Legislature(2009 - 2010)SENATE FINANCE 532
02/25/2010 02:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Gas Tax | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
February 25, 2010
2:39 p.m.
2:39:58 PM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 2:39 p.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Donald Bullock Jr., Legislative Counsel; Susan Pollard,
Assistant Attorney General, Oil, Gas And Mining Section,
Department Of Law; Senator John Coghill; Senator Joe
Paskvan; Senator Gary Stevens; Senator Hollis French.
SUMMARY
^Gas Tax
2:40:05 PM
Co-Chair Stedman addressed the flexibility of the
legislature regarding Alaska Clear Equitable Share (ACES)
and the Alaska Gasline Inducement Act (AGIA). He introduced
Mr. Bullock and acknowledged his vast experience pertaining
to gas and oil in Alaska.
DONALD BULLOCK JR., LEGISLATIVE COUNSEL, discussed the memo
dated February 22, 2010, titled "Gas production tax
limitation in AS 43.90.320." The question in the memo
addressed whether the state is bound by the tax exemption
in AS 43.90.320 and how much flexibility is allowed. The
tax exemption works to counter any tax increase subsequent
to the tax that goes into effect beginning the first day of
open season. He opined that the exemption approach is the
most consistent with Article 9, section 4, which allows for
the creation of exemptions by general law.
Mr. Bullock explained that statute outlining the exemption
could be amended or repealed and he noted the memo
addressed potential repercussions of any changes that may
be enacted. He provided background information regarding
the agreement with TransCanada, the licensee for the AGIA
project. Prior to awarding TransCanada with the license the
legislature determined that amending statutory terms and
conditions would have significantly altered the proposal's
terms. He clarified that the relationship with the licensee
is different than the relationship with producers as
inducements offered encourage a producer to make a firm
commitment during the first binding open season as opposed
to a later time. The inducements that are based on the
first open season will expire if there are no binding
commitments after the first open season, making all
producers equal in the event of a future open season. He
conveyed that TransCanada may argue that the change to
inducements caused impairments to their project if the
inducements under AS 43.90.320 were amended to become less
attractive, and insufficient producers were to commit
during the first open season.
2:46:49 PM
Co-Chair Stedman asked about the deadline of May 1, 2010 as
the start of the first binding open season.
Mr. Bullock responded that TransCanada notified the Federal
Energy Regulatory Commission (FERC) that the open season
would begin on May 1st. The qualifications for resource
inducements are located in AS 43.90.300 and require that
the first commitments qualify for the inducements. He
stated that those qualified for a resource inducement are
entitled to an annual exemption from the state's gas
production tax in the amount equal to the difference
between the amount of the person's gas production tax
obligation calculated under the gas production tax in
effect during that tax year. The tax year would be a future
year within a ten year period, which is the ten year period
the exemption would be exercised. He explained that future
production and tax law are used to calculate this number,
which is compared to the amount of the person's gas
production tax in effect on May 1, 2010, the start of the
first binding open season. It would be clear as of the May
1st date that a person considering making a commitment into
the pipeline project could determine whether their tax
obligation under current law would impact their decision to
make a firm commitment during the first open season.
2:49:24 PM
Co-Chair Stedman wondered whether making a structural
change within the tax program after May 1st would
potentially cause problems with TransCanada.
Mr. Bullock noted thatwhile there is nothing to prevent
making changes to the law after May 1st, it would
definitely muddy the waters. He recommended getting the
base tax rate in place before the May 1st open season start
date to avoid potential problems.
Senator Thomas referenced Section (a) of AS 43.90.320 and
asked Mr. Bullock to describe what is meant by "a person
qualified" for a resource inducement under this section.
Mr. Bullock responded that a person's qualification for the
inducements is based on whether they have made a firm
commitment during the open season. The conditional
commitment does not constitute a firm commitment. The tax
inducement is specific to gas. As oil and gas are combined
for tax purposes, the Department of Revenue would need to
separate the gas tax and compare it to a future tax on gas.
He remarked that the process would have been less
complicated prior to passage of the Petroleum Production
Tax (PPT), when oil and gas were taxed separately.
2:52:26 PM
SENATOR JOE PASKVAN, inquired about the intended impact of
AS 43.90.320.
Mr. Bullock replied that the statute determines tax
liability based on gas production tax in the future
compared to tax on future production using current law. An
exemption would occur only in the event of a tax increase
and would equal the difference.
Senator Paskvan remarked that a presentation by the
Department of Revenue (DOR) projected decreasing gas prices
between the years 2020 and 2030 resulting in an annual
revenue loss of $2 billion under current law. He wondered
if that was the effect statutory language intended.
Mr. Bullock communicated that he was not able to answer the
question and noted the administration may be better
equipped to respond.
Senator Paskvan requested that Mr. Bullock address the DOR
estimate.
Mr. Bullock could not attest to the accuracy of the DOR
estimate. He examined the two tax rates under AS
43.55.011(g). The first is 25 percent and the second is
determined by the average barrel of oil equivalent value
compared to $30. He relayed that six million BTU's of gas
have the energy equivalent of one barrel of oil. Combining
gas with oil would decrease the average value, resulting in
lower tax. The AGIA exemption would also be impacted.
2:58:24 PM
Senator Paskvan wondered whether official statements by the
commissioner of DOR regarding revenue issues would have
legal implications.
Mr. Bullock reported that the statutes and regulations
would govern over statements made by the department.
Senator Paskvan asked if Mr. Bullock had any knowledge of
documentation pointing to inconsistencies between DOR
statements and statutory language.
Mr. Bullock disclosed that he was not aware of any and
noted he was not privy to all of the department's
statements on the subject.
Senator Paskvan inquired whether official statements made
by a department were of greater evidentiary value than
opinions voiced by a department.
Mr. Bullock clarified that the court considers legislative
intent. If a state agency has adopted regulations the court
may defer to department expertise to interpret regulatory
language.
Senator Paskvan solicited information about the lock-in
date of May 1, 2010.
Mr. Bullock remarked that under AS 43.90.320 the pertinent
tax would be the tax in effect at the beginning of the
first binding open season. May 1st could change if the
start of the open season changed.
Senator Paskvan asked if the most appropriate time to make
changes would be prior to May 1, 2010. Mr. Bullock agreed.
Senator Paskvan noted that Department of Revenue
Commissioner Galvin indicated that the legislature would
have until May 1, 2010 to make changes. He questioned
whether changes made after May 1st could have negative
repercussions for the state.
Mr. Bullock stated that he did not have the factual
information to answer the question. He referenced his
earlier testimony regarding issues that may arise between
the licensee and producers.
Senator Paskvan asked Co-Chair Stedman if amendments should
be made before May 1, 2010.
Co-Chair Stedman opined that making changes prior to May
1st could help avoid potential problems that may arise if
changes were made subsequent to May 1st.
Senator Paskvan requested verification of possibility there
may be serious legal consequences if a change were made
after May 1, 2010.
Mr. Bullock acknowledged the possibility of potential
problems.
3:03:49 PM
Senator Paskvan stated that prospective constitutional
effects raised in Mr. Bullock's memorandum denote that a
change in the law after a binding commitment has been made
is a prohibited state action.
Mr. Bullock clarified that the law reserves the
legislature's flexibility and permits the amendment of law
at its discretion. He likened the flexibility to the lease
the Legislative Affairs Agency enters into, which is
subject to review and appropriation by each legislature.
Neither are statutory contractual.
Senator Paskvan asked what legal consequences TransCanada
might consider if the state failed to honor the May 1, 2010
lock-in date.
Mr. Bullock recommended waiting until the end of the open
season to review what occurred during the season. He
alleged that if firm transportation commitments were
obtained TransCanada may assert the inducement had no
impact. TransCanada could claim the reduction of the
inducement value limited the number of commitments secured
and that their expectations under the license were
impaired. Mr. Bullock noted the claims would be difficult
to prove as statutes are subject to legislative discretion.
Senator Paskvan requested verification that dealing with
the potential annual revenue loss of $2 billion prior to
May 1, 2010 would be in the state's best interest.
Mr. Bullock reiterated that making changes prior to May 1st
would help avoid potential issues that may arise if changes
were made after May 1st.
3:07:22 PM
Co-Chair Stedman recapped that action taken by the
legislature before May 1st could lessen risk exposure.
Mr. Bullock pointed out that the key statutory language is
"the production tax in effect at the start of the first
binding open season."
3:08:45 PM
SUSAN POLLARD, ASSISTANT ATTORNEY GENERAL, OIL, GAS AND
MINING SECTION, DEPARTMENT OF LAW, discussed several
questions previously provided to her by the Department of
Revenue. The first question related to possible liabilities
the state could face if AS 43.90.320 were amended or
repealed. She noted the statute provides the clear ability
for the legislature to make changes. She stated it could be
argued that the AGIA applicants were made aware of
potential statutory amendments during discussions in the
2007 legislative session. She voiced that the Department of
Law was not currently prepared to publicly address specific
litigation issues. She observed that when analyzing who may
possess a vested interest in the pipeline project, shippers
may not feel invested until a much later time when they are
required to sign a Transportation Services Agreement (TSA).
3:12:25 PM
Ms. Pollard expounded on who would be entitled to the
inducement under AS 43.90.300. The commissioners of the
Department of Revenue and Department of Natural Resources
(DNR) have to agree that a person is qualified. Proposed
regulations for the vetting process are reviewed and
potentially amended by DOR and DNR based on public comment.
Ms. Pollard addressed the second question, which focused on
DOR's proposed regulation regarding the definitions of gas
production tax and gas tax obligation. She discussed the
committee's concerns about lock-in provisions and the
apprehension around the ability to make changes related to
the production tax obligation. She recommended looking at
general statutory authority and the necessary requirements
for agencies to implement a statute.
Ms. Pollard pointed out that regulations must be within
statutory authority and are reviewed by the Department of
Law (DOL) and the Legislative Affairs Agency. She noted
that there are a couple of issues in AS 43.90.320 that
requires agency interpretation regulation. The DOR
regulation defines the gas production tax and how it
applies under current law. She clarified that the
legislature would lock in a formula, which would reflect a
separation of gas from oil and gas production tax under AS
43.55.011. The regulation delineates the gas that is to be
committed during open season by volume, term of years, and
gas shipped through the North Slope. She indicated the
absence of regulation would make it unclear how a producer
would determine gas production taxes in the future. She
advised that the regulation would provide a baseline
calculation for comparison in order to determine
qualifications for exemption.
3:17:59 PM
Ms. Pollard commented on the concern that the relationship
between oil and gas, also known as the "parity" issue,
would restrict the ability to make changes to the oil and
gas production tax. She detailed that DOL contends that
there is currently no obligation that would apply to a
future calculation, regardless of what the future tax may
be.
Co-Chair Stedman offered that the fundamental issue
concerning the committee is the May 1st deadline and
potential risk exposure to TransCanada that may arise if
changes are made to the tax structure subsequent to this
date.
Ms. Pollard asked for clarification on the question.
Co-Chair Stedman restated his previous concern regarding
potential risk exposure to TransCanada if changes to the
tax structure were made following the start of the first
binding open season on May 1, 2010.
3:21:31 PM
Ms. Pollard provided an example in which she compared
combined oil and gas tax to a tax in which gas is separated
from oil. Under current law, there is an oil and gas
production tax, with regulatory action by DOR to define gas
production tax for the purpose of the AGIA exemption. She
used a May 15 date related to the separate oil and gas tax.
She highlighted an exemption comparison between the tax on
the books at May 1 and the gas tax as of May 15.
Co-Chair Stedman wondered if the state's risk exposure
introduced by the potential annual revenue loss of $2
billion would increase if amendments were made after May 1,
2010.
Mr. Bullock voiced that the state has a contract with
TransCanada to carry the project forward. He observed that
AGIA includes a provision preventing the state from
soliciting a competing gasline to provide inducements. He
observed that if the state makes changes to inducements
subsequent to May 1, 2010 the issue is whether the
amendments would impair the contract between the state and
TransCanada. The risk lies in the potential contract
impairment as there is a prohibition against legislation
that may impair contract obligations.
Ms. Pollard agreed and reiterated her earlier testimony
that AGIA applicants were made aware of potential statutory
amendments during discussions in the 2007 legislative
session.
3:26:47 PM
Senator Thomas pointed out that people rely on existing
statutory language and noted that changes made prior to May
1, 2010 would be more of a public relations issue than a
legal one. He inquired whether the state would be exposed
to legal action by TransCanada-Exxon if the legislature
were to make amendments to current law by separating gas
and oil tax before the start of the open season. He
wondered if TransCanada could claim that the value of their
exclusivity license had been reduced as a result of changes
made by the state.
Ms. Pollard restated the question and asked if any changes
would be made to the gas production tax exemption under AS
43.90.320.
Senator Thomas affirmed and explained that oil and gas tax
would be separated. He repeated his previous question
regarding potential risk exposure to legal action brought
by TransCanada-Exxon.
Ms. Pollard replied that she was not prepared to expound on
license details and potential litigation.
Mr. Bullock stated that according to statute the pertinent
tax would be the tax that is in effect on the first day of
the open season. He pointed out that the inducements are
only applicable to the first open season. If the first open
season fails the legislature will have to determine whether
inducements are necessary in the future. He purported that
other inducements could be introduced to offset the
devaluation if an amendment subsequent to May 1, 2010
resulted in devaluation of the inducement. The purpose of
the inducements is to encourage firm commitments that would
allow the pipeline to commence operation.
3:30:52 PM
Senator Thomas commented on the hopes for a successful open
season. He relayed the concern that a successful open
season may make it difficult to make tax amendments as a
future profit decrease may encourage the licensee or others
involved to take legal action against the state.
SENATOR JOHN COGHILL, asked for clarification on the
language in AS 43.90.320(c). He questioned whether the
section reflected the legislature's intention that the
inducement was created for the exclusive licensee to offer
to producers.
Mr. Bullock explained that subsection (c) referred to the
person who has made a firm commitment and is claiming the
exemption. He detailed that statute outlines that a person
or person's affiliates will not protest or appeal a filing
by the licensee to roll in mainline expansion costs up to
the level that the licensee is required to propose and
support. Mr. Bullock referenced the rolled-in rate issue,
which aimed at diminishing the burden on new production by
preventing them from carrying the full cost of the pipeline
expansion. He stated that ultimately the determination of
the rate will be up to either the Federal Energy Regulatory
Commission or the Regulatory Commission of Alaska (RCA).
Senator Coghill wondered if there was a condition related
to the rate if conflicts arose with the section.
Mr. Bullock observed that a person must agree not to
protest the rolled-in rates and must make a firm
transportation commitment during the open season as a
condition of the tax exemption.
Senator Coghill observed that the start of the binding open
season was a central topic. He conveyed the importance of
understanding any issues that may violate AS 43.90.320(c)
and questioned whether the start of an open season would be
applicable if it were a conditioned open season.
Mr. Bullock did not believe a conditioned open season would
be binding. He elaborated that there would need to be a
firm commitment during the open season and if there was a
condition that could not be met during the open season the
commitment could not be classified as firm. He noted the
existence of different types of commitments such as changes
that TransCanada might make to their project compared with
conditions that TransCanada would have no control over.
3:36:47 PM
Senator Paskvan asked if TransCanada-Exxon's announcement
of the open season effectively put the state on notice that
any statutory changes should occur prior to May 1, 2010.
Mr. Bullock clarified that statute specifies taxes will be
determined on the first day of open season regardless of
the start date. Original AGIA terms require the licensee to
have an open season within a set time period. May 1, 2010
was selected as the specific date within the set time
parameters.
Senator Paskvan questioned whether, during a contingent
open season, it was allowable to resolve contingencies by
December 5, 2011, which would at that time become a binding
open season and lock in the tax at May 1, 2010.
Mr. Bullock addressed language in AS 43.90.320, regarding
acquisition of firm transportation capacity in the first
binding open season. He communicated that a discrepancy
exists between statutory language and FERC regulations, and
noted that FERC doesn't specify a period of time in which
the open season will occur. The purpose of the open season
and firm commitments are to demonstrate the necessity of a
pipeline. A lack of firm commitments could give the
impression there is not a basis or need for a pipeline.
Senator Thomas asked whether the state would have liability
in the future under AS 43.90.320 if oil and gas were
decoupled, and noted decoupling would result in an
increase in oil tax and no change to the gas tax.
Mr. Bullock observed the exemption is based on the tax at
the start of the open season compared to tax on gas in the
future. There is no link between the gas tax under the
exemption and the oil tax.
3:41:33 PM
ADJOURNMENT
The meeting was adjourned at 3:42 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2010 02 25 Legal Services Memo Gas Production Tax Limitation.pdf |
SFIN 2/25/2010 2:30:00 PM |
Oil and Gas Production Tax Review |
| Agenda 022510 pm.docx |
SFIN 2/25/2010 2:30:00 PM |
Oil and Gas Production Tax Review |
| 2010 02 25 Response D Wood Calculations FY2008.pdf |
SFIN 2/25/2010 2:30:00 PM |