04/25/2005 08:39 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HJR1 | |
| HJR2 | |
| HB223 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
April 25, 2005
8:39 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Peggy Wilson
Representative Max Gruenberg
MEMBERS ABSENT
Representative Paul Seaton
Representative Carl Moses
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 1
Proposing a balanced budget amendment to the Constitution of the
State of Alaska relating to an appropriation limit.
- HEARD AND HELD
SPONSOR SUBSTITUTE FOR HOUSE JOINT RESOLUTION NO. 2
Proposing amendments to the Constitution of the State of Alaska
creating and relating to the gas revenue endowment fund,
relating to deposits to the fund, limiting appropriations from
the fund based on an averaged percent of the fund market value,
relating to deposits to the permanent fund, and relating to
deposits to the budget reserve fund.
- HEARD AND HELD
HOUSE BILL NO. 223
"An Act levying a tax on certain known resources of natural gas,
conditionally repealing the levy of that tax, and authorizing a
credit for payments of that tax against amounts due under the
oil and gas properties production (severance) tax if
requirements relating to the sale and delivery of the natural
gas are met; and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HJR 1
SHORT TITLE: CONST AM: BALANCED BUDGET AMENDMENT
SPONSOR(S): REPRESENTATIVE(S) ROKEBERG, BERKOWITZ
01/10/05 (H) PREFILE RELEASED 12/30/04
01/10/05 (H) READ THE FIRST TIME - REFERRALS
01/10/05 (H) W&M, JUD, FIN
04/25/05 (H) W&M AT 8:30 AM CAPITOL 106
BILL: HJR 2
SHORT TITLE: CONST. AM: GAS REVENUE ENDOWMENT FUND
SPONSOR(S): REPRESENTATIVE(S) HAWKER
01/10/05 (H) PREFILE RELEASED 12/30/04
01/10/05 (H) READ THE FIRST TIME - REFERRALS
01/10/05 (H) W&M, JUD, FIN
04/01/05 (H) SPONSOR SUBSTITUTE INTRODUCED
04/01/05 (H) READ THE FIRST TIME - REFERRALS
04/01/05 (H) W&M, JUD, FIN
04/25/05 (H) W&M AT 8:30 AM CAPITOL 106
BILL: HB 223
SHORT TITLE: NATURAL GAS PIPELINE INCENTIVE/ GAS TAX
SPONSOR(S): REPRESENTATIVE(S) CROFT
03/17/05 (H) READ THE FIRST TIME - REFERRALS
03/17/05 (H) W&M, O&G, RES
04/25/05 (H) W&M AT 8:30 AM CAPITOL 106
WITNESS REGISTER
REPRESENTATIVE ETHAN BERKOWITZ
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of HJR 1.
REPRESENTATIVE MIKE HAWKER
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of HJR 2.
REPRESENTATIVE ERIC CROFT
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as the sponsor of HB 223.
MARK GNADT, Staff
to Representative Eric Croft
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Offered information on HB 223.
MICHAEL HURLEY, Director of State Government Relations
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to HB 223.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 8:39:46 AM. Representatives
Weyhrauch, Rokeberg, Wilson, and Gruenberg were present at the
call to order. Representative Samuels arrived as the meeting
was in progress.
HJR 1-CONST AM: BALANCED BUDGET AMENDMENT
8:40:31 AM
CHAIR WEYHRAUCH announced that the first order of business would
be HOUSE JOINT RESOLUTION NO. 1, Proposing a balanced budget
amendment to the Constitution of the State of Alaska relating to
an appropriation limit.
REPRESENTATIVE WILSON moved that the committee adopt CSHJR 1,
Version 24-LS0156\Y, Cook, 3/7/05, as its working document.
There being no objection, Version Y was before the committee.
8:41:12 AM
REPRESENTATIVE ROKEBERG, speaking one of the sponsors of HJR 1,
explained that Alaska has no constitutional requirement for a
balanced budget, instead Alaska has a statutory requirement for
the succeeding years after a current year of a balanced budget.
He related his belief that Alaska should have a balanced budget
policy, particularly for the current fiscal year. The
constitution and the statutes seem to allow a situation in which
there is a current deficit that is financed by tax anticipation
notes and [the legislature can] merely budget for the succeeding
year's budget, which would result in continual deficits to be
corrected after the fact. This resolution is the first step in
developing a long-range fiscal plan, he added.
8:42:53 AM
REPRESENTATIVE ETHAN BERKOWITZ, Alaska State Legislature,
speaking as one of the prime sponsors, said this resolution
proposes two things: to transition to a balanced budget
requirement and to require the legislature to pass a balanced
budget. He related that the constitutional amendment should be
simple and easy to understand with statements of principle. Any
further explanation of what constitutes "balanced" can be
addressed statutorily, he said. He added that this resolution
will aid in finding consensus between both parties' caucuses.
CHAIR WEYHRAUCH inquired as to the cite for the statutory
requirement to have a balanced budget for succeeding years.
REPRESENTATIVE ROKEBERG specified that the statute is AS
37.07.020(c).
8:47:09 AM
REPRESENTATIVE WILSON asked how HJR 1 would change the [process
that the legislature currently undergoes when balancing a
budget].
REPRESENTATIVE ROKEBERG answered that there might not
necessarily be many differences in terms of the "end product,"
instead the change will be the process the legislature uses to
get to that end product. This process will provide assurance to
the public that the legislature has adequate funds. He related
that the constitutional budget reserve (CBR) fund has been
utilized often in order to balance the budget, which is evident
to the public. However, this year supplemental budgets, new
funds, and other devices have been utilized, all of which seems
to confuse the public, he opined. Representative Rokeberg
reiterated that [under the current process] it would be possible
for the legislature to actually pass an imbalanced budget and
then realign in the next legislature, which he opined is bad
public policy.
8:48:58 AM
CHAIR WEYHRAUCH related his understanding that in the context of
HJR 1, the term "balanced" refers to revenues equaling expenses
rather than "fair."
REPRESENTATIVE BERKOWITZ answered, "Yes."
8:49:12 AM
CHAIR WEYHRAUCH proposed a hypothetical situation in which the
legislature passes a budget in which revenues equal expenses,
and related his understanding that the legislature could
appropriate the funds to the CBR and the corpus of the permanent
fund while not having enough money for state government. He
surmised that the aforementioned could be considered "balanced."
Furthermore, the governor could veto, through his line item
authority, provisions of any budget legislation and thus the
governor could throw the budget out of balance. He asked
whether the aforementioned actions of the governor could be
considered an unconstitutional act because this resolution only
provides for the legislature.
REPRESENTATIVE ROKEBERG responded that the resolution's language
speaks to the submission of the budget by the governor, with
follow-up action by the legislature. He opined that the
aforementioned is an "excellent point" that will have to be
addressed in subsequent legislation.
8:50:55 AM
CHAIR WEYHRAUCH asked how this resolution would prevent fiscal
gaps from occurring during low oil prices. He then questioned
whether this resolution would be bad public policy because it
would force the spending of money [the legislature] doesn't want
to spend because oil prices are so high and revenues are greater
than anticipated expenses.
8:52:30 AM
REPRESENTATIVE BERKOWITZ related his belief that a balanced
budget requirement forces fiscal discipline because there is no
requirement for any legislature, in a year of surplus, to spend
all its revenues. He recalled that previous discussions
concerning long-range fiscal plans have been "too fast and too
controversial" and as a consequence no progress is made.
Representative Berkowitz opined that in order to make progress,
the legislature needs to slowly remove some of the options for
tangential amendments and debates.
8:54:01 AM
REPRESENTATIVE ROKEBERG reiterated that there is no requirement
[in HJR 1] to spend more than the state has, which is merely
sound fiscal prudence. He then focused on Representative
Wilson's question regarding potential changes with the passage
of HJR 1, and suggested that this resolution would prohibit the
tactic of a bifurcated budget. He explained that a bifurcated
budget could result from a situation in which the majority is
not able to obtain a three-quarter vote and thus decides to
adjourn the session without passing a budget. The
aforementioned would result in a partially funded cash flow that
doesn't go into the CBR, and upon returning in January the
[budget] would be revisited. Although he opined that the
aforementioned tactic isn't particularly prudent, it has been
discussed out of frustration.
8:55:37 AM
REPRESENTATIVE GRUENBERG related his belief that HJR 1 is very
clear and most voters could understand it. Although he
acknowledged Representative Berkowitz's concern that there are
too many undefined terms in HJR 1, he pointed out that the
courts and the legislature define the terms rather than the
constitution, which is what differentiates the constitution from
a statute. He reiterated that the resolution should be simple
so that people can understand it.
CHAIR WEYHRAUCH commented that one of the issues that he reviews
with these types of amendments is regarding the balance of power
between the executive and the legislative branch. In reviewing
HJR 1 it seems that the following language: "[Section 16.]
General fund appropriations by the legislature shall not exceed
anticipated revenue." cedes authority to the executive branch.
However, the resolution doesn't specify the governor's authority
once that happens. Also all of [the appropriation legislation]
would have some impact on the budget and necessitate review of
the mix as a whole in order to determine the effect on revenues
and expenditures. He questioned how one would manage that in
the legislature and the executive branch. He also questioned
whether [the legislature] would simply cede the authority for
the balanced budget amendment to the governor because if [the
legislature] passes bills that don't have a balance, then it may
be engaging in [an] unconstitutional act.
8:59:34 AM
REPRESENTATIVE ROKEBERG, speaking to Representative Gruenberg's
comments regarding the original HJR 1, related that the
statement, "The budget for each fiscal year shall be balanced
with the appropriations do not exceed the amounts available for
expenditures under the appropriations," is different than
stating, "Appropriations shall not exceed anticipated revenues."
He related his belief that there is a significant problem with
the [definition of] "anticipated revenues," particularly because
Alaska has various sources of funds available for appropriation,
including the CBR and various dedicated funds. The debate is
whether or not those are considered "revenues," which is why
Version Y takes a more "neutral" standpoint on the issue.
REPRESENTATIVE ROKEBERG then turned his attention to Chair
Weyhrauch's comments, and stated that the budget building
process should ultimately be determined by the legislature and
balanced before adjournment. The duty of the Finance Committees
is to explain to the legislature the expenditures in the budget
[and how they] will be covered by available revenues. The
legislature can't restrict the ability of the governor to
exercise his veto power because that's a conflict of law within
the constitution. However, by exercising his/her veto power,
the governor can only decrease spending as opposed to increasing
it.
9:02:24 AM
REPRESENTATIVE GRUENBERG related his understanding that 44
states have balanced budget amendments. He opined that perhaps
an analysis of the aforementioned amendments could help
determine the appropriate language for Alaska's proposal. He
related that he strongly supports a balanced budget amendment.
He offered that the amendment could simply state, "General fund
appropriations shall not exceed anticipated revenue" in order to
clarify the purpose of the resolution. He asked if the
resolution should state that each house in the legislature has
to pass a balanced budget to the other house or should it state
that the final budget bill given to the governor has to be
balanced. He noted that Representative Berkowitz intended [the
later to be the intent of HJR 1]. Representative Gruenberg then
surmised that the final budget signed by the governor must be
balanced as well, to which he noted both sponsors nodded in
agreement. He asked if this resolution refers to [budget] bills
individually or the "whole ball of wax."
9:06:10 AM
REPRESENTATIVE BERKOWITZ replied, "It's the whole ball of wax."
For instance, there could be a situation in which budget bills
were running at a deficit, but a revenue bill provided enough
revenue so that the entire package came into balance, he
explained.
REPRESENTATIVE ROKEBERG acknowledged that there are provisions
in the constitution that make distinctions between the operating
and capital budgets. Therefore, it's important to clearly state
on the record that the intention is for the resolution to be all
encompassing.
REPRESENTATIVE GRUENBERG asked if there are other states that
have constitutional provisions that accomplished encompassing
all the budgets [including the capital, operating, and
supplemental budgets].
REPRESENTATIVE BERKOWITZ noted that the committee packet should
include information from the National Conference of State
Legislatures (NCSL).
REPRESENTATIVE GRUENBERG clarified that his interest is in
regard to [specific] text [from those states that have
constitutional provisions that accomplished encompassing all the
budgets].
9:08:07 AM
REPRESENTATIVE WILSON related that she agreed with the intention
of this resolution, however, the public doesn't have the "time
or sometimes the inclination" to become as educated as the
legislature. She opined that she has a hard time transferring
the final decision to the public because they aren't as informed
as is an individual who is elected and whose job she believes it
is to become informed on the issues. Representative Wilson
said, "There's going to be a cost involved and bottom line, I
don't think ... much will change ... in the long run."
9:10:19 AM
REPRESENTATIVE BERKOWITZ highlighted that during his service in
the legislature he has voted against every single constitutional
amendment, except for subsistence. He opined that there
shouldn't be a constitutional change unless it's a statement of
purpose that's absolutely necessary. The requirement of a
balanced budget is an issue that the public can quickly
understand, he opined. Furthermore, providing an opportunity to
debate and vote on such a requirement will give the public more
confidence as to what happens in Juneau and would ensure the
public that the legislature isn't engaging in deficit spending.
Currently, the legislature does, to a certain extent, engage in
deficit spending, by using the principal of the CBR.
Representative Berkowitz further opined that the public
understands balancing the budget, it's simple.
9:12:30 AM
CHAIR WEYHRAUCH commented that he appreciates these discussions
taking place because it's important to have a record fleshing
out constitutional amendments.
9:12:41 AM
REPRESENTATIVE ROKEBERG related that many Alaskans, including
himself, assumed there was a balanced budget mandate. However,
no such constitutional mandate exists. He offered that this
resolution responds to the lack of a balanced budget
requirement.
CHAIR WEYHRAUCH again directed attention to the following
language in the original [HJR 1]: "[Section 16.] General fund
appropriations by the legislature shall not exceed anticipated
revenue." He related his understanding that under the
aforementioned language the legislature could pass all the bills
it wants and rely on the spring revenue forecast and what the
oil prices are going to be in the future. Under such a
scenario, the legislature could say that it anticipates high
revenues and thus pass a high budget. However, when the revenue
forecast falls short of its predictions because the price of oil
was overestimated, then the legislature can blame [the
forecasters] for not anticipating the revenue shortfall.
9:14:59 AM
REPRESENTATIVE BERKOWITZ offered that the term "general fund" is
very restrictive because it ignores the various other funds like
the CBR and other dedicated funds, which are issues that fall
outside the GF. Therefore, the exceptions would swallow-up the
intent. Furthermore, language such as "Expenditures shall not
exceed revenues" raises the issue of what constitutes revenue.
CHAIR WEYHRAUCH highlighted that the key word in Version Y is
"balanced". He recalled that when the U.S. Congress passed the
Gramm-Rudman-Hollings Act they began to do things such as value
Yellowstone as an asset of the U.S. Therefore, he requested
clarification on the meaning of the term "balanced" in the
context of this amendment because accountants will see ledger
issues. He then posed a situation in which the legislature is
providing for a balanced budget and a citizens' initiative wants
to institute a tax for cruise ships that would provide
additional revenues. In such a situation would the citizens'
initiative not work on tax policy because the legislature is
going to pass through a balanced budget.
REPRESENTATIVE ROKEBERG said, in reference to the last instance,
no because it's not the intent to further restrict the
legislature's hands and the initiative process is really an
extension of the legislature's ability to enact legislation. He
reviewed the language that he had considered and related that
ultimately the discussion between he and Representative
Berkowitz centered on the simplicity of constitutionalizing
"balance" rather than getting caught up in the minutia.
REPRESENTATIVE BERKOWITZ pointed out that the language of
Section 12 of the constitution is clarified by the term
"balanced." He highlighted that the aforementioned section
makes reference to "proposed expenditures and anticipated
income." Although the definitions of those terms might be
unsettled, the totality of the understanding of what a balanced
budget is with proposed expenditures and anticipated income
would all be contained within the current language of the
constitution, he said. Because the aforementioned terms are
contained in the current language of the constitution, there is
no need to address the issue of injecting new terms.
9:18:36 AM
CHAIR WEYHRAUCH related his belief that if this language goes
before the public, [the resolution] will pass because everyone
shares the notion of living within his or her means. Despite
that popular support, Chair Weyhrauch expressed concern about
the nuance of the amendment and what it means for the function
of government, the appropriation process, and the balance of
power between the executive and the legislative branches.
9:19:11 AM
REPRESENTATIVE GRUENBERG highlighted that Colorado, Louisiana,
and Montana all have balanced budget amendments that are simple,
general, and similar to the original HJR 1. He opined that the
public could understand the aforementioned constitutional
amendments, particularly Louisiana's because it deals with oil
and gas revenues. He reiterated that any constitutional
amendment brought before the voters needs to be simple in order
to prevent confusion and mistrust of the legislature.
9:20:39 AM
REPRESENTATIVE ROKEBERG said that Representative Gruenberg just
made the sponsor's case for a one-word change.
REPRESENTATIVE GRUENBERG said he agreed, but opined that the
resolution seemed to state that only the governor would have to
submit [a balanced budget].
REPRESENTATIVE BERKOWITZ offered that Section 2 [should clarify
that].
REPRESENTATIVE GRUENBERG suggested that it should not just be
limited to the legislature and should be put in the passive in
order to avoid the veto issues.
9:21:20 AM
REPRESENTATIVE BERKOWITZ agreed that Section 2 doesn't address
the governor's requirements and that is something that needs to
be addressed. By the same token, as with any constitutional
amendment, there are going to be interpretive statutes that go
with it. He related his understanding that a balanced budget
occurs when expenditures match income because those are the
terms that are in the constitution. As a matter of
constitutional policy, it's not wise to put the definition [of
balanced budget] in the constitution rather it should occur
statutorily. Representative Berkowitz suggested that every
legislator should read the publication entitled, "Guidelines for
Constitutional Amendments". He then reviewed the eight
guidelines suggested by the aforementioned publication.
9:24:14 AM
REPRESENTATIVE WILSON commented that she has not seen this
legislature pass a budget when there aren't matching
expenditures. Therefore, she asked how this resolution will
change the process.
9:25:03 AM
REPRESENTATIVE ROKEBERG replied that this resolution anticipates
the time when the legislature will be short of anticipated
revenues, which will force the legislature to finally develop a
long-range fiscal plan. He noted that over the last decade, the
legislature, during times of substantially reduced revenues, has
been forced to review what sources of revenue are available and
what expenditures should be reduced. However, the state has
been fortunate in that money has come forth or price volatility
has swung in the state's favor. Representative Rokeberg
stressed that one of the purposes of HJR 1 is to force some
discipline on the legislature and the public.
9:26:25 AM
REPRESENTATIVE GRUENBERG recalled that during the Cowper
Administration, the legislature didn't pass a budget and so
there was a special session. He further recalled that recently
the legislature passed a budget that wasn't balanced and thus
the governor had to veto many things. However, this resolution
seems to require the legislature to pass a balanced budget
before it adjourns.
[HJR 1 was held over.]
HJR 2-CONST. AM: GAS REVENUE ENDOWMENT FUND
9:27:32 AM
CHAIR WEYHRAUCH announced that the next order of business would
be SPONSOR SUBSTITUTE FOR HOUSE JOINT RESOLUTION NO. 2 Proposing
amendments to the Constitution of the State of Alaska creating
and relating to the gas revenue endowment fund, relating to
deposits to the fund, limiting appropriations from the fund
based on an averaged percent of the fund market value, relating
to deposits to the permanent fund, and relating to deposits to
the budget reserve fund.
CHAIR WEYHRAUCH thanked Representative Hawker for all his past
work with the House Special Committee on Ways and Means.
9:28:24 AM
REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, sponsor,
opined that this resolution is one of three critical structural
framework elements needed to craft long-term sustainable fiscal
policy. He said:
This bill would propose a constitutional amendment to
address one of those critical issues and that's the
long-term sustainability of having ... the liquid
capital cash available to meet our ongoing state
needs, not only for this generation but for future
generations. I draw your attention to the sponsor
statement ... I think all Alaskans, at one time or
another, have heard what is referred to as the "Great
Alaska Prayer" and that is: "Lord please grant me
another Prudhoe Bay, I promise not to fritter this one
away." I don't think anything could be more accurate
in its conception. This state has had an incredible
amount of wealth. Our wealth is natural resource
based; these are extractive resources, that once we
have severed the resource and sold it, it is gone
forever. These are not renewable resources
particularly our oil and gas, which makes the
foundation of the state's revenue base .... We've
certainly got fisheries, timber, [and] other resources
that are clearly in the renewable category, but the
physical financial magnitude of those resources pales
in comparison to our oil and gas resources. What this
specific constitutional amendment proposes to do is it
makes the statement that when we start developing our
natural gas, that great resource on the North Slope,
that this time instead of spending the money we take
from that gas as we sever disposable non-renewable
resource we take all the proceeds from that severance,
that sale, and place it into its own permanent fund.
... if you allow me the latitude to call it a gas
permanent fund, [the] idea [is] to model it exactly on
our existing permanent fund but the difference being
that this time instead of just taking constitutionally
25 percent of the revenues generated, we take all of
it. And we make the commitment that says we will
convert this money that we receive into an endowment
that will meet the state's needs for generations. [A]
critical element of this bill is that the endowment I
propose to have managed in the format of the [percent
of market value] POMV mechanism .... The one
differential in this amendment is that it makes it
very clear that in this gas permanent fund ... that
the money available in the future under the POMV may
be used for any public purpose, taking care of our
state, except paying dividends to individual Alaskans;
I think it's a critical distinction we need to make
here. This is the fund that will take care of our
public needs in the future.
REPRESENTATIVE HAWKER turned attention to the chart entitled
"Gas Revenue Endowment Fund (GREF)", which details the projected
benchmark of production and tax estimates provided by the
Department of Revenue. He highlighted that in year 2030
operating under the POMV mechanism, the money coming from a POMV
is the same amount as is being received from the severance of
resources. Every year beyond 2030, there is actually more
revenue available to the state under the POMV mechanism, when
the earnings on reinvestment of the principal are included than
is being taken from the extractive process itself. The point of
this resolution is to [implement mechanisms] to provide a
sustainable, stable, and predictable economic base for the
state, he reiterated. He offered that it is appropriate and
correct for the legislature to put before Alaska a
constitutional framework for a fiscal plan. He noted that HJR
1, HJR 2, and passing a POMV methodology for the existing
permanent fund are material sources of bridging the gap between
today and the 10 to 15 years before gas comes online. The
aforementioned components are essential to the constitutional
framework that is being demanded by the citizens of Alaska, he
surmised.
9:36:36 AM
CHAIR WEYHRAUCH asked if the GREF was for gas from the Alaska
North Slope (ANS) gas.
REPRESENTATIVE HAWKER replied yes, it specifically excludes
existing producing reserves elsewhere in the state.
9:36:56 AM
CHAIR WEYHRAUCH asked if today the state obtains any revenue
from ANS gas.
REPRESENTATIVE HAWKER responded that there is a very small
amount of gas produced on the North Slope from a small 4-inch
line that is feeding some of the pump stations and providing
basic utility fuel. He explained that natural gas is methane,
butane, ethane, propane, and the difference lies in the number
of carbon atoms in the molecule. Currently, the industry is
moving natural gas liquids (NGLs) through the Trans-Alaska
Pipeline System (TAPS) as part of the oil flow. As a result of
a processing activity, the molecules can be liquefied, run
through the pipeline, and separated for use later. He clarified
that references to a gasline refer to moving only methanes and
liquefied propane gas (LPGs). He specified his intent to only
grab the methane and LPGs not the heavier NGLs in order to have
a separate accounting, which is easier for the industries
involved.
9:39:36 AM
REPRESENTATIVE HAWKER, in response to Representative Wilson,
clarified that C, which is butane, is in both NGLs and LPGs. He
4
recalled that the oil industry attempted to put butanes down the
TAPS pipeline, but as production volume slowed it is no longer
safe or technically feasible to do so. This constitutional
mechanism provides no incentive for an industry to choose [what
natural gas to obtain], the industry will simply opt for what is
best technically. Furthermore, this resolution is not a tax or
revenue mechanism that has any effect on the industry, but
rather is a mechanism for the state to do something with the
royalties it receives, he said.
9:41:07 AM
REPRESENTATIVE WILSON alluded to her belief that what HJR 2
proposes is what the original framers of the permanent fund
dividend had in mind, although it was changed. She indicated
that originally the intent [with the permanent fund] was to use
it to run the state when the revenues from the pipeline slowed
down. Therefore, she noted her agreement with the provision in
HJR 2 that [specifies any appropriation from the proposed fund
can't be used to provide dividends or other payments to all
residents]. Representative Wilson concluded by lauding the
concept of HJR 2 and the hope that this resolution is passed and
no future legislature changes it.
REPRESENTATIVE HAWKER said that HJR 2 is about the current
legislature having the vision to ensure fiscal discipline and a
sustainable economic base for Alaska.
9:44:21 AM
REPRESENTATIVE HAWKER, in response to Chair Weyhrauch, related
that the POMV mechanism specifically states that the "look-back"
period would be five fiscal years and it would be the first five
of six years pre-dating. The purpose of the six years is to
allow the legislature to "know exactly how much money is on the
deck, available to spend that year," at the beginning of
session. Therefore, the legislature won't be guessing the oil
prices, which is one of the great fallacies of the current
system, he stated. He highlighted that the look-back period
shall be implemented by law. The provision addressing the look-
back period read as follows:
Appropriations from the gas revenue endowment fund for
a fiscal year may not exceed five percent of the
average of the market values of the fund on June 30
for a number of previous fiscal years as provided by
law. However, for purposes of calculating the amount
that may be appropriated from the fund for a fiscal
year, the market value of the fund for the fiscal year
immediately preceding that fiscal year shall not be
included.
REPRESENTATIVE HAWKER explained that under the aforementioned
provision future legislatures can decide how wide a look-back
window should be, which he said provides him greater comfort in
proposing the fixed 5 percent POMV.
9:47:02 AM
REPRESENTATIVE GRUENBERG asked if the committee wanted to adopt
the amendment in the bill packet in order to have a committee
substitute (CS) for the next meeting on HJR 2.
CHAIR WEYHRAUCH responded that he wanted to postpone adoption of
the amendment because there may be more to come.
REPRESENTATIVE HAWKER concurred, and said he would be happy to
accommodate any further concerns. He noted that the amendment
in the bill packet makes it clear that any incidental gas
products going down TAPS don't get included in this calculation.
9:48:23 AM
REPRESENTATIVE HAWKER, in response to Representative Wilson,
related his belief that the only massive gas deliveries that
will make a significant economic impact on long-range planning
will come from the North Slope, which is why the resolution is
restricted to that. He relayed that other areas of the state
with existing gas production have small potential and thus he
said he didn't want to create conflicts with existing
activities. Moreover, he said that he didn't want to create a
fund that doesn't have enough to manage the state in the long
run, he noted.
CHAIR WEYHRAUCH announced that HJR 2 would be set aside.
HB 223-NATURAL GAS PIPELINE INCENTIVE/ GAS TAX
9:49:36 AM
CHAIR WEYHRAUCH announced that the final order of business would
be HOUSE BILL NO. 223 "An Act levying a tax on certain known
resources of natural gas, conditionally repealing the levy of
that tax, and authorizing a credit for payments of that tax
against amounts due under the oil and gas properties production
(severance) tax if requirements relating to the sale and
delivery of the natural gas are met; and providing for an
effective date."
9:50:09 AM
REPRESENTATIVE ERIC CROFT, Alaska State Legislature, sponsor,
testifying via teleconference, stated that HJR 2 details the
expectation of gas to be online in 2012, and therefore many
residents and those in state government are gearing up in
anticipation of those revenues. State government is hoping to
address how to save and spend the anticipated revenues from a
gasline. He opined that there's a significant probability that
the major gas producers, the lease holders on the North Slope,
are interested in producing other gas fields before ANS gas;
perhaps because the internal rate of return is higher in other
gas fields such as Qatar, Russia, and Indonesia. Furthermore,
the aforementioned countries might be "less subtle" regarding
the decision of whether to develop. He related his belief that
if the major oil companies told the Indonesian government they
plan to delay development for 10 to 15 years, the Indonesian
government would cut the project and allow another producer to
develop. Countries unconstrained by constitutions can be more
direct about preserving their interests and assuring their
sovereign interests are protected. He explained that through a
combination of internal rates of returns and other pressures,
other sovereign nations are putting their gas reserves ahead of
Alaska's. He highlighted that although Australia and New
Zealand have constitutions, they require the oil companies to
develop the resource leased within 10 years, or else it becomes
the property of the state and is leased out to another company.
He expressed concern that Alaska has let itself be placed on the
"back burner" for too long. He recalled that after the oil
pipeline was built the citizens of Alaska expected a gas line,
and since then the state has been in a frustrating cycle for
nearly 25 years.
REPRESENTATIVE CROFT recalled that the legislature has heard
much testimony on the duty to produce under the leases. The oil
companies do not, as a matter of law, have the ability to deny a
"reasonably profitable" gasline project in order to develop a
more profitable project in a Third World country. If Alaska
doesn't do something to assert its sovereignty, then
Representative Hawker's aforementioned chart is going to be off
by at least 10 and probably more like 15 to 20 years, he
suggested. The legislature holds these resources in trust for
the people of the State of Alaska, he noted. Although every
state legislature holds something in trust, Alaska is somewhat
unique because it holds the major income producing property of
the state, the subsurface resources, in trust to manage in the
best interest of the people. This legislature has done a good
job of that management, but a rather poor job with regard to
seeing that the gas is developed. If this project is delayed
for a substantial period of time, Alaskan's lose another
increment in the notion that it's the state's resource, choice,
and decision. He said he doesn't want Alaska to defer to
outside powers when it comes to resource decisions.
REPRESENTATIVE CROFT informed the committee that HB 223 was
modeled after the Kentucky Stranded Coal Act, which resulted
after the West Virginia coal companies bought-up Kentucky leases
in order to prevent competition with other coal ventures.
Kentucky decided that if the coal companies weren't going to
develop the coal, the state would tax the companies for the
resource in the ground. This legislation specifies that
starting in 2007 there would be a tax on gas reserves. However,
that tax would stop once the line is built and oil companies
agree to sell or commit the gas to a bona fide project and from
that point forward the oil companies would receive credit for
future severance taxes paid.
9:58:58 AM
REPRESENTATIVE GRUENBERG recalled that most mid-continent oil
leases have a clause requiring production or the lease is lost.
REPRESENTATIVE CROFT recalled that according to Spencer Hosie,
an oil and gas attorney on contract with the Legislative Budget
and Audit Committee, and representatives from a firm in Houston,
Texas, it's a clear principle of law that there is an implied
duty to produce and market in every lease. A leaseholder does
not have the right to take an otherwise viable project, which is
one with a reasonable rate of return, and not develop it because
it would make more money elsewhere; there is a legal obligation
to develop. The only defense is impossibility or commercial
impractibility in that the project doesn't make a reasonable
rate of return. For instance, if Exxon wants all of its project
to have an internal rate of return of 25 to 30 percent and
Alaska's project only makes 18 percent, Alaska's project is
reasonably profitable and they have to develop it despite other
attractive prospects worldwide, he concluded.
10:01:08 AM
REPRESENTATIVE WILSON inquired as to why the fee only applies to
gas in units leased before 2002 that have more than more then 1
trillion cubic feet (tcf) of known gas.
REPRESENTATIVE CROFT responded this legislation didn't want to
discourage any exploration on the North Slope, and therefore [HB
223] concentrates on the reserves that have remained undeveloped
for decades. This legislation doesn't penalize a company for
discovering a new field. The point, he clarified, is to
identify the known fields that have not been sufficiently acted
upon by the leaseholders.
10:02:33 AM
REPRESENTATIVE SAMUELS turned attention to page 2, lines 6-7,
which read: "gas to be consumed as fuel in its state-approved
oil and gas unit of origin within five years of January 1 of the
tax year". He asked if "gas to be consumed as fuel" refers to
gas burned as fuel on the North Slope and not being reinjected.
REPRESENTATIVE CROFT related his understanding that some of the
gas is being used for the producers' fuel needs in order to heat
and power the facilities, so the aforementioned language
addresses that. In further response to Representative Samuels,
Representative Croft replied that reinjecting gas can produce
more oil but that determination is made on each individual field
by the Alaska Oil and Gas Conservation Commission (AOGCC), the
state, and leaseholders. However, at some point if there aren't
gas handling facilities or places to store it, a field can't be
marketed. He highlighted that Prudhoe Bay is reaching it's gas-
handling capacity because as a field matures there tends to be
more gas than oil. Therefore, this legislation is intended to
motivate gas production and develop a place to store it,
preferably a gas pipeline that brings gas to market, he noted.
After the pipeline [is in use], the tax goes away and the AOGCC
can balance field-by-field decisions regarding [reinjection,
etcetera]. He then mentioned the need to clarify whether, under
the language on page 2, lines 6-7, that fuel could be consumed
for reinjection and power [for the maintenance of oil and gas
facilities] because the intent was to provide an exemption for
both.
10:07:46 AM
MARK GNADT, Staff to Representative Eric Croft, Alaska State
Legislature, explained that the list of [hydrocarbon] exemptions
for taxation is based on a 1997 letter from ExxonMobil
Corporation to the AOGCC, which related their methodology for
determining what gas is available to market.
10:08:47 AM
REPRESENTATIVE SAMUELS requested a copy of that letter. He then
requested clarification as to what other "nonconventional gas
resources" would be.
MR. GNADT said he would research that and provide an answer.
10:09:46 AM
MICHAEL HURLEY, Director of State Government Relations,
ConocoPhillips Alaska, Inc., related that ConocoPhillips Alaska,
Inc. strongly opposes the gas reserves tax. The producers have
been diligently working with the administration to "hammer out a
fiscal contract which would provide the certainty to move the
project forward," and that effort would be severely disrupted
by enactment of this kind of punitive tax, he said. He opined
that a project can't be taxed into existence. A tax of this
sort doesn't act as any kind of incentive, but rather increases
the uncertainty surrounding gas development in Alaska.
Furthermore, it removes resources and efforts from the critical
negotiations producers are trying to pursue, he opined. He
relayed that progress is being made in the discussions with the
administration and he urged not to add to the distractions which
have already "plagued these efforts."
10:11:10 AM
CHAIR WEYHRAUCH inquired as to Mr. Hurley's thoughts regarding
land that is leased for resource development that isn't
developed and whether that land should revert back to the state
or should the company pay taxes on the resources in the ground.
10:11:46 AM
MR. HURLEY stated that all of Alaska's oil and gas leases have a
set term [for development]. He recalled that most of the North
Slope leases are set at 7 to 10 years depending on the
particular vintage of the leases. The primary term details that
if an explorer does not find commercial quantities of
hydrocarbons, the leases revert back to the state, he added. In
response to Representative Samuels, Mr. Hurley clarified that
the language used [in the leases] was "wells capable of
producing paying quantities of oil and gas".
10:13:01 AM
REPRESENTATIVE SAMUELS inquired as to when Point Thompson's term
expires.
MR. HURLEY said that he doesn't know, but recalled that the
Point Thomson wells are relatively old vintage leases and had
wells capable of paying quantities. He related that discussions
with the Department of Natural Resources, the administrator of
those leases, have occurred for many years.
REPRESENTATIVE SAMUELS then posed a scenario in which there are
paying quantities of oil and gas, although only the oil is being
developed. He asked if Mr. Hurley would interpret there to be
development because the oil is being developed.
MR. HURLEY replied yes.
10:14:34 AM
REPRESENTATIVE CROFT commented that Representative Samuels has
identified the problem in that the leases have provisions, but
those [provisions] can be extended if oil and gas has been found
but not yet developed. In fact, Point Thomson is on its 21st
plan of development extension, which has resulted in penalties
for failing to meet benchmarks on development of that project.
If both oil and gas are in paying quantities and both are
reasonably profitable, he questioned whether it would be
sufficient to produce the oil and warehouse the gas under the
terms of the lease. Although he didn't know, he opined that he
would hope not because he believes there is an independent
obligation to produce each if it's reasonably profitable.
However, if the oil can be produced and the gas warehoused, then
the gas could be put on hold for decades with no consequence to
the producers. Allowing the aforementioned, he opined, places
Alaska's interests second and means the legislature isn't doing
its job. This legislation offers another way to address the
concern by saying that although [the producers] may be violating
their legal obligations, there would be consequences, other than
going to court, for not developing Alaska's gas.
[HB 223 was held over.]
ADJOURNMENT
10:17:13 AM
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
10:17 a.m.
| Document Name | Date/Time | Subjects |
|---|