Legislature(2007 - 2008)
01/24/2007 06:58 AM House W&M
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| Presentation by the Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
January 24, 2007
6:58 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Anna Fairclough, Vice Chair
Representative Bob Roses
Representative Peggy Wilson
Representative Sharon Cissna
Representative Max Gruenberg
MEMBERS ABSENT
Representative Paul Seaton
COMMITTEE CALENDAR
PRESENTATION BY THE DEPARTMENT OF REVENUE:" Where did the fiscal
gap go?"
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JERRY BURNETT, Legislative Liaison/Director
Administrative Services Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Attended for the Department of Revenue.
PATRICK GALVIN, Acting Commissioner
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Testified as appointed commissioner of the
Department of Revenue on the production profits tax.
MICHAEL WILLIAMS, Ph.D., Chief Economist
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Presented an overview of revenue sources
and forecasting.
DUDLEY PLATT, Petroleum Engineer
(No address provided)
POSITION STATEMENT: Speaking as an independent consultant to
the Department of Revenue, answered questions regarding revenue
issues.
ACTION NARRATIVE
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 6:58:48 AM. Present at the call to
order were Representatives Roses, Fairclough, and Wilson.
Representatives Gruenberg and Cissna arrived as the meeting was
in progress.
^Presentation by the Department of Revenue
7:00:18 AM
CHAIR HAWKER expressed pleasure to be back and reminded members
that the House Special Committee on Ways and Means was first
established four years ago when the state faced large budget
deficits. The prior budget shortfall brought to the
legislature's attention the "paramount importance" of Alaska's
short- and long-term fiscal issues. The committee is charged
with statutory responsibility to consider methods to control
state spending, to identify ways to make government programs
more efficient, and to propose new measures to raise additional
state revenues. Chair Hawker announced that he wanted to focus
on long-term fiscal planning with an eight-year horizon so as to
leave the state on a "sound fiscal footing." He then related
that the committee will likely address the issues of pension
liability and the cruise ship tax.
7:14:19 AM
CHAIR HAWKER pointed out that the Revenue Sources Book, the
Annual Report of the Division of Operations, and the Annual
Report of the Alaska Tax Division, all prepared by the
Department of Revenue, are public documents that provide good
reference tools for the public and this committee. Another
helpful document is the Alaska Taxable, prepared by the
Department of Commerce, Community, & Economic Development.
JERRY BURNETT, Legislative Liaison/Director, Administrative
Services Division, Department of Revenue, mentioned that another
helpful publication was the Alaska Legislative Budget Handbook,
also referred to as "The Swiss Army Knife Guide to Budgets",
prepared by the Alaska Legislative Finance Division.
7:19:38 AM
PATRICK GALVIN, Acting Commissioner, Department of Revenue,
updated the committee on the implementation of the production
profits tax (PPT) by noting that the first "true-up" payments
are due at the end of March. These payments will provide the
first indication of whether the state will receive the revenues
it expects under the PPT.
ACTING COMMISSIONER GALVIN then referenced a committee handout
titled State Revenue, Crude Oil Production & the PPT, dated
January 24, 2007, and prepared by the Department of Revenue. He
directed the committee to the section on page 6 of the handout
titled "PPT True-Up Payment". He noted that the payments due
through the end of March 2007 will be based on the former tax
system because the Department of Revenue is still working on
regulations for the PPT. Once the regulations are final, the
oil producers are expected to recalculate their taxes in
relation to what would have been paid under the PPT and make
payment for the difference.
7:23:56 AM
ACTING COMMISSIONER GALVIN, in response to a query by Chair
Hawker, agreed that the PPT was retroactive to April 1st and
that from April 1st through the end of December, the industry
has been paying taxes on the previous economic limit factor
(ELF), and thus this catch-up payment under the PPT will be for
the three calendar quarters ending in December 2006. However,
he clarified that in the "revenue sense" those are not full
quarters because the normal budgetary year starts July 1st;
therefore payments for July are based on production in June.
Since the PPT was retroactive to April 1st, the state is getting
taxes for the production from April 1st through the end of May,
which would normally not be captured this [2006-2007] fiscal
year. Therefore, this fiscal year's budget gets an "extra two
months" of production. Acting commissioner Galvin said that the
Department of Revenue is estimating that just under $1 billion
in additional tax payments will be due under the PPT. He
reminded the committee that these are estimates.
7:26:31 AM
ACTING COMMISSIONER GALVIN informed the committee that the
regulations relevant to the PPT are being developed in two
different packages. One package is moving more quickly than the
other because the more complex elements of the PPT have been
left for a subsequent regulatory package. He explained that the
Department of Revenue held workshops in the fall of 2006 for
industry and other stakeholders. Draft regulations were
published in early December 2006 and the Department of Revenue
received a number of comments from industry and legislators.
Acting commissioner Galvin, referring to page 6 of the handout,
noted that the issues raised during the comment period included
methods of transferring tax credits, treatment of lease
expenditures, allowable overhead rates, fencing losses, and
calculation of non-payment penalties.
7:29:23 AM
ACTING COMMISSIONER GALVIN explained that since the regulations
will not be final until just before or after first returns are
due, the Department of Revenue is relying on communication with
the taxpayers so they can make a good faith effort to meet
initial expectations with their returns. He acknowledged that
there will be some additional clarifications and adjustments to
returns once the regulations are finalized. The Department of
Revenue will be working with the taxpayers to see that this is
accomplished as smoothly as possible, he remarked. Acting
commissioner Galvin, referencing page 7 of the handout, noted
that the Department of Law will review the regulations before
submission to the Lieutenant Governor's Office for final
approval. He said he expects the first packet of regulations to
be finalized by late March or early April; with the second
package to be finalized later in the spring.
7:31:08 AM
CHAIR HAWKER expressed concern about whether the Department of
Revenue had adequate time to complete the regulation development
process prior to the time the first tax returns under PPT are
due.
ACTING COMMISSIONER GALVIN indicated that the Department of
Revenue has been engaged in conversation with industry all
along, and thus for "issues that have the greatest swing", the
industry has an idea of where the Department of Revenue is
going. He opined that the initial returns will be fairly close
to "where we would expect them to end up once the regulations
are completed, but we do recognize there will likely be some
adjustment period after the [regulations] are finalized."
7:33:49 AM
ACTING COMMISSIONER GALVIN, regarding whether the Department of
Revenue has identified any technical problems in the PPT
legislation, stated that there are some areas of concern that
the Department of Revenue is reviewing, although it has not yet
determined whether the problems can be resolved by regulation.
Some of the Cook Inlet portions of the PPT bill are problematic
in terms of identifying how to implement them in the
regulations. He noted that the next few months will clarify
whether these problems can be dealt with by regulation, or
whether they will require some clarifying technical amendments.
7:37:52 AM
REPRESENTATIVE ROSES asked whether the producers are allowed to
withhold their anticipated payments, or whether they must make
the payments, then make the adjustments later.
ACTING COMMISSIONER GALVIN responded that the taxpayers are
required by the PPT to make their payments at the due date. The
Department of Revenue feels the taxpayers have been provided
with "clarifying information" and have seen the draft
regulations and the comments that have come in under the
proposed regulations. Therefore, Acting Commissioner Galvin
related that he expects the payments to be made in "good faith,
based upon [the taxpayers] best ability to comply with the
[PPT]". When the regulations are final, the Department of
Revenue will "look at any modifications that need to be made",
he said.
7:39:46 AM
REPRESENTATIVE GRUENBERG inquired as to whether there was
anything the legislature or this committee could do to help
expedite the resolution of some of these issues.
ACTING COMMISSIONER GALVIN assured Representative Gruenberg that
at this point there is a "fairly good process lined up", with
good communication with industry. If there is a role for this
committee, the Department of Revenue will take advantage of the
chair's offer to "use this committee in that capacity."
7:42:19 AM
MICHAEL D. WILLIAMS, Ph.D., Chief Economist, Department of
Revenue introduced himself and directed the committee to pages
1-2 of the handout and informed the committee his testimony will
cover state revenue and crude oil production. He pointed out
that oil revenues currently make up 88 percent of state
revenues. Future projections show declining crude oil
production and undulating prices; as a result, "what happens is
that oil revenues go up and down, and non-oil revenues continue
to increase."
7:46:56 AM
CHAIR HAWKER asked if the presentation was based on restricted
or unrestricted revenues. He noted that unrestricted revenues
are available for appropriation by the legislature, while
restricted revenues are constitutionally restricted from public
spending and are largely dedicated to the permanent fund.
DR. WILLIAMS explained that his testimony will focus on revenue
which the legislature "can actually allocate." Oil-based
revenues include those from royalties, production, income, and
property taxes, as well as bonus and rental income. Non-oil
revenues include categories such as alcohol and tobacco taxes,
fines, forfeitures, licenses, permits and investment income.
Oil revenue dominates the Alaska revenue picture, with crude oil
prices and production volumes being the "key factors in
estimating oil revenue," he noted.
7:51:07 AM
DR. WILLIAMS, in response to Representative Gruenberg, explained
that the Department of Revenue updates its revenue forecast in
the Revenue Sources Book twice a year.
REPRESENTATIVE GRUENBERG, referencing the fluctuating price of
oil and advances in computer technology, questioned whether it
would be advantageous to provide information online so the
Department of Revenue and general public could see the "latest
and best" revenue figures. Dr. Williams replied that
technically anything is possible, but he cautioned that
forecasting future prices takes some time and effort. The big
picture of oil production, price volatility and production
decline may be more important than monthly updates.
7:54:53 AM
DR. WILLIAMS explained that he is planning on doing some long
range scenarios in the future, which he thinks will be valuable
for the committee. He did note that non-oil sources of income
currently represent about 12 percent of general fund
unrestricted revenue. The Fall 2006 Revenue Sources Book
predicts that non-oil revenues will increase to about 23 percent
of total revenues in about 10 years.
7:59:29 AM
DR. WILLIAMS, referring to the slide titled "Fall Oil Production
Forecasts", emphasized that historically the Department of
Revenue has overestimated production volumes. There are several
reasons for this, including the maturity of the aging Prudhoe
Bay field, and the difficulty of developing the heavy or
"viscous" oil of Alaska's North Slope.
8:02:55 AM
REPRESENTATIVE GRUENBERG expressed concern regarding the
deterioration of some of the oil production facilities and
wondered if this deterioration has an effect on the Department
of Revenue's ability to accurately forecast production.
DUDLEY PLATT, Petroleum Engineer, speaking as an independent
consultant for the Department of Revenue, indicated that the
forecasting process attempts to make adjustment for the
production decline due to deterioration. However, it is still
difficult to anticipate certain unexpected events such as the
recent occurrences of anchors falling off a tankers, which
caused high inventory levels in Valdez and backed-up production
all the way through the North Slope.
8:05:43 AM
DR. WILLIAMS, in further reference to factors that influence
revenue forecasting, paraphrased from the following written
testimony [original punctuation provided].
Miscellaneous Events - there are two categories under
this heading.
1.The first is unexpected events - here we have
things like bullet holes in pipelines, earthquakes,
anchors falling off of tankers, foul weather that
causes power outages or delays tankers from loading
oil.
2.The second is volume accounting issues - here
we are dealing with database management issues
attempting to reconcile volumes submitted by the
producers.
Taken together these reasons have caused the
Department to over-estimate volumes produced on the
North Slope.
For FY 2007, the ANS production forecast has been
revised downward to 740,000 barrels per day, which is
a 12% decline from the 845,000 b/d produced in FY
2006. This reflects volume reduction from numerous
unplanned events, including pipeline corrosion
problems at Prudhoe Bay, Lisburne and Milne Point.
For the Fall 2006 forecast, the Department of Revenue
continues to make adjustments to our production
expectations from the North Slope. In the near term,
we have incorporated revised reservoir performance
analysis on declining fields, reviewed the uncertainty
associated with the pace and scope of developing
satellite fields and re-evaluated downtime for all
fields due to current pipeline closures and related
corrosion testing on the North Slope. For the longer
term, we have delayed Point Thomson and associated
satellite one year to maintain our assumed ten year
lead time for development.
As I mentioned earlier, the North Slope is a mature
oil province that is in decline. Its aging
infrastructure will likely have additional problems as
we look into the future and the harsh environment of
the North Slope amplifies the likelihood of other
occurrences. In addition, the development of fields
containing viscous oil is providing challenges to the
oil industry. These factors have been incorporated
into our forecast and are the reasons for forecasting
lower ... volumes.
North Slope crude oil production is characterized in
three ways, each with discrete, albeit estimated
confidence levels: (1) currently producing, (2)
currently under development and (3) currently under
evaluation. We do this so that you will have an
understanding about the uncertainty associated with
the production forecast. We continue to forecast
production of only those reserves that have already
been discovered and at minimum are being evaluated for
development.
8:07:24 AM
DR WILLIAMS, responding to a question about the accuracy of the
projections, explained that fields characterized as "currently
producing" are assigned a "confidence level" of 98 percent for
the current year and of 90-95 percent throughout the remainder
of the forecast period. Projects characterized as "currently
under development" include those that are currently funded and
are in the design and construction phase.
REPRESENTATIVE WILSON asked when the projects shown as
"currently under development" on the slide titled "ANS
Production Forecast by Category", would start producing.
MR. PLATT answered that very little will come on line in 2007.
However in 10 years, the production will increase. He
attributed much of the increase to the West Sak. He noted that
projects do not always produce the amount of oil expected at the
time expected.
8:15:10 AM
MR. PLATT, in reference to forecasting, told the committee the
oil forecasting charts end at fiscal year 2010, and do not show
the next 40 years. Development does not always happen when the
forecasters think it is going to happen, and this makes it
difficult to predict future production. MR. Platt stated the
Point Thomson field is a case in point; delay of Point Thomson
delayed other satellite fields that could have come through a
common facility at Point Thomson.
8:20:06 AM
REPRESENTATIVE CISSNA acknowledged that certain events can
change the forecast dramatically, but she questioned whether
there are ways to increase oversight of certain elements, such
as ships or pipelines, so as to increase the accuracy of the
forecast.
DR. WILLIAMS opined that some type of oversight could perhaps
have averted some pipeline corrosion issues. Other incidents,
such as the anchors falling off two new ships, cannot be
predicted. In further response to Representative Cissna, Dr.
Williams noted that there is a cost-benefit analysis to
determine whether regulatory action is appropriate, but that
"certainly if there had been some sort of review board in place
that reviewed pipelines--for the last 10 years they would have
made it all up just in what we lost in revenue last year."
8:28:45 AM
MR. BURNETT noted that the Department of Environmental
Conservation and Department of Law have been looking into issues
regarding regulation of pipelines.
8:29:21 AM
MR. WILLIAMS reminded the committee that oil production in
Alaska has gone on longer than predicted 25 years ago due to
technical advances in oil production. Moreover, oil companies
continue to work on new techniques to increase production of
heavy oil, for example.
8:33:23 AM
MR. PLATT, in response to chair Hawker, noted that the North
Slope is a "huge petroleum basin"; basins contain numerous
different sized fields. Basins like this generally have a
"hyperbolic decline, not an expediential decline". This
concept, as applied to Cook Inlet, will show a bend in
production. Likewise, there is "no reason to think Draconian
thoughts" and to think that this same type of decline will not
happen on the North Slope.
8:36:24 AM
DR. WILLIAMS continued by discussing technically viable projects
that are still being evaluated by the producers. These
projects, although currently unfunded, have a "high chance" of
being developed. He noted that the PPT creates a "fiscal
framework" that provides incentives for exploration.
8:39:08 AM
CHAIR HAWKER asked whether he was correct in reading Department
of Revenue forecast materials to indicate that "to meet the
numbers in our forecast, we have to be bringing on within a
couple of years ... 44 percent more [production] on line than we
have today."
MR. PLATT confirmed this perception, but noted there is a lot of
uncertainty in oil price estimates. Mr. Platt said he believes
he overestimated the linkage between high oil prices of the last
three years and the incremental oil production that he expected
through new capital investment.
MR. WILLIAMS reminded the committee that projects characterized
as "under development" on the slide titled "ANS Production
Forecast by Category", are funded, while those labeled "under
evaluation" have not been funded.
MR. PLATT clarified that some of the projects in the "under
development" category are funded, but some have not received
corporate approval.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
8:43:01 AM
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