Legislature(2013 - 2014)

04/20/2014 04:37 PM Senate FIN


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                 SENATE FINANCE COMMITTEE                                                                                       
                      April 20, 2014                                                                                            
                         4:37 p.m.                                                                                              
                                                                                                                                
4:37:06 PM                                                                                                                    
                                                                                                                                
RECONVENED CONTINUATION OF RECESSED MEETING ON 4/19/20.                                                                         
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Kelly called the Senate Finance Committee meeting                                                                      
to order at 4:37 p.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Kevin Meyer, Co-Chair                                                                                                   
Senator Anna Fairclough, Vice-Chair                                                                                             
Senator Click Bishop                                                                                                            
Senator Mike Dunleavy                                                                                                           
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Suzanne  Armstrong,  Staff,   Senator  Kevin  Meyer;  Brodie                                                                    
Anderson, Staff, Representative  Steve Thompson; Joe Balash,                                                                    
Commissioner,   Department   of  Natural   Resources;   Doug                                                                    
Chapados, President and Chief  Executive Officer, Petro Star                                                                    
Inc.;  Matt Fonder,  Director, Tax  Division, Department  of                                                                    
Revenue; Senator Hollis French.                                                                                                 
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HJR 10    CONST. AM: TRANSPORTATION FUND                                                                                        
                                                                                                                                
          HJR 10 was SCHEDULED but not HEARD.                                                                                   
                                                                                                                                
HB 287    OIL ROYALTIES; TAX CREDIT                                                                                             
                                                                                                                                
          SCS CSHB  287(FIN) was  REPORTED out  of committee                                                                    
          as  amended with  "no recommendation"  and with  a                                                                    
          previously  published  indeterminate fiscal  note:                                                                    
          FN2 (DNR)  and a  forthcoming amended  fiscal note                                                                    
          from the Department of Revenue.                                                                                       
                                                                                                                                
HB 306    EVAL. INDIRECT EXPENDITURES; TAX CREDITS                                                                              
                                                                                                                                
          SCS CSHB  306(FIN) was  REPORTED out  of committee                                                                    
          with  "individual  recommendations"   and  with  a                                                                    
          previously published  zero fiscal  note: FN1(CED),                                                                    
          a   previously   published   zero   fiscal   note:                                                                    
          FN2(CED),     previously  published  indeterminate                                                                    
          fiscal  note:  FN3(LWD),  a  previously  published                                                                    
          zero   fiscal   note:   FN4(DNR),   a   previously                                                                    
          published indeterminate  fiscal note:  FN5(CED), a                                                                    
          previously    published   fiscal    impact   note:                                                                    
          FN6(LEG),  and   a  previously   published  fiscal                                                                    
          impact note: FN7(REV).                                                                                                
                                                                                                                                
HB 384 am                                                                                                                       
          ALASKA MINIMUM WAGE                                                                                                   
                                                                                                                                
          HB 384 am was SCHEDULED but not HEARD.                                                                                
                                                                                                                                
CS FOR HOUSE BILL NO. 306(FIN)                                                                                                
                                                                                                                                
     "An Act  relating to the  review and  administration of                                                                    
     tax  credit  programs;   requiring  the  Department  of                                                                    
     Revenue  to report  indirect expenditures;  relating to                                                                    
     the   duties   of   state   agencies;   requiring   the                                                                    
     legislative   finance  division   to  analyze   certain                                                                    
     indirect  expenditures;  relating  to lapse  dates  for                                                                    
     appropriations  for  capital  projects;  repealing  the                                                                    
     insurance   tax  education   credit,  the   income  tax                                                                    
     education  credit, the  veteran employment  tax credit,                                                                    
     the oil or gas producer  education credit, the property                                                                    
     tax  education credit,  the  mining business  education                                                                    
     credit,  the fisheries  business education  credit, the                                                                    
     fisheries   business   tax   credit   for   scholarship                                                                    
     contributions,  the fisheries  business salmon  product                                                                    
     development tax  credit, the fisheries  business salmon                                                                    
     utilization tax credit,  the fisheries business landing                                                                    
     tax   credit   for   scholarship   contributions,   the                                                                    
     fisheries   resource  landing   tax   credit  for   the                                                                    
     fisheries  resource   harvested  under   the  community                                                                    
     development quota,  the fisheries resource  landing tax                                                                    
     education credit,  and the film production  tax credit;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
4:38:20 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Fairclough  MOVEDMOVED  to  ADOPT  the  proposed                                                                    
committee  substitute for  HB  306,  Work Draft  28-LS1396\K                                                                    
(Nauman,  4/19/14)) as  a working  document. There  being NO                                                                    
OBJECTION, it was so ordered.                                                                                                   
                                                                                                                                
SUZANNE  ARMSTRONG,  STAFF,   SENATOR  KEVIN  MEYER,  walked                                                                    
through  the changes  in the  new version  of the  bill. She                                                                    
stated that there were two  different sets of changes in the                                                                    
document.  She   announced  that   she  would   discuss  the                                                                    
substantive  changes, and  Mr.  Anderson  would discuss  the                                                                    
sections pertaining  to the  transition language.  The first                                                                    
change  was  on Section  5,  which  was  a new  section.  It                                                                    
proposed to  delete language that pertained  to construction                                                                    
of a public facility under  AS 37.05.315(b). She stated that                                                                    
not all  grants to municipalities were  for the construction                                                                    
of a public facility, so  the section updated the statute to                                                                    
more   accurately  reflect   the  practice   of  grants   to                                                                    
municipalities, which  ranged from road  construction; water                                                                    
and  waste water  systems; public  buildings; and  equipment                                                                    
purchases. Another change was  in Section 6, which pertained                                                                    
to grants  to named recipients  AS 37.05.316, and was  a new                                                                    
section to  the bill.  It proposed to  add a  new subsection                                                                    
that  provided  that grants  to  named  recipients lapse  of                                                                    
substantial  ongoing  work  on  the project  had  not  begun                                                                    
within  five   years  after  the   effective  date   of  the                                                                    
appropriation or  allocation. It was the  same standard that                                                                    
was used under grants to  municipalities, so it was meant to                                                                    
draw  a parallel  between the  two standards.  She furthered                                                                    
that   Department  of   Commerce,  Community   and  Economic                                                                    
Development (DCCED) used the same  standard in practice when                                                                    
administering grants  to named  recipients, although  it was                                                                    
not codified in law. Another  changed occurred in Section 7,                                                                    
which was a new section to the legislation.                                                                                     
                                                                                                                                
4:44:40 PM                                                                                                                    
                                                                                                                                
Ms. Armstrong looked at Section  9, which proposed to delete                                                                    
a reference  that was  no longer  necessary in  statute. She                                                                    
announced  that  the CS  did  not  delete the  International                                                                    
Airports Construction  Fund. Section  10 was included  in HB
306, but there  were some proposed changes.  She stated that                                                                    
Section   10    pertained   to   unexpended    balances   of                                                                    
appropriations for capital projects.  Under AS 37.25.020, it                                                                    
stipulated that  an appropriation for a  capital project was                                                                    
valid  for  the life  of  the  project, and  the  unexpended                                                                    
balance  shall  be  carried  forward  to  subsequent  fiscal                                                                    
years.  The legislation  proposed  to amend  the statute  to                                                                    
include the  same language that if  substantial ongoing work                                                                    
on  the  project  had  begun within  five  years  after  the                                                                    
effective  date  of the  appropriation.  There  had been  an                                                                    
examination of  prior year capital appropriations,  and felt                                                                    
that she  could have  examined more appropriations  if given                                                                    
more  time. She  had identified  capital projects  that were                                                                    
complete,  but  had  not  been  closed  out,  and  estimated                                                                    
balances   remained.  She   was  able   to  work   with  the                                                                    
departments  to identify  the funds,  and reappropriate  the                                                                    
funds to FY  15 priorities. Under the  Executive Budget Act,                                                                    
it was loosely required that  the executive branch provide a                                                                    
capital  appropriation status  report  (CASR) annually.  The                                                                    
information in the CASR could  be helpful to the legislature                                                                    
when they considered capital programs for state agencies.                                                                       
                                                                                                                                
4:48:31 PM                                                                                                                    
                                                                                                                                
Ms.  Armstrong related  that the  next change  was found  on                                                                    
Section 17,  which proposed to  repeal four sections  of law                                                                    
that established capital projects  funds that were no longer                                                                    
utilized   for   accounting   purposed  by   Department   of                                                                    
Transportation  and  Public   Facilities  (DOT/PF)  and  the                                                                    
Office of Management and Budget (OMB).                                                                                          
                                                                                                                                
Co-Chair  Meyer  felt that  the  changes  in the  bill  were                                                                    
technical and for "clean up purposes."                                                                                          
                                                                                                                                
Senator  Dunleavy  asked  how  the  tax  credits  that  were                                                                    
outlined in  other legislation would  fit into the  bill. He                                                                    
wondered  if those  credits would  be  reviewed before  they                                                                    
were enacted. Co-Chair Meyer deferred to Mr. Anderson.                                                                          
                                                                                                                                
Vice-Chair Fairclough  wondered if  there was a  fiscal note                                                                    
to account  for the  additional reporting  requirements. Ms.                                                                    
Armstrong replied that there was  not an updated fiscal note                                                                    
from   the  two   departments   as  it   pertained  to   the                                                                    
administration  of  grants   to  the  municipalities,  named                                                                    
recipients,  and unincorporated  communities. She  explained                                                                    
that the  bill focused  on current processes  and procedures                                                                    
that DCCED, but  were not codified. She felt  that the other                                                                    
fiscal impact would be through  OMB in quickly preparing the                                                                    
CASR.                                                                                                                           
                                                                                                                                
Vice-Chair Fairclough  observed that the CASR  would already                                                                    
be used for best business practices.                                                                                            
                                                                                                                                
BRODIE  ANDERSON,  STAFF,   REPRESENTATIVE  STEVE  THOMPSON,                                                                    
stated that  there were some necessary  technical changes in                                                                    
the  CS,  in  order  to  ensure  that  the  legislation  was                                                                    
constitutional. He  looked at Session Law.  He remarked that                                                                    
some of  the effective dates  were not outlined  in statute,                                                                    
but  were  outlined  in  Session Law.  He  stated  that  the                                                                    
drafters  added some  sections of  the bill  to address  the                                                                    
Session Law. He  looked at Section 22, in  which Session Law                                                                    
that impacted the film tax credit.                                                                                              
                                                                                                                                
Vice-Chair Fairclough announced that  Section 22 was on page                                                                    
9. Mr.  Anderson agreed, and  stated that Section 22  was on                                                                    
page 9, line 18.                                                                                                                
                                                                                                                                
4:53:24 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
4:53:50 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Mr.  Anderson looked  at page  9, line  13, Section  22, and                                                                    
stated that  it related  to the film  tax credit.  He stated                                                                    
that Section 23 dealt with  the education tax credit session                                                                    
law.  He  explained that  Section  24  related to  both  the                                                                    
salmon  product  development  tax  credit,  and  the  salmon                                                                    
utilization  tax credit.  He  looked at  page  10, line  12,                                                                    
which was the session  law referencing the salmon production                                                                    
development  tax  credit  and  the  salmon  utilization  tax                                                                    
credit.                                                                                                                         
                                                                                                                                
Co-Chair  Meyer   inquired  what   line  Mr.   Anderson  was                                                                    
referencing. Mr.  Anderson responded that he  was looking at                                                                    
line 15.                                                                                                                        
                                                                                                                                
Mr.  Anderson continued  to  discuss  the technical  changes                                                                    
relating to Session Law.                                                                                                        
                                                                                                                                
4:58:14 PM                                                                                                                    
                                                                                                                                
Mr. Anderson stated  that there was a component  in the film                                                                    
tax credit which related to  a prequalified film tax credit.                                                                    
He  explained  that  Department   of  Revenue  (DOR)  needed                                                                    
clarification of at one point  the credits should be carried                                                                    
forward. It was the  intention that the prequalified credits                                                                    
be   issued,   so   the    language   clarified   that   the                                                                    
prequalification could be used to  claim the tax credit. The                                                                    
final change  was on page  11, lines 5  and 6, which  was an                                                                    
effective  immediate  date  for   the  report  sections.  He                                                                    
clarified that it  was in Section 30, line 10,  which was an                                                                    
effective  date  of July  1,  2014.  He explained  that  the                                                                    
capital budget  effective dates  were the  first day  of the                                                                    
fiscal  year. He  stated that  line 28,  Section 35  was the                                                                    
immediate  effective  date  for  the report  that  would  be                                                                    
created  for  both  DOR  and  Legislative  Finance  Division                                                                    
(LFD).                                                                                                                          
                                                                                                                                
Senator Dunleavy  remarked that there were  some tax credits                                                                    
included in  legislation that related to  the liquid natural                                                                    
gas  (LNG)  pipeline and  education.  He  wondered how  this                                                                    
legislation  would   impact  those  credits.   Mr.  Anderson                                                                    
responded  that the  education bill  held  tax credits  that                                                                    
impacted  corporate  income  tax;  fisheries  business  tax;                                                                    
fisheries resource landing tax;  the mining license tax; and                                                                    
the oil and gas property  and production tax. He stated that                                                                    
the  passing of  the education  bill and  HB 306  would roll                                                                    
into the 2018 sunset date for education tax credits.                                                                            
                                                                                                                                
5:02:24 PM                                                                                                                    
                                                                                                                                
Senator  Dunleavy  noted that  the  credits  would have  two                                                                    
years  of data  to  see  the outcomes  and  benefits of  the                                                                    
contributions. Mr. Anderson replied in the affirmative.                                                                         
                                                                                                                                
Senator Dunleavy  noted that there  were tax credits  in the                                                                    
gas bill  as well  and wondered  if the  amount of  time was                                                                    
sufficient.  Mr.  Anderson responded  that  HB  306 did  not                                                                    
address the oil and gas tax credits.                                                                                            
                                                                                                                                
Senator  Dunleavy remarked  that  he was  not following  the                                                                    
explanation.                                                                                                                    
                                                                                                                                
Co-Chair  Meyer   wondered  what  areas  were   exempt.  Mr.                                                                    
Anderson replied  that the tax  credits that  were addressed                                                                    
were  education tax  credits, film  production tax  credits,                                                                    
veteran's  employment  tax  credit, salmon  utilization  tax                                                                    
credit,   CDQ  tax   credit,  and   the  salmon   production                                                                    
development tax credit.                                                                                                         
                                                                                                                                
Senator Dunleavy  asked how the tax  credits were determined                                                                    
to  be included  in  the legislation.  Mr. Anderson  replied                                                                    
that in the  beginning of the bill's  formulation, there had                                                                    
been a bill that exempted any  tax credits that were part of                                                                    
Title  38.  They had  been  told  that  they could  not  use                                                                    
language  that  "tied  the  hands  of  future  legislators."                                                                    
Therefore,  they looked  at a  different way  to assign  tax                                                                    
credits.                                                                                                                        
                                                                                                                                
5:06:44 PM                                                                                                                    
                                                                                                                                
Senator Dunleavy  surmised that  there were recipients  of a                                                                    
donation  from  a  company  and   the  companies  that  were                                                                    
recipients of  a tax  credit from the  state. He  noted that                                                                    
the  LNG  bill  had  some   tax  credits  for  gas  and  oil                                                                    
companies,  but  there may  be  a  recipient that  would  be                                                                    
training  in  Fairbanks.  He  wondered  how  the  labor  and                                                                    
training tax  credits would be impacted  by the legislation.                                                                    
Mr.  Anderson  responded  that those  proposed  tax  credits                                                                    
would  be  listed  in  the  report  section,  and  could  be                                                                    
evaluated. He  stressed that the  bill did not  sunset those                                                                    
credits or evaluations.                                                                                                         
                                                                                                                                
Senator  Bishop surmised  that the  oil  and gas  production                                                                    
credits that applied to the  education and training would be                                                                    
immune from the legislation.  Mr. Anderson responded that he                                                                    
would have to examine the specific statute.                                                                                     
                                                                                                                                
Senator Bishop  surmised that  the legislature  would review                                                                    
the  credit report,  and he  wondered  if there  would be  a                                                                    
matrix to outline a proper  decision. Mr. Anderson responded                                                                    
that  DOR  must  create  a report,  and  there  were  strict                                                                    
guidelines about  the drafting of  the report. Then  LFD was                                                                    
then obligated  to answer the questions  within the statute,                                                                    
to  analyze the  ratios and  benefits of  the credits,  then                                                                    
provide a  recommendation. He stated  that LFD  was required                                                                    
to provide the methodology for the conclusion.                                                                                  
                                                                                                                                
Senator Dunleavy  wondered if the  bill prevented  other tax                                                                    
credits from being created by  statute. Mr. Anderson replied                                                                    
in the negative.                                                                                                                
                                                                                                                                
5:11:38 PM                                                                                                                    
                                                                                                                                
Senator  Dunleavy   wondered  what  determined  a   new  tax                                                                    
credit's sunset  for review. Mr.  Anderson replied  that the                                                                    
bill  that created  the tax  credit would  include a  sunset                                                                    
date, unless it was a  component of the listed education tax                                                                    
credit.                                                                                                                         
                                                                                                                                
Ms.  Armstrong furthered  that often  times the  legislature                                                                    
would  create credits,  deductions,  or monetary  incentives                                                                    
for  activity  without  any   comprehensive  review  of  the                                                                    
performance of the  credits. She stressed that  the focus of                                                                    
the   bill  was   on  bringing   the   evaluations  to   the                                                                    
legislature's  attention and  the cumulative  impact on  the                                                                    
treasury of the state.                                                                                                          
                                                                                                                                
Senator Bishop  surmised that  the bill  was a  cost benefit                                                                    
analysis  of  each  credit. Ms.  Armstrong  replied  in  the                                                                    
affirmative, with other capital budget items.                                                                                   
                                                                                                                                
Vice-Chair Fairclough directed  the committee's attention to                                                                    
the fiscal notes.                                                                                                               
                                                                                                                                
Vice-Chair Fairclough MOVED to  REPORT SCS CSHB 306(FIN) out                                                                    
of  committee   with  individual  recommendations   and  the                                                                    
accompanying fiscal notes. There  being NO OBJECTION, it was                                                                    
so ordered.                                                                                                                     
                                                                                                                                
SCS  CSHB  306(FIN)  was  REPORTED  out  of  committee  with                                                                    
"individual   recommendations"   and   with   a   previously                                                                    
published   zero  fiscal   note:   FN1(CED),  a   previously                                                                    
published zero fiscal note:  FN2(CED),  previously published                                                                    
indeterminate fiscal note:  FN3(LWD), a previously published                                                                    
zero   fiscal  note:   FN4(DNR),   a  previously   published                                                                    
indeterminate fiscal note:  FN5(CED), a previously published                                                                    
fiscal  impact note:  FN6(LEG), and  a previously  published                                                                    
fiscal impact note: FN7(REV).                                                                                                   
                                                                                                                                
5:17:50 PM                                                                                                                    
RECESSED                                                                                                                        
                                                                                                                                
7:31:34 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
CS FOR HOUSE BILL NO. 287(RLS) am                                                                                             
                                                                                                                                
     "An Act  relating to the  determination of  the royalty                                                                    
     received  by the  state on  oil  production refined  or                                                                    
     processed  in  the  state; providing  tax  credits  for                                                                    
     qualified  infrastructure   expenditures  for  in-state                                                                    
     refineries   and  hydrocarbon   processing  facilities;                                                                    
     approving and ratifying the sale  of royalty oil by the                                                                    
     State  of  Alaska  to  Tesoro  Corporation  and  Tesoro                                                                    
     Refining and Marketing Company LLC; and providing for                                                                      
     an effective date."                                                                                                        
                                                                                                                                
7:32:38 PM                                                                                                                    
                                                                                                                                
Co-Chair Kelly MOVED to ADOPT Amendment 1(copy on file).                                                                        
                                                                                                                                
     Page 1, line 3:                                                                                                            
          Delete "and hydrocarbon processing facilities"                                                                        
                                                                                                                                
     Page 3, lines 11-12:                                                                                                       
          Delete "or hydrocarbon processing facility"                                                                           
                                                                                                                                
     Page 3, lines 12-13:                                                                                                       
          Delete "Except as provided in (b) of this                                                                             
          section, a"                                                                                                           
          Insert "A"                                                                                                            
                                                                                                                                
     Page 3, line 13:                                                                                                           
          Delete "or hydrocarbon processing facility"                                                                           
                                                                                                                                
     Page 3, lines 14-15:                                                                                                       
          Delete "or processed hydrocarbon products"                                                                            
                                                                                                                                
     Page 3, line 20-21:                                                                                                        
          Delete "or hydrocarbon processing facility"                                                                           
                                                                                                                                
     Page 3, lines 22-27:                                                                                                       
          Delete all material                                                                                                   
                                                                                                                                
     Reletter the following subsections accordingly.                                                                            
                                                                                                                                
     Page 4, line 12:                                                                                                           
          Delete "(e)"                                                                                                          
          Insert "(d)"                                                                                                          
                                                                                                                                
     Page 4, line 19:                                                                                                           
          Delete "or hydrocarbon processing facility"                                                                           
                                                                                                                                
     Page 4, line 26:                                                                                                           
          Delete "or hydrocarbon processing facility"                                                                           
                                                                                                                                
     Page 4, lines 29-30                                                                                                        
          Delete "or hydrocarbon processing facility"                                                                           
                                                                                                                                
     Page 5, line 2:                                                                                                            
          Delete "or hydrocarbon processing facility"                                                                           
                                                                                                                                
     Page 5, lines 3-4:                                                                                                         
          Delete "or hydrocarbon processing facility"                                                                           
                                                                                                                                
     Page 5, lines 12-14:                                                                                                       
          Delete all material                                                                                                   
                                                                                                                                
     Renumber the following paragraphs accordingly.                                                                             
                                                                                                                                
     Page 5, lines 17-18:                                                                                                       
          Delete ", petroleum-based feedstock, or processed                                                                     
          hydrocarbon products"                                                                                                 
          Insert "or petroleum-based feedstock"                                                                                 
                                                                                                                                
Co-Chair Meyer OBJECTED for discussion.                                                                                         
                                                                                                                                
JOE BALASH,  COMMISSIONER, DEPARTMENT OF  NATURAL RESOURCES,                                                                    
explained Amendment 1.                                                                                                          
                                                                                                                                
Co-Chair  Meyer  WITHDREW  his  OBJECTION.  There  being  NO                                                                    
further OBJECTION, Amendment 1 was ADOPTED.                                                                                     
                                                                                                                                
7:36:28 PM                                                                                                                    
                                                                                                                                
Commissioner  Balash  continued  to  discuss  the  bill  and                                                                    
stated that there was a hope to  see a change in the cost of                                                                    
energy  for  interior Alaska,  with  the  completion of  the                                                                    
Interior  Energy  Plan to  bring  LNG  to the  Interior.  He                                                                    
stated that DNR had reached  out to Petro Star, and wondered                                                                    
if  they would  be the  next to  announce their  closure. He                                                                    
stated that March  was the month of the year  for Petro Star                                                                    
to renew their crude oil  purchases, so they were faced with                                                                    
a  big decision.  He stated  that the  consequence of  Petro                                                                    
Star  was of  too  great magnitude,  because  they were  the                                                                    
chief supplier  of military grade  jet fuel for  Eielson Air                                                                    
Force  Base,  Fort  Wainwright, Jay  Bear,  and  Kodiak  Air                                                                    
Station;  and  the  marine  grade   diesel  for  Kodiak  Air                                                                    
Station.  He stressed  that DNR  was compelled  to determine                                                                    
what  could  keep Petro  Star  operational.  There had  been                                                                    
strong  consideration  for the  sale  of  royalty oil  at  a                                                                    
discounted price, but  that path was not  pursued. He stated                                                                    
that DNR formulated  a package of incentives  that was first                                                                    
heard and  reviewed by the House,  but they changed it  to a                                                                    
different combination for the investment incentive credit.                                                                      
                                                                                                                                
7:41:42 PM                                                                                                                    
                                                                                                                                
Senator   Dunleavy   queried   the  sunset   date   of   the                                                                    
legislation.  Commissioner Balash  directed the  committee's                                                                    
attention to  page 3, lines  17 and  18. He stated  that the                                                                    
effective  date  was  after December  31,  2014  and  before                                                                    
January 1, 2020.                                                                                                                
                                                                                                                                
Senator   Dunleavy  wondered   if   there   would  be   some                                                                    
retroactivity. Commissioner Balash replied in the negative.                                                                     
                                                                                                                                
Co-Chair  Meyer asked  how DNR  had  determined five  years.                                                                    
Commissioner Balash responded that  there were some projects                                                                    
that the  refineries were currently examining,  so there was                                                                    
a near  term perspective. Some other  investments that would                                                                    
be applied to the refinery  itself, there may be a component                                                                    
of their air permitting that must be examined.                                                                                  
                                                                                                                                
Co-Chair Meyer looked at page 4,  line 8, and asked how that                                                                    
provision worked.  He assumed that  the company  would still                                                                    
receive  a  payment  if  they  had  not  applied,  but  were                                                                    
eligible for  the tax credit. Commissioner  Balash responded                                                                    
that the  credit would  be taken  against a  state corporate                                                                    
income tax  liability. If they had  exhausted the liability,                                                                    
but had credit  remaining, the language would  allow them to                                                                    
request  a refund  similar  to the  credit  program for  the                                                                    
Alaska oil and gas production tax system.                                                                                       
                                                                                                                                
Vice-Chair  inquired how  Alaska  would compete  in the  new                                                                    
world of refining.                                                                                                              
                                                                                                                                
7:47:34 PM                                                                                                                    
                                                                                                                                
Vice-Chair   Fairclough  requested   that  the   Petro  Star                                                                    
representative testify again before the committee.                                                                              
                                                                                                                                
DOUG CHAPADOS, PRESIDENT AND  CHIEF EXECUTIVE OFFICER, PETRO                                                                    
STAR INC., introduced himself.                                                                                                  
                                                                                                                                
Vice-Chair   Fairclough  remarked   that   Petro  Star   had                                                                    
indicated  that the  refinery was  carrying  a negative  net                                                                    
profit.  She wondered  if that  was  accurate. Mr.  Chapados                                                                    
replied that  Petro Star  had carried  a negative  profit in                                                                    
2014.                                                                                                                           
                                                                                                                                
Vice-Chair  Fairclough inquired  why Mr.  Chapados responded                                                                    
that Petro Star  had taken steps to become  a very efficient                                                                    
operation.  He reported  that the  quality  bank had  become                                                                    
less solvent over the last few years.                                                                                           
                                                                                                                                
7:51:32 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Fairclough  queried  what expenditure  would  be                                                                    
made to reduce the cost to  qualify for the credit that made                                                                    
Petro Star more profitable.  Mr. Chapados replied that there                                                                    
was  a current  project with  the Alaska  Railroad, but  the                                                                    
details were outlined in a nondisclosure agreement.                                                                             
                                                                                                                                
Vice-Chair  Fairclough noted  that it  had been  stated that                                                                    
the  quality bank  and  the  cost of  crude  were the  major                                                                    
components  for  why  Petro Star  was  not  profitable.  She                                                                    
surmised  that  there  would be  a  capital  expenditure  to                                                                    
qualify  for  the  credit,  but not  fix  the  problem.  Mr.                                                                    
Chapados replied that Petro Star  could not control the cost                                                                    
of  crude and  other aspects  of the  business. He  stressed                                                                    
that Petro Star worked hard  to control the things that they                                                                    
had some measure of influence over.                                                                                             
                                                                                                                                
Vice-Chair Fairclough surmised  that the capital expenditure                                                                    
would turn  a profit  to maintain  business for  an extended                                                                    
period  of time.  Mr. Chapados  replied in  the affirmative,                                                                    
and furthered that  the capital expenditure was  just one of                                                                    
many proposed projects for Petro Star.                                                                                          
                                                                                                                                
Vice-Chair  Fairclough   queried  if   there  would   be  an                                                                    
opposition to review the credit.  Mr. Chapados would be open                                                                    
to a  review the following  year to determine if  the credit                                                                    
had the desired results.                                                                                                        
                                                                                                                                
Senator   Bishop  noted   that  refining   was  not   wildly                                                                    
profitable for anyone anywhere.  He surmised that Petro Star                                                                    
was examining  many different  ways to  save money,  and the                                                                    
credit would  allow the business to  decrease transportation                                                                    
costs. Mr. Chapados agreed.                                                                                                     
                                                                                                                                
Vice-Chair  Fairclough inquired  if  a tax  credit for  bulk                                                                    
storage  had been  created  the  prior legislative  session.                                                                    
Commissioner Balash  replied that  it was  his understanding                                                                    
that there was a storage credit, but it was for LNG.                                                                            
                                                                                                                                
7:57:22 PM                                                                                                                    
                                                                                                                                
Vice-Chair Fairclough  asked for  more influence  to support                                                                    
the legislation. Commissioner Balash  replied that there was                                                                    
no  intention to  bring and  incentive  for this  particular                                                                    
industry.  He stressed  that it  was an  unregulated market,                                                                    
which was  fiercely competitive. He stressed  that there was                                                                    
no intention  to pick winners  and losers among  the state's                                                                    
refineries. In  order for the  administration and  public to                                                                    
fully understand the economic  benefits of the refineries to                                                                    
Alaska,  DNR was  prepared  to  undertake a  competitiveness                                                                    
review and  analysis of  the factors  that were  driving the                                                                    
operations of  the industry's facilities. He  explained that                                                                    
he was  already in conversation  with an economist  that had                                                                    
previously  worked with  the state  regarding this  issue in                                                                    
the industry. He  felt that the analysis  could be conducted                                                                    
concisely  and inexpensively.  The only  way to  ensure that                                                                    
the  credits  were  effective,   would  be  to  conduct  the                                                                    
analysis  and   review  to  determine  a   healthy  refining                                                                    
industry for Alaska in the long term.                                                                                           
                                                                                                                                
Vice-Chair  Fairclough  wondered  why   a  credit  would  be                                                                    
extended beyond  the one business that  supplied 100 percent                                                                    
of  the  military  grade  jet and  marine  diesel  fuel,  at                                                                    
approximately   50   to   60   million   gallons   annually.                                                                    
Commissioner Balash responded that  DNR attempted to keep in                                                                    
mind  the maximum  cost and  the corresponding  contribution                                                                    
that  the   facilities  make  to  the   state  treasury.  He                                                                    
explained that the state's royalty  values increased and the                                                                    
production tax  value increased.  In 2013 the  total quality                                                                    
bank  charges  paid by  all  TAPS  refineries exceeded  $112                                                                    
million, and  the total back to  the state was in  excess of                                                                    
$50 million  between increased  royalty value  and increased                                                                    
production tax value.                                                                                                           
                                                                                                                                
8:04:57 PM                                                                                                                    
                                                                                                                                
Vice-Chair Fairclough  wondered why the credit  was extended                                                                    
to  other businesses  other  than  Petro Star.  Commissioner                                                                    
Balash  replied that  the liquid  oil products  industry was                                                                    
one  that  was very  competitive  for  customers at  fueling                                                                    
stations around  Alaska. He felt  that extending  the credit                                                                    
to   other   businesses    would   enhance   that   positive                                                                    
competitiveness.                                                                                                                
                                                                                                                                
Vice-Chair Fairclough  surmised that limiting the  credit to                                                                    
only  one   business  would   interfere  with   the  market.                                                                    
Commissioner Balash  replied that  it was a  policy concern,                                                                    
in not wanted to upset the existing competitive balance.                                                                        
                                                                                                                                
8:07:27 PM                                                                                                                    
                                                                                                                                
Co-Chair Kelly  stressed that the oil  refinery industry was                                                                    
strong.  He remarked  that the  demand for  refined products                                                                    
was   strong.  He   felt   that  environmental   regulations                                                                    
inhibited  the improvement  of existing  refineries and  the                                                                    
building of  new refineries. He stressed  that Alaska needed                                                                    
refined  products, and  therefore needed  a strong  refinery                                                                    
industry.                                                                                                                       
                                                                                                                                
Vice-Chair Fairclough  remarked that  there was an  issue of                                                                    
the  security of  a refinery  to produce  in Alaska  and the                                                                    
jobs of those that were  currently employed. She wondered if                                                                    
there should  be an  exclusion for  those that  were already                                                                    
receiving a  royalty oil sale contract.  Commissioner Balash                                                                    
replied  that the  legislation was  the same  legislation in                                                                    
Resources, but had some added  pages. He stated that DNR was                                                                    
seeking the approval  of a royalty sale  contract to Tesoro.                                                                    
Tesoro was  paying a  price that was  higher than  the state                                                                    
would  have  received under  the  RIV  calculation with  the                                                                    
producers. He  felt that  creating an  eligibility exemption                                                                    
would create  a disincentive  for the instate  refineries to                                                                    
purchase  royalties  from the  state.  The  state wants  the                                                                    
refineries  to purchase  royalties,  because  they pay  more                                                                    
than what was received from the producers.                                                                                      
                                                                                                                                
8:13:01 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Fairclough  wondered   how  Commissioner  Balash                                                                    
would respond  to people that  feel that credits  should not                                                                    
be  available  to  those  that   were  operating  a  healthy                                                                    
business.  Commissioner  Balash  noted that  the  refineries                                                                    
were  the  exact type  of  operation  that many  legislators                                                                    
focus upon.                                                                                                                     
                                                                                                                                
Co-Chair Kelly wondered  what if the company  must repay the                                                                    
credit,  if  the  company shuts  down.  Commissioner  Balash                                                                    
replied  in   the  affirmative,   and  explained   that  the                                                                    
provision was on page 4, line 19.                                                                                               
                                                                                                                                
Senator Dunleavy  queried the difference between  Petro Star                                                                    
and  Tesoro's situations.  Commissioner Balash  replied that                                                                    
Tesoro was  located on the  Kenai Peninsula, and  had access                                                                    
to natural  gas to generate their  electricity. He furthered                                                                    
that Tesoro had  water access, and could bring  in crude oil                                                                    
as  necessary that  was not  exclusive North  Slope or  TAPS                                                                    
crude  oil. He  stated  that Tesoro  had  a refined  product                                                                    
pipeline that  ran from their  facility to  Anchorage, which                                                                    
allowed  them  to  deliver  their  products  efficiently  to                                                                    
market.  That pipeline  was  approaching  capacity, and  may                                                                    
need   to  be   looped   to   deliver  additional   product,                                                                    
particularly  in light  of the  closure of  Flint Hills.  He                                                                    
stated  that Tesoro  saw many  different varieties  of crude                                                                    
oil, so they  were seeking to construct a  pipeline from the                                                                    
west side of  Cook Inlet over to their facility  on the east                                                                    
side  of  Cook Inlet.  That  pipeline  would allow  for  the                                                                    
elimination  of  a  tank and  barge  system  that  presently                                                                    
operated on the west side near a volcano.                                                                                       
                                                                                                                                
8:17:09 PM                                                                                                                    
                                                                                                                                
Senator Dunleavy noted  that earlier in the  year, the major                                                                    
producers and  Tesoro were on  the same page in  the quality                                                                    
bay.  He  wondered   if  the  state  was  a   part  of  that                                                                    
discussion.  Commissioner Balash  replied  that Flint  Hills                                                                    
had  filed a  complaint with  the Federal  Energy Regulatory                                                                    
Commission  (FERC), and  the state  intervene. Subsequently,                                                                    
the state's goal was to  see the system operated fairly. The                                                                    
state would  ensure that  high quality  oil would  be valued                                                                    
appropriately  and  compensated  for dilution.  He  stressed                                                                    
that DNR was  not seeking to eliminate  quality bank charges                                                                    
paid by  the TAPS  refineries. He  felt that  they situation                                                                    
must be  revisited and  adjusted to  bring it  into balance.                                                                    
The quality bank system worked  with a variety of components                                                                    
that  could  tie to  the  products  made  from a  crude  oil                                                                    
stream.  Some of  the  components were  valued  on a  market                                                                    
basis, but some components were  fixed. It would appear that                                                                    
the fixing  of that value caused  the rest of the  system to                                                                    
fall out of  balance. The specific complaint  filed by Flint                                                                    
Hills, and  the specific  remedy may not  be agreed  upon by                                                                    
the  state. He  explained  that FERC  had  opened their  own                                                                    
investigation.  He stated  that the  Flint Hills  action may                                                                    
soon be dismissed by the Administrative Law Judge.                                                                              
                                                                                                                                
Senator  Dunleavy  wondered  if the  Valdez  facility  could                                                                    
import oil from North Dakota and  refine it at a lower cost.                                                                    
Commissioner Balash  deferred to Mr. Chapados,  but believed                                                                    
that Valdez could feasibly import and refine the oil.                                                                           
                                                                                                                                
Senator  Dunleavy   restated  his  question.   Mr.  Chapados                                                                    
responded   that  the   possibility   was  currently   being                                                                    
examined.                                                                                                                       
                                                                                                                                
Co-Chair Meyer wondered how the  state was protected, if the                                                                    
refineries  sold  assets  or became  bankrupt.  Commissioner                                                                    
Balash responded that  the amount of the  credit claimed was                                                                    
prorated over the  remaining nine years. If in  any one year                                                                    
the  facility  ceases  commercial operation,  the  remaining                                                                    
amount of  the credit would  be reflected as an  increase in                                                                    
tax liability by the tax payer.                                                                                                 
                                                                                                                                
8:23:18 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer wondered  if  it should  be  covered in  the                                                                    
legislation.  Commissioner Balash  replied  that  it may  be                                                                    
covered in corporate income tax.                                                                                                
                                                                                                                                
Co-Chair  Meyer asked  if Mr.  Fonder could  respond to  the                                                                    
questions.                                                                                                                      
                                                                                                                                
Vice-Chair  Fairclough  looked  at  page  4,  line  19,  and                                                                    
wondered how the state would be protected.                                                                                      
                                                                                                                                
MATT FONDER, DIRECTOR, TAX  DIVISION, DEPARTMENT OF REVENUE,                                                                    
explained  that  the  language was  modeled  after  the  gas                                                                    
storage  facility  credit  and   the  LNG  storage  facility                                                                    
credit. The functionality was like any other tax liability.                                                                     
                                                                                                                                
Vice-Chair Fairclough  felt that Mr. Fonder  did not respond                                                                    
to the question.  She wondered if the state  was entitled to                                                                    
any  reimbursement if  a person  received a  tax credit  and                                                                    
invested in  a piece  of property  that improved  the asset,                                                                    
then sold the property. She felt  that line 20 did not allow                                                                    
the state  any reimbursement.  Mr. Fonder responded  that he                                                                    
did  not believe  that it  was specifically  covered in  the                                                                    
language.                                                                                                                       
                                                                                                                                
8:26:26 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
8:33:28 PM                                                                                                                    
RECONVNED                                                                                                                       
                                                                                                                                
Vice-Chair Fairclough MOVED to  ADOPT a conceptual amendment                                                                    
2.                                                                                                                              
                                                                                                                                
     Page 4, line 20                                                                                                            
     Following "operation"                                                                                                      
     Insert "or is sold"                                                                                                        
                                                                                                                                
There being NO OBJECTION, it was so ordered.                                                                                    
                                                                                                                                
Co-Chair  Meyer inquired  how the  amendment worked  for the                                                                    
commissioner. Commissioner  Balash responded that  DNR would                                                                    
be able  to involve  the Department of  Law (DOL)  to ensure                                                                    
that  the right  material  was captured.  He  felt that  the                                                                    
conceptual amendment  made it  clear that  there could  be a                                                                    
specific piece  of property that  was subject to  the credit                                                                    
in question.                                                                                                                    
                                                                                                                                
Vice-Chair  Fairclough  agreed that  it  was  her intent  to                                                                    
include the property.                                                                                                           
                                                                                                                                
Senator Olson  wondered how the  state was protected  if the                                                                    
company was  bankrupt. Commissioner  Balash replied  that he                                                                    
read,  "If   the  facility  ceases   commercial  operation",                                                                    
related to bankruptcy.                                                                                                          
                                                                                                                                
Senator  Bishop  felt  that   Mr.  Fonder  alluded  to  that                                                                    
summation.                                                                                                                      
                                                                                                                                
Senator  Dunleavy  wondered  what   the  state  received  in                                                                    
royalty  oil in  conjunction with  Petro Star.  Commissioner                                                                    
Balash replied that the amount  of increased value the state                                                                    
received for  the royalty, as  a consequence of  the quality                                                                    
bank charges  by all  TAPS refineries  was $20.6  million in                                                                    
2013.                                                                                                                           
                                                                                                                                
Senator  Dunleavy  surmised  that   ANS  was  trading  at  a                                                                    
premium; and Tesoro was refining oil from the west coast.                                                                       
                                                                                                                                
Senator Hoffman asked why there  was no program to subsidize                                                                    
fuel for the military.  Commissioner Balash responded that a                                                                    
subsidiary mechanism might work, if Petro Star had closed.                                                                      
                                                                                                                                
8:40:57 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
8:41:40 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Vice-Chair Fairclough MOVED to  REPORT SCS CSHB 287(FIN) out                                                                    
of  committee as  amended  with individual  recommendations,                                                                    
the accompanying fiscal notes.  There being NO OBJECTION, it                                                                    
was so ordered.                                                                                                                 
                                                                                                                                
SCS CSHB 287(FIN)  was REPORTED out of  committee as amended                                                                    
with  "no recommendation"  and with  a previously  published                                                                    
indeterminate fiscal note: FN2 (DNR) and a forthcoming                                                                          
amended fiscal note from the Department of Revenue.                                                                             
                                                                                                                                
HJR 10 was SCHEDULED but not HEARD.                                                                                             
                                                                                                                                
HB 384 am was SCHEDULED but not HEARD.                                                                                          
                                                                                                                                
ADJOURNMENT                                                                                                                   
8:43:11 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 8:43 p.m.                                                                                          
                                                                                                                                
                                                                                                                                

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