Legislature(2007 - 2008)SENATE FINANCE 532

11/12/2007 04:00 PM FINANCE


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Audio Topic
04:10:55 PM Start
04:11:47 PM HB2001
05:48:40 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
- Note Time Change/Agenda Change -
+= SB2001 OIL & GAS TAX AMENDMENTS TELECONFERENCED
Heard & Held
+ HB2001 OIL & GAS TAX AMENDMENTS TELECONFERENCED
Heard & Held
Walk-through of Bill
                    SENATE FINANCE COMMITTEE                                                                                    
                        November 12, 2007                                                                                       
                            4:10 P.M.                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Charlie Huggins, Vice Chair                                                                                             
Senator Kim Elton                                                                                                               
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
Senator Fred Dyson                                                                                                              
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Senator Lyda Green;  Senator Gary Stevens; Senator  Hollis French;                                                              
Senator  Johnny Ellis;  Senator  Gene Therriault;  Senator  Thomas                                                              
Wagoner;  Senator  Bill Wielechowski;  Steve  Porter,  Legislative                                                              
Consultant,   Legislative   Budget   and  Audit   Committee;   Dan                                                              
Dickinson, Consultant, Legislative  Consultant, Legislative Budget                                                              
and Audit  Committee; Barry Pulliam,  Senior Economist,  Econ One,                                                              
Research,  Contractor,  Legislative  Budget and  Audit  Committee;                                                              
David Teal, Director, Legislative Finance Division                                                                              
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
None                                                                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
CS HB 2001(FIN) am                                                                                                              
          An  Act relating to  the production  tax on oil  and gas                                                              
          and  to  conservation  surcharges  on oil;  providing  a                                                              
          limit  on the amount  of tax that  may be levied  on the                                                              
          production  of certain gas  that is produced  outside of                                                              
          the  Cook  Inlet  sedimentary  basin;  relating  to  the                                                              
          sharing   between   agencies  of   certain   information                                                              
          relating  to the production  tax and  to oil and  gas or                                                              
          gas  only  leases; expanding  the  period  in which  the                                                              
          Department of  Revenue may assess the amount  of oil and                                                              
          gas   production   tax  and   conservation   surcharges;                                                              
          prohibiting  a producer or  explorer from receiving  tax                                                              
          credits  if  certain  judgments  are not  satisfied  and                                                              
           requiring,  as   a  condition  of   receiving  the   tax                                                             
           credits, the  deposit of  the amount  of certain  unpaid                                                             
           judgments and  certain interest  on  those judgments  in                                                             
           the  court  during  an  appeal  and  relating   to  that                                                             
           interest; relating to  state oil and gas audit  masters;                                                             
           making  conforming  amendments;  and  providing  for  an                                                             
           effective date.                                                                                                      
                                                                                                                                
           CS HB  2001 (FIN)  was  HEARD &  HELD in  Committee  for                                                             
           further consideration.                                                                                               
                                                                                                                                
CS FOR HOUSE BILL NO. 2001(FIN) am                                                                                            
                                                                                                                                
      An Act relating to the production  tax on oil and gas and  to                                                             
      conservation surcharges  on  oil; providing  a limit  on  the                                                             
      amount  of tax  that  may  be levied  on  the  production  of                                                             
      certain  gas that  is  produced  outside of  the  Cook  Inlet                                                             
      sedimentary basin; relating  to the sharing between  agencies                                                             
      of certain  information relating  to the  production tax  and                                                             
      to oil and gas  or gas only leases;  expanding the period  in                                                             
      which the  Department of  Revenue may  assess  the amount  of                                                             
      oil  and gas  production  tax  and  conservation surcharges;                                                              
      prohibiting  a  producer  or  explorer  from  receiving   tax                                                             
      credits  if   certain  judgments   are   not  satisfied   and                                                             
      requiring, as a condition  of receiving the tax credits,  the                                                             
      deposit  of  the  amount  of  certain  unpaid  judgments  and                                                             
      certain interest on  those judgments in  the court during  an                                                             
      appeal and relating to  that interest; relating to state  oil                                                             
      and gas  audit  masters; making  conforming  amendments;  and                                                             
      providing for an effective date.                                                                                          
                                                                                                                                
 Co-Chair Steadman called the  Senate Finance Committee meeting  to                                                             
 order at 4:10:55 PM.                                                                                                         
                                                                                                                                
 4:11:47 PM                                                                                                                   
                                                                                                                                
 STEVE  PORTER,  LEGISLATIVE  CONSULTANT,  LEGISLATIVE  BUDGET  AND                                                             
 AUDIT   COMMITTEE,   reminded   the   Committee   about   a   past                                                             
 presentation which talked about  the value equation; value,  minus                                                             
 the costs,  times the  tax, minus  the credits,  yields the  total                                                             
 value.  He began his presentation  by focusing on total revenue  -                                                             
 West Coast - received from selling  the oil, as depicted on  graph                                                             
 1.  He  related that the  next step is  that transportation  costs                                                             
 are deducted from  every barrel of oil,  both the royalty  barrels                                                             
 and the non-royalty barrels, shown in slide 2.                                                                                 
                                                                                                                                
4:14:55 PM                                                                                                                    
                                                                                                                                
Mr. Porter  highlighted gross production  value - the  value after                                                              
the royalty  is  taken care  of, as depicted  on  slide 3.   Next,                                                              
producer costs  are taken out before  the production tax  value is                                                              
determined  - slide  4.   The production  tax value  is the  value                                                              
upon which the tax is calculated.                                                                                               
                                                                                                                                
Mr. Porter  turned to  slide 5  to show  the base production  tax,                                                              
which on the  current PPT is 22.5  percent.  The new  proposed tax                                                              
is  25 percent.   The  slide  shows the  producer  cash flow,  not                                                              
producer  profit,  because  "profit"  suggests  a  return  on  the                                                              
money.  The  state tax is based  on a single snapshot in  a year -                                                              
whatever cash flow happens in that year is taxed.                                                                               
                                                                                                                                
Co-Chair  Stedman  noted  that  Senator  Stevens,  Senator  Ellis,                                                              
Senator French, and Senator Therriault had joined the meeting.                                                                  
                                                                                                                                
Mr. Porter  explained that  in a  low price  world the margin  for                                                              
the tax base  begins to occur.   Revenue share is a  percentage of                                                              
the effective rate of the tax.                                                                                                  
                                                                                                                                
Mr. Porter discussed  excluded costs from the producer  cash flow.                                                              
Those  costs  are actual  costs  and  cannot  be included  in  the                                                              
producer  cash  flow.    As  excluded  costs  are  increased,  the                                                              
producer  cash flow  is lessened.   They cannot  be considered  as                                                              
part of producer profit.                                                                                                        
                                                                                                                                
Mr. Porter  turned to slide  7 to show  the next piece,  corporate                                                              
income tax.                                                                                                                     
                                                                                                                                
4:18:51 PM                                                                                                                    
                                                                                                                                
Mr.  Porter discussed  the  progressivity tax  shown  on slide  8,                                                              
which is based  on the trigger price.   It is based on  the amount                                                              
of cash flow  per barrel.  The slope  of the line is  based on the                                                              
tax factor, whether it was .4 or .2 percent.                                                                                    
                                                                                                                                
Co-Chair   Stedman  noted   that  Senator   Wagoner  and   Senator                                                              
Wielechowski had joined the meeting.                                                                                            
                                                                                                                                
Mr. Porter  addressed the federal  government take shown  on slide                                                              
9,  which  is  35  percent  off   the  top  after  all  the  other                                                              
calculations  are made.   The producer  does get  to deduct  state                                                              
taxes against  the federal  tax.   Two elements  are not  shown on                                                              
this slide: property tax and credits.                                                                                           
                                                                                                                                
 4:20:41 PM                                                                                                                   
                                                                                                                                
 Mr. Porter  reported that  slide  10 shows  that, at  the  current                                                             
 price of roughly $9 per barrel,  the base tax ends up being  about                                                             
 22.5 to 25 percent,  the progressivity tax, if  it caps out at  25                                                             
 percent, would  be  roughly the  same,  corporate income  tax  and                                                             
 federal tax  are added,  and  the current  effective tax  rate  is                                                             
 plus or minus $90 per barrel.                                                                                                  
                                                                                                                                
 At-Ease:       4:21:25 PM                                                                                                    
                                                                                                                                
 Reconvened:    4:22:56 PM                                                                                                    
                                                                                                                                
 DAN DICKINSON,  LEGISLATIVE  CONSULTANT,  LEGISLATIVE  BUDGET  AND                                                             
 AUDIT  COMMITTEE,   referred  to  a   handout  entitled   "Summary                                                             
 Comparison between  Various Approaches  to Production  Tax"  (copy                                                             
 on  file.)   The  analysis  compares  current  law  with  HB  2001                                                             
 (Alaska's  Clear   and   Equitable  Share   -  ACES),   and   CSHB                                                             
 2001(FIN)am, which passed  out of the House  recently.  The  color                                                             
 coding shows  red as current  law, yellow  depicts the Governor's                                                              
 proposal  (ACES),  and  white  reflects  something  not  found  in                                                             
 either of the other two proposals.                                                                                             
                                                                                                                                
 4:24:13 PM                                                                                                                   
                                                                                                                                
 Mr. Dickinson  explained that  on the  first page,  the base  rate                                                             
 for  the  House   version  of   the  bill  is   25  percent.   The                                                             
 progressivity has  elements from  current law  and the Governor's                                                              
 proposal, as well  as elements of  its own.   The trigger point  -                                                             
 or  how   much   margin  is   allowed   on  each   barrel   before                                                             
 progressivity kicks in  - is at  $30.  The slope  - or the  amount                                                             
 added to  the tax for  each dollar  per barrel  over the  starting                                                             
 place - is  at .4 percent.   It is calculated  on a monthly  basis                                                             
 and it is applied to the net with a cap of 25 percent of net.                                                                  
                                                                                                                                
 4:25:54 PM                                                                                                                   
                                                                                                                                
 Mr. Dickinson  suggested examining  the language  in  the bill  at                                                             
 this point.   He referred to page  12 of the  House version of  HB                                                             
 2001  where  subsection   (g)  deals  with   progressivity.     He                                                             
 summarized that  the monthly  production tax  value is calculated                                                              
 in the  manner  described  in AS  43.55.160(a),  except  that  the                                                             
 gross  value  at  the  point  of  production  for  the   month  is                                                             
 substituted for the  gross value  at the point  of production  for                                                             
 the calendar  year.   The base  tax is  calculated  by taking  the                                                             
 gross value and  subtracting the  costs in order  to come up  with                                                             
 the net value.                                                                                                                 
                                                                                                                                
Mr. Dickenson  reported that the  floor remains as in  current law                                                              
- a  single  floor calculated  on the  North Slope.   Credits  can                                                              
still be applied against  the floor.  The rate ranges  from 0 to 4                                                              
percent.   The one  difference has  to do if  there are  gas sales                                                              
from the North Slope for use in state.                                                                                          
                                                                                                                                
4:28:25 PM                                                                                                                    
                                                                                                                                
Mr. Dickinson  explained the investment  credits, which  are found                                                              
in AS  43.55.023.   The provision  in current  law that  says they                                                              
can  be taken  in the  year of  investment, applies  to the  House                                                              
version  of  the bill.    The  percentage  of loss  carry  forward                                                              
credits has been  changed to 25 percent.  A new  entrant would get                                                              
20  percent.   The ability  to use  transitional investment  (TIE)                                                              
credits  ends  December  31,  2007.    If  investments  were  made                                                              
between March  31, 2001, and March  31, 2006, then there  is money                                                              
in the TIE credits.   He explained how TIE credits  could still be                                                              
allowed to go forward.                                                                                                          
                                                                                                                                
4:31:30 PM                                                                                                                    
                                                                                                                                
Mr. Dickinson  related that  exploration credits  are found  in AS                                                              
43.55.025  and  predate  PPT.    The  exploration  credits  varied                                                              
depending  on certain  conditions.    With PPT,  the  same set  of                                                              
rules applied.   This  legislation raises  exploration credits  to                                                              
30  percent,   but  keeps   development  and  production   capital                                                              
investments at 20 percent.                                                                                                      
                                                                                                                                
Mr. Dickinson  noted that  bad acts  are disallowed when  applying                                                              
for credits.   Under  the new  legislation, DNR  will take  a more                                                              
active role.   In addition, exploration outside of  the Cook Inlet                                                              
has to be three miles from any pre-existing well.                                                                               
                                                                                                                                
Mr. Dickinson reported  that the confidentiality of  well data has                                                              
changed to  two years, or  if the Commissioner  of DNR  thinks the                                                              
data  would  adversely  affect  a  lease sale,  or  if  a  private                                                              
landowner does not want the information to become public.                                                                       
                                                                                                                                
4:34:37 PM                                                                                                                    
                                                                                                                                
Mr.  Dickinson explained  that the  current bill  expands what  is                                                              
allowed for pre-existing  wells.  Transitional  investment credits                                                              
prior to  2003 can be offered  by DNR for  up to 5 percent  of the                                                              
costs incurred.                                                                                                                 
                                                                                                                                
 Mr. Dickinson listed  the exception to tax  credits.  If there  is                                                             
 an unpaid judgment, the state will withhold credits.                                                                           
                                                                                                                                
 4:36:26 PM                                                                                                                   
                                                                                                                                
 Mr. Dickinson addressed the  state purchase of the credits,  which                                                             
 can be made by  appropriation and has a  limit of $25 million  per                                                             
 taxpayer.  The  ARM Board  is authorized to  purchase credits  and                                                             
 the state  would,  in turn,  purchase  the  credits from  the  ARM                                                             
 Board.                                                                                                                         
                                                                                                                                
 Mr. Dickinson  dealt  with  the  allowable  lease  expenditures  -                                                             
 costs that are deductible.   AS 43.55.165 has been changed to  say                                                             
 that before a  cost can be  deducted, the State  has to authorize                                                              
 it through  regulations.    The idea  behind  the  structuring  of                                                             
 costs was the notion  that most of the  oil produced are in  units                                                             
 with working interest  owners.  The  change involves the  implicit                                                             
 use of producer audits of operators.                                                                                           
                                                                                                                                
 4:38:55 PM                                                                                                                   
                                                                                                                                
 Mr. Dickinson explained  that there  is a list  of bad acts  which                                                             
 would disallow the deduction  of costs for repair or replacement.                                                              
 The current  law regarding  dispute  resolution remains.    Public                                                             
 outreach costs are listed and removed.                                                                                         
                                                                                                                                
 Mr. Dickinson  reported  that  the  final  item  under deductible                                                              
 costs for operating  a lease  would be determined  on a  formulaic                                                             
 basis.   He explained  the  formula, which  will apply  to  legacy                                                             
 fields.   Base costs  in 2006  would be  multiplied  by 3  percent                                                             
 annually.  He  related how recalculations  would be determined  if                                                             
 overpayments  were made.    The  first year,  the  base  would  be                                                             
 multiplied by 137 percent due to a shortened timeframe.                                                                        
                                                                                                                                
 4:42:06 PM                                                                                                                   
                                                                                                                                
 Mr. Dickinson continued  to speak  to forecast issues.   Before  a                                                             
 penalty is assessed,  the state must ask  for documentation.   The                                                             
 request for documentation can not occur retrospectively.                                                                       
                                                                                                                                
 Mr.  Dickinson  addressed  the  disclosure  of  tax  information,                                                              
 comparing  the  three  various  approaches.    The  House  version                                                             
 states  that  information  of   individual  taxpayers  cannot   be                                                             
 revealed.    It  does  require  that  tax  information  for  three                                                             
 taxpayers be combined.                                                                                                         
                                                                                                                                
 4:44:49 PM                                                                                                                   
                                                                                                                                
Mr. Dickinson  explained that  in the  House version, the  sharing                                                              
of data  between departments  remains unchanged.   The  statute of                                                              
limitation was  changed to six years.   The Department  of Revenue                                                              
would  create six  exempt positions  for master  auditors and  the                                                              
remaining positions would remain classified.                                                                                    
                                                                                                                                
Mr. Dickinson noted  that the effective date of the  bill would be                                                              
January 1, 2008.                                                                                                                
                                                                                                                                
Mr.  Dickinson mentioned  that downstream  costs  were changed  in                                                              
the  House  version  to  be  the   lower  of  the  actual  or  the                                                              
reasonable costs for tankers and for the pipeline.                                                                              
                                                                                                                                
Co-Chair Stedman noted that Senator Green was present.                                                                          
                                                                                                                                
Mr.  Dickinson addressed  the gas  ceilings  in Cook  Inlet.   The                                                              
average rate  is calculated and any  gas produced for  instate use                                                              
receives the same rate.                                                                                                         
                                                                                                                                
4:50:34 PM                                                                                                                    
                                                                                                                                
Mr.  Dickinson  spoke  about additional  penalties  for  over  and                                                              
under  reporting of  payments.    The IRS  rules  apply for  under                                                              
payment  of taxes.    An additional  penalty  has  been added  for                                                              
under reporting  of payments.   If costs  are overestimated  by 10                                                              
percent,  the company  would  owe  a 10  percent  penalty.   Gross                                                              
negligence would incur a 20 percent penalty.                                                                                    
                                                                                                                                
Mr.  Dickinson  reviewed  the  intent language.    He  noted  that                                                              
savings  from the  ceilings  on gas  should  be passed  on to  the                                                              
consumers.                                                                                                                      
                                                                                                                                
4:53:11 PM                                                                                                                    
                                                                                                                                
Mr.  Dickinson discussed  the  final four  administrative  issues.                                                              
Monthly estimated  payments under current  law do not allow  for a                                                              
ceiling.   The House version  of the bill  allows for  ceilings to                                                              
be   applied  monthly.      Up  to   $50   million  generated   by                                                              
progressivity  may  be  appropriated  to  go  to  LIHEAP  funding.                                                              
There is  new language that deals  with whistleblowers.   There is                                                              
a provision  which allows  DNR to rewrite  their Net  Profit Share                                                              
Lease Regulations  to be  retroactive.   The required 2011  Report                                                              
was deleted.                                                                                                                    
                                                                                                                                
 Mr.  Dickinson  addressed  a  mechanical  issue  in  one   of  the                                                             
 amendments that  dealt  with  fixed operating  costs,  which  also                                                             
 required a report in 2011.                                                                                                     
                                                                                                                                
 4:56:14 PM                                                                                                                   
                                                                                                                                
 Senator Elton asked about the  unpaid judgment as an exception  to                                                             
 tax credits.    He  assumed  that  it would  apply  to  the  Exxon                                                             
 Valdez, but not to Point Thomson.  Mr. Dickinson did not know.                                                                 
                                                                                                                                
 Senator Dyson  stressed the  importance of  protecting high  level                                                             
 auditors from  punishment for  disagreeing  with their  boss.   He                                                             
 questioned if  the whistle blowing  provisions would  apply.   Mr.                                                             
 Dickinson explained  that state  employees are  excluded from  the                                                             
 provisions.  Senator Dyson  questioned if they should be  provided                                                             
 protection.   Mr.  Dickinson  noted  that  auditors  can  only  be                                                             
 removed for  cause.    Master auditors  could  be  removed  merely                                                             
 because   they   were   thought   to   be   troublesome   to   the                                                             
 administration's vision.                                                                                                       
                                                                                                                                
 Mr. Porter  added that  the  application is  correct in  that  the                                                             
 risk is  there.    Generally, auditors  are  in  the professional                                                              
 ranks and it normally would not be a problem.                                                                                  
                                                                                                                                
 5:05:06 PM                                                                                                                   
                                                                                                                                
 BARRY PULLIAM, SENIOR ECONOMIST,  ECON ONE, RESEARCH, CONTRACTOR,                                                              
 LEGISLATIVE BUDGET  AND  AUDIT COMMITTEE,  referred to  a  handout                                                             
 entitled,  "Estimated  Average  Effective  Tax  Rate,  Government                                                              
 Shares  and Revenue  Impacts  at  Various  West  Coast  ANS  Price                                                             
 Levels" (copy  on file.)   He noted  that the  charts contain  new                                                             
 DOR  volume  projections  and  new  cost  projections.  The  House                                                             
 version of the bill was also added.                                                                                            
                                                                                                                                
 Mr. Pulliam highlighted  the first chart,  "Effective Tax Rate  on                                                             
 Gross Taxable  Value  at Various  West  Coast ANS  Price  Levels."                                                             
 The chart compares  PPT, PPT Expected,  SB 2001, Senate  Judiciary                                                             
 CS, and  the House bill.   He  noted that  the difference  between                                                             
 PPT and the  PPT expected  is the  cost issue.   The PPT  expected                                                             
 incorporates  the   cost  as   expected  last   year,  while   PPT                                                             
 incorporates currently  expected costs.   All five  tax rates  use                                                             
 the Fall 2007 DOR Forecasts.                                                                                                   
                                                                                                                                
 Mr. Pulliam  pointed  out  that  the House  bill  and  the  Senate                                                             
 Judiciary version  closely  mirror each  other because  they  have                                                             
 some of the  same elements.   They  have the same  25 percent  tax                                                             
 rate and the same progressivity  feature.  They each top out at  a                                                             
50 percent  overall tax  rate.   They fall  below, at low  prices,                                                              
the SB  2001 line  because they  don't have  the same gross  floor                                                              
that SB 2001 has.   They raise more quickly, over  $55 per barrel,                                                              
because  of the higher  progressivity.   He pointed  out that  the                                                              
House  bill is  not  retroactive,  which results  in  a lower  tax                                                              
rate.  Another difference  is  that  the House  bill  incorporates                                                              
deemed operating costs  for Prudhoe Bay and Kuparuk.   EconOne has                                                              
estimated these  numbers in aggregate,  which could cause  them to                                                              
change.                                                                                                                         
                                                                                                                                
5:10:48 PM                                                                                                                    
                                                                                                                                
Mr.  Pulliam explained  that the  next chart  is "Estimated  Total                                                              
Government Share  at Various  West Coast ANS  Price Levels".   The                                                              
House  bill  and  the  Senate  Judiciary  bill  are  very  similar                                                              
because each  is progressive with  the government share  rising at                                                              
higher price levels.   All the tax scenarios have  a progressivity                                                              
feature to them.                                                                                                                
                                                                                                                                
5:12:00 PM                                                                                                                    
                                                                                                                                
Mr. Pulliam spoke  to the "Estimated Marginal Government  Share at                                                              
Various West  Coast ANS Price Levels".   He explained  the revenue                                                              
to the  state and federal  government as  prices rise by  a dollar                                                              
per  barrel.   At  $80  per barrel,  the  share of  the  increased                                                              
revenue  at $81  would be  80 percent  to government  take and  20                                                              
percent to the  industry.  The figures increase  until 85 percent;                                                              
at   that  time   they  decline.     Until   that  point,   rising                                                              
progressivity  causes the  tax rate  to  climb.   Prices begin  to                                                              
decrease due  to cap provisions;  all are  at 50 percent  with the                                                              
exception of the current PPT, which caps out at 47.5 percent.                                                                   
                                                                                                                                
Mr. Pulliam  noted that  the Senate  Judiciary and House  versions                                                              
of the  bill, with .4  progressivity, will  reach the  higher take                                                              
point sooner  than the current  PPT or SB  2001.  At $100  ANS the                                                              
cap would  occur.  When  progressivity is  not as steep,  it would                                                              
not be reached until $120 or more.                                                                                              
                                                                                                                                
5:16:18 PM                                                                                                                    
                                                                                                                                
Mr.  Pulliam  spoke  to  the  fourth   slide,  "Estimated  Average                                                              
Effective  Tax Rate,  Government  Shares  and Revenue  Impacts  at                                                              
Various West  Coast ANS Price Levels".   The bottom box  shows the                                                              
estimated  revenue  impact  of each  of  the  different  proposals                                                              
relative  to the current  PPT.   The Senate  Judiciary CS  and the                                                              
House  bill have  similar figures.   He  explained that  at $80  a                                                              
 barrel, the  Senate Judiciary  CS and  the House  bill both  would                                                             
 have significant revenue impacts over and above SB 2001.                                                                       
                                                                                                                                
 5:17:46 PM                                                                                                                   
                                                                                                                                
 Co-Chair Steadman asked for an  explanation of how Capex and  Opex                                                             
 are handled  when  the price  deviates  from the  $60 mark.    Mr.                                                             
 Pulliam explained that the  operating and capital costs are  fixed                                                             
 at a $60  reference level and  then allowed to  deviate from  that                                                             
 point.  If  prices rise above  $60 they both  increase; if  prices                                                             
 fall below $60 they both decrease.   They operate with a one-year                                                              
 lag.  The relationship for Capex  is larger than for Opex.   Capex                                                             
 modeling is  consistent  with  DOR assumptions  and  the  modeling                                                             
 that results  in their  fiscal notes.   The  specific figures  for                                                             
 capital are that if  prices go up by  1 percent, capital  spending                                                             
 would go up .3  percent the following year.   The reverse is  also                                                             
 true.    The  relationship  for  operating  costs  is,  for  every                                                             
 percent increase in  price over $60, operating  costs go up by  .2                                                             
 percent the following year.  The reverse is also true.                                                                         
                                                                                                                                
 5:19:57 PM                                                                                                                   
                                                                                                                                
 Senator Thomas noted  that the chart  indicates that PPT  Expected                                                             
 would outperform  all  versions  other  than a  price  range  from                                                             
 about $95 -  $122.   Mr. Pulliam agreed.   He  explained that  the                                                             
 analysis of  the  PPT  Expected forecast  focused  on  a  narrower                                                             
 price  band.   Forecasters  did  not  foresee  the  high  rise  of                                                             
 prices.  The assumption reflects a fixed cost world.                                                                           
                                                                                                                                
 5:22:48 PM                                                                                                                   
                                                                                                                                
 In response to a  question by Senator  Thomas, Mr. Pulliam  stated                                                             
 that it  would be unlikely  in the  near time  period that  prices                                                             
 would fall below $40 per barrel.                                                                                               
                                                                                                                                
 AT EASE:       5:24:02 PM                                                                                                    
                                                                                                                                
 RECONVENE:     5:26:35 PM                                                                                                    
                                                                                                                                
 DAVID TEAL,  DIRECTOR, LEGISLATIVE  FINANCE DIVISION,  provided  a                                                             
 handout entitled,  "Tax  Rates in  Various  Versions of  SB  2001"                                                             
 (copy on file.) He reviewed  the major provisions of a tax  system                                                             
 based on net  cash flow.   PPT has  a base rate  of 22.5  percent.                                                             
 ACES, Senate Judiciary, and House  versions of the bill raise  the                                                             
 base rate to 25  percent.  The Senate  Finance version returns  to                                                             
 a base rate  of 22.5 percent.   Currently under  PPT, the  trigger                                                             
 is at $40.   All of  the other  proposals have a  trigger at  $30.                                                             
The rates vary;  under PPT the progressivity is  .25 percent, ACES                                                              
is .20  percent, Senate  Judiciary and the  House versions  are at                                                              
.40 percent,  and the  Senate Finance  version  is at .60  percent                                                              
and has multiple  triggers and multiple rates.   Comparing maximum                                                              
rates  shows PPT  at  47.5 percent,  ACES,  Senate Judiciary,  and                                                              
House at 50 percent,  and Senate Finance is capped  at 75 percent,                                                              
but never actually goes beyond 50 percent.                                                                                      
                                                                                                                                
Mr.  Teal  compared  the  tax  systems  three  ways:  increase  in                                                              
revenue,  total  revenue, and  government  share.   He  emphasized                                                              
that  the  models  are  snapshots  and  many  components  such  as                                                              
monthly  take vs. annual  take and  credit delays  don't show  up.                                                              
These models depict relative positions.                                                                                         
                                                                                                                                
5:30:38 PM                                                                                                                    
                                                                                                                                
Mr.  Teal  looked  first  at  increases   in  revenue  under  ACES                                                              
relative to PPT.   The base rate is 25 percent.   He described the                                                              
gross floor  and the  impact of  the trigger,  which flattens  out                                                              
and  produces $400  to $500  million  more a  year than  PPT.   He                                                              
compared the progressivity factor in PPT and ACES.                                                                              
                                                                                                                                
Mr.  Teal described  what  would  happen  when adding  the  Senate                                                              
Judiciary line.   The base rate is 25 percent, but  at the trigger                                                              
point,  a much  higher  progressivity  kicks in,  which  generates                                                              
more  revenue  more quickly.    PPT  is  a longer,  slower  climb.                                                              
Eventually, ACES,  and Senate Judiciary  produce the  same revenue                                                              
at high oil prices.                                                                                                             
                                                                                                                                
5:33:38 PM                                                                                                                    
                                                                                                                                
Mr. Teal  noted that the House  and Senate Judiciary  versions are                                                              
the  same.   He  described  the  addition  of the  Senate  Finance                                                              
version to the graph.   It produces the same amount  of revenue as                                                              
PPT does  with a 22.5  percent base rate  until the  trigger point                                                              
is reached, at which  point progressivity is high -  as much as .6                                                              
percent.    Then it  begins  to  taper off  producing  between  $1                                                              
billion  and $1.7  billion  more  than PPT.    Where others  reach                                                              
their  maximum  at  50  percent,  PPT continues  to  climb  at  .1                                                              
percent progressivity and holds flat at very high oil prices.                                                                   
                                                                                                                                
5:34:53 PM                                                                                                                    
                                                                                                                                
Mr. Teal  turned to  the second  way of  comparing tax  scenarios,                                                              
total  state  revenue.    Revenue continues  to  climb  under  all                                                              
scenarios.    PPT  is  low;  ACES  is  a  shift  upward.    Senate                                                              
Judiciary  and House  versions  are higher  revenue  at lower  oil                                                              
 prices, but  then the  high progressivity  in the  Senate  Finance                                                             
 begins to catch  up, and  at the $90  range, the  same revenue  is                                                             
 produced.   At  higher  prices,  the  progressivity  continues  to                                                             
 climb and produces more revenue than the others.                                                                               
                                                                                                                                
 5:36:01 PM                                                                                                                   
                                                                                                                                
 Mr. Teal  addressed  the third  way  of comparing  tax scenarios,                                                              
 government share  of  revenue.   PPT  has  the  lowest government                                                              
 take,  ACES  is  higher  because  of  a  higher  base  and   lower                                                             
 progressivity, the House  and Senate Judiciary  versions shift  up                                                             
 and then  flatten  out, and  Senate  Finance almost  follows  PPT.                                                             
 The difference is due to reasonable transportation costs.                                                                      
                                                                                                                                
 Senator Dyson  questioned the net  surcharge and  trigger for  the                                                             
 Senate Finance  version.   Mr. Teal explained  that progressivity                                                              
 begins at $30  and the rate is  .6 percent.  At  $50, it drops  to                                                             
 .5 percent, at $70 it drops  to .35 percent, and beyond $90  it is                                                             
 .1 percent.    He  explained  the  advantage  of  having  multiple                                                             
 trigger points.                                                                                                                
                                                                                                                                
 5:39:20 PM                                                                                                                   
                                                                                                                                
 Senator  Elton  referred to  the  charts  on  page  8  and  9  and                                                             
 requested clarification  regarding  crossover  points.   Mr.  Teal                                                             
 responded that  they differ  because the  scale of  each graph  is                                                             
 different.                                                                                                                     
                                                                                                                                
 Senator Elton expressed confusion  that the numbers on page 8  did                                                             
 not concur  with the  numbers on  page 9.   Mr.  Teal referred  to                                                             
 page 10  and pointed  out that  the numbers  fall on  top of  each                                                             
 other.  The differences are  quite small.  This chart was  drafted                                                             
 right before the meeting started so some errors may be present.                                                                
                                                                                                                                
 5:43:14 PM                                                                                                                   
                                                                                                                                
 Senator Thomas  asked  if there  were  other differences  such  as                                                             
 TAPS language or  other specific  items that may  have an  impact.                                                             
 Mr. Teal replied  that, unlike EconOne, he  left out estimates  of                                                             
 costs to  the  operating  cap  in order  to  present  a  snapshot.                                                             
 There are production, volume,  credits, and delay factors that  do                                                             
 affect these models.                                                                                                           
                                                                                                                                
 Co-Chair Stedman explained  the importance  of having Legislative                                                              
 Finance   involved  in   the   process.      EconOne   will   have                                                             
 presentations on progressivity in the near future.                                                                             
                                                                                                                                
5:47:11 PM                                                                                                                    
                                                                                                                                
Senator Dyson asked if the changes in the CS were largely                                                                       
regarding base rates, trigger points, and progressivity.  Co-                                                                   
Chair Stedman said there would also be other changes.                                                                           
                                                                                                                                
CS HB 2001 (FIN) am was HELD in Committee for further                                                                           
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the Senate                                                                
Finance Committee meeting was adjourned at 5:48:40 PM.                                                                        
                                                                                                                                

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