay nothing on
those claims at all in settlement. There is a material
litigation risk that our legal positions will be rejected by
the courts, and the State's position upheld. Just look at
the record, since 1970 in the number of tax cases, which is
over 20, that the Alaska Supreme Court has decided,
taxpayers have won only two. So the odds are against you.
If the State's position is upheld, we will have to pay and
the statutes of limitation won't prevent the State from
getting all the money it's entitled to. On the other hand,
if we win, then some of the State's claims will be lost.
"That may sound like a harsh result, but it's no different
from the case where someone gets hit by a car and then files
suit for damages the day after the statute of limitations
runs out for filing such lawsuits. It's too bad, but the
plaintiff can't sue. That's what the statute of limitations
does.
"Passing this retroactive legislation won't mean that the
statute of limitations issue will be resolved. Far from it.
Over 18 years of retroactivity is a long time to be reaching
back and changing things. It is likely there will be
litigation over that. And if there is, there will once
again be litigation risk for each side that the other side
will win. The cases on retroactivity suggest that the State
should win if the retroactive change cures some technical
flaw in the current statute, as opposed to materially
changing the substance of the current statute. If it is not
a curative change, the retroactivity should be
unconstitutional.
"Much of the question of whether retroactivity is curative
or not, will depend on what the present laws mean. If they
mean, what the State, in court, is arguing they mean, then
SB 377 is probably curative and the retroactivity will be
okay. Of course, if the courts rule in the State's favor on
the meaning of the present laws, then you don't need for 377
because they already mean what the amendment would do. And
on the other hand, if the courts rule that the present laws
don't mean what the State is arguing for, then SB 377 is
probably not curative and its retroactivity will be
unconstitutional.
"Representative Ulmer was very interested at yesterday's
hearing about whether the proposed retroactive changes in
this legislation are really nothing more than affirmation of
the Department of Revenue's longstanding practice and
position, or whether they are material departures from prior
practice. As a former Commissioner of Revenue, I have some
qualification to answer her question.
"The three-year statute of limitations was enacted in 1976.
The Department of Revenue's very first regulation about that
statute after its enactment was a regulation adopted under
the separate accounting tax, former AS 43.21. This
regulations was section 700(e) of chapter 12 of the
Department's regulations, adopted early in 1979. Around
1981 the chapter number was changed to 21 instead of 12, but
the regulation itself was left unchanged. I wrote that
regulation. John Messenger, the Deputy Revenue Commissioner
at that time, was my boss and he worked closely with me in
reviewing my drafts of the separate accounting regulations.
He is now one of the State's outside legal counsel in these
cases, and he was here for the negotiations over this
legislation during the past few days. If he is still
around, you could ask him to confirm what I tell you about
the separate accounting regulations.
"At any rate, section 700(e) says, and I quote: `Returns
and assessments under this section are subject to amendment
for three years from the date of the original notice of
assessment.' Let me repeat the key part - assessments are
subject to amendment for three years from the date of the
original notice of assessment. This doesn't sound to me
like a statement that new amendments can be made after the
three years are up. Does it to you?
"In point of fact, it was intended to mean - and as its
draftsman, I ought to know what it's supposed to mean - just
what it says. Three years to audit and issue the final tax
bill. No further amendments after that time is up, unless
the three years were extended by mutual agreement with the
taxpayer.
"Actually, and enough time has passed that I can safety say
it now, section 700(e) was really kind of a stretch of the
statute of limitations to begin with. The statute says it
runs from the date the taxpayer files its return. Under
separate accounting, that was no later than April 15th,
following the tax year. But section 700(e) says the three
years start running from the date of the notice of
assessment, which was August 15. Now there were aspects of
the separate accounting that made it more like an ad valorem
tax, in which the tax obligation is fixed when the tax
assessor sends you the tax bill. With separate accounting,
the obligation to pay up was fixed, subject to audit, by the
issuance of the tax bill or the assessment in August and not
by the return filed in April. And so Mr. Messenger and I
both felt this bit of a stretch was justifiable given the
peculiar nature of separate accounting. But the point is,
the Department's policy and practice, as reflected in this
1979 regulation and recodified in 1981, did not contemplate
issuing amended assessments after the three-year period,
plus extensions, had expired.
"In February 1984 state auditors issued BP's predecessor,
Sohio, an assessment for 1978 separate accounting taxes,
purporting to amend an earlier assessment issued in 1981 and
which Sohio had appealed. The three years under section
700(e) of the regulations had expired August 15, 1982. That
meant the first assessment in `81 was within the three
years, the second assessment in 1984 was after the three
years. Sohio protested the new assessment, arguing it was
barred by the three-year statute, that was in April 1984.
On October 16, 1984, the Attorney General's Office issued a
formal opinion, asserting that amendments to a timely
assessment could be made, even after the time was up, so
long as the appeal over the on time assessment was still
pending in the Department of Revenue and hadn't made it into
court.
"To my knowledge as a former Commissioner, this 1984
Attorney General's Opinion was the first public assertion,
by any agency of the state of Alaska, of the proposition
that the three-year statute does not prevent the Department
from issuing new claims after the three years are up, if the
appeal is still in the Department. I can say categorically
that this position now being asserted was not the
Department's position or policy while I was Commissioner
from April 16, 1979 to December 6, 1982.
"Sometime in late 1984 or 1985 Sohio wrote to Commissioner
Mary Nordale, asking her whether the 1984 AG's Opinion
reflected the position of the Department. She replied to
the effect that, while it was highly persuasive because the
Attorney General, after all, is legal counsel for the State,
it would not be addressed as a matter of formal departmental
policy until the issue had been presented in due course
through a formal tax appeal, at which time she or her
successor would decide whether, as a matter of policy, they
would seek to go as far as the AG's Opinion said the
Department could go.
"In March 1987, Sohio sued the State, seeking declaratory
judgement that the 1984 AG's Opinion was wrong. The
Attorney General, representing the Department of Revenue,
argued that the courts should not decide this issue until
the Department of Revenue had the chance to take a position
on it. In making this argument, the Attorney General
pointed to Commissioner Nordale's 1985 letter saying the
question would be formally decided by the Department in due
course through a formal hearing. Those arguments were
vigorously made throughout the course of Sohio's lawsuit
from 1987 until 1989. The Alaska Supreme Court decided that
case April 21, 1989. While noting that Commissioner
Nordale's letter made it appear very likely that the
Department would end up following the AG's Opinion, the
Court agreed with the Attorney General that the Department
had not yet formally taken this position. And so the Court
ordered the Sohio to go back to its tax appeal in the
Department to find out the Department's position is in due
course. Now what all this means is this, up until that
decision on April 21, 1989, when the Alaska Supreme Court
decided the case, the Department of Revenue was earnestly
and strenuously arguing to the courts that it had not taken
a position on the interpretation of the three year statute
of limitations. The Department can't have it both ways.
Either it didn't have a position on the three year statute,
just as it told the courts, which conflicts with what the
Administration is telling you now, or you're being told the
truth now, and it did have a position then and the
Department simply lied about to the Alaska Supreme Court.
"Now I don't actually believe that anyone has been
deliberately lying to anyone about this issue. And I don't
have to decide whether people were forgetful about things
back in 1989 or whether they are forgetful now. The fact
is, the Alaska Supreme Court ruled in 1989 that the
Department did not then have a position on the three-year
statute. If it had ruled otherwise, it would not have sent
the tax back to the Department. So that question has been
already considered and adjudged. The Department has a
position it has formally held for less than five years and
is asking you to use that as justification for rewriting the
law retroactively by more than 18 years.
"In conclusion, BP opposes the retroactive changes to the
statute of limitations for the following reasons. First, it
won't move the tax disputes any closer to a resolution. It
only makes a procedural change to allow both sides'
litigation teams to duke it out to the end. Second, it
won't save the alleged $3 billion from falling off the
table. Either it has already fallen, or the present laws
have already kept it from falling off. Either way, SB 377
won't change this. Third, the legislation usurps the
authority of the Judicial Branch by attempting to dictate
the outcome of litigation pending before the courts. We are
willing to let the courts decide, despite the State's "home
court" advantage. Remember, they're 20 plus to 2. We're
willing to let the courts decide. Why isn't the State?
Fourth, changing the rules retroactively by more than 18
years sets a dreadful precedent. If the State does this and
gets away with it, what will keep it from similarly
desperate retroactive measures in the future as it struggles
with the looming budget crunch? Fifth, it singles out one
single industry - oil - for unfair and unequal treatment.
Sixth, it sends a message to us and to all others who might
invest here that the usual stability one expects in the
United States is not really the case in Alaska.
"Thank you, Mr. Chairman and members of the committee for
this opportunity to testify."
Number 411
CHAIRMAN VEZEY stated he would forego questions to hear from
the next witness.
Number 418
TOM THERIOT, MANAGER, ALASKA INTEREST ORGANIZATION, EXXON
COMPANY U.S.A., gave the following testimony in opposition
of SB 377:
"Mr. Chairman, members of the committee, my name is Tom
Theriot. I am manager of the Alaska Interest Organization
for Exxon Company, U.S.A. In this position, I have
management stewardship for Exxon's production interest on
the North Slope of Alaska. Let me thank you up front for
allowing me the opportunity to testify before your committee
this afternoon. I am here this afternoon to voice strong
opposition to SB 377 because of the unfavorable statute of
limitation provisions, which were formerly SB 185. As you
may be aware, Exxon has strongly opposed the legislation
since it was first introduced in April of last year, for
reasons I'll cite in a moment. Obviously, we support the
position of the Alaska Oil & Gas Association in opposition
to the bill, and we do appreciate the efforts of many others
from the business community, including some Alaska Native
corporations, and others who have come out in opposition to
this legislation. Our General Tax Counsel, Mr. Paul
Sullivan, has testified in opposition to this legislation on
two occasions - In April of 1993 before the Senate Judiciary
Committee, and then again in April of this year before
Senate Labor and Commerce. I have provided copies of the
more expansive 1993 testimony for your reference. As you
study it, should you have any questions, I'll be happy to
try to answer them.
"I'll be very brief this afternoon, and I really only want
to touch on the negative aspects of the legislation from a
businessman's point of view. As Manager of Exxon's Alaska
production assets, a primary responsibility of mine is one
of ongoing planning and consideration of future investments.
In looking at the legislation from the standpoint of
managing the business and making investment decisions on how
best to develop the oil and gas reserves, this legislation
is bad policy, it sets a bad precedent in the State, and it
sends the wrong signal in terms of the business climate here
in Alaska. The retroactivity aspects of the bill, back to
1976, are particularly onerous, and certainly erode our
confidence in our ability to do business in the state.
"We recognize this is a business that involves risks, and we
are prepared to deal with what I call the traditional risks.
For example, will the recovery of oil live up to our
production expectations? Can we reasonably estimate the
investments required to recover the oil? What is a
reasonable range of future prices that we can expect? These
are risks we accept and learn to deal with to help us assess
the economic viability of investment opportunities.
"What is very difficult to contemplate are the risks that
materialize for me as a businessman as a result of
legislation like SB 377. Specifically, what are the tax and
other state rules that affect the project? When we invest,
can we have the confidence and faith that those rules won't
change? Or are we at risk that they might change? Not just
for the future, but maybe for the past too. It would
clearly be desirable that our investment decisions would not
have to include this added risk - a risk that further
diminishes the attractiveness of that investment.
"Obviously, we need clarity and stability in the legislative
and regulatory climate in fiscal and other matters. We will
always want that, and will always ask the legislature to do
what you can to help build and create that climate.
"I am aware of some of the concepts that have been offered
up in the committee substitute, that purportedly add
certainty to what taxpayers and investors can expect in the
State prospectively. Indeed, these provisions may be
beneficial, but at the same time, they are tainted as they
are part of legislation which provides for retroactive
changes to other aspects of the tax law. While these
provisions lay out some ground rules for doing business in
the future, one would have to question for how long? A
year, two years, or until the State decides to change them
again? With passage of this legislation, precedent in the
State would suggest that the policy makers truly don't value
the stability and certainty that the business community so
desperately needs.
"For the reasons, I've stated, Exxon strongly opposes
legislation containing retroactive statute of limitations
provisions as currently written in SB 377. We urge this
committee and the legislature to reject SB 377.
Thank you very much for the opportunity to testify before
you."
Number 471
ADJOURNMENT
CHAIRMAN VEZEY stated the House State Affairs Committee
would reconvene at 8:00 a.m., May 9, 1994, thereby
adjourning the meeting at 5:43 p.m.
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