Legislature(2009 - 2010)SENATE FINANCE 532

03/18/2010 03:00 PM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 230 BUDGET: CAPITAL, SUPP. & OTHER APPROPS TELECONFERENCED
+= SB 253 APPROP: DEFERRED MAINTENANCE/REPLACEMENT TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= SB 305 SEPARATE OIL & GAS PRODUCTION TAX TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 18, 2010                                                                                            
                         3:14 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
3:14:57 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 3:14 p.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Charlie Huggins, Vice-Chair                                                                                             
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Joe Thomas                                                                                                              
                                                                                                                                
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Donny Olson                                                                                                             
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Leslie   Houston,  Director,   Division  of   Administrative                                                                    
Services, Department of  Corrections; Dwayne Peeples, Deputy                                                                    
Commissioner, Department of  Corrections; Richard Svobodney,                                                                    
Deputy Attorney General, Department  of Law; Dave Balisdell,                                                                    
Director,  Administrative Services  Division, Department  of                                                                    
Law;  Linda Perez,  Administrative Director,  Office of  the                                                                    
Governor; Karen Rehfeld, Director,  Office of Management and                                                                    
Budget,   Office  of   the  Governor;   Roger  Marks,   LB&A                                                                    
Consultant,    Logsdon   and    Associates;   Pat    Galvin,                                                                    
Commissioner, Department of Revenue;                                                                                            
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
                                                                                                                                
SB 230    BUDGET: CAPITAL, SUPP. & OTHER APPROPS                                                                                
                                                                                                                                
          SB 230 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
SB 253    APPROP: DEFERRED MAINTENANCE/REPLACEMENT                                                                              
                                                                                                                                
          SB 253 was HEARD and HELD in committee for                                                                            
          further consideration                                                                                                 
                                                                                                                                
                                                                                                                                
SB 305    SEPARATE OIL & GAS PRODUCTION TAX                                                                                     
                                                                                                                                
          SB 305 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
3:15:07 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman discussed housekeeping.                                                                                        
                                                                                                                                
                                                                                                                                
SENATE BILL NO. 230                                                                                                           
                                                                                                                                
     "An Act  making and amending  appropriations, including                                                                    
     capital  appropriations,  supplemental  appropriations,                                                                    
     and  other  appropriations;  making  appropriations  to                                                                    
     capitalize  funds;  and   providing  for  an  effective                                                                    
     date."                                                                                                                     
                                                                                                                                
                                                                                                                                
SENATE BILL NO. 253                                                                                                           
                                                                                                                                
     "An  Act  making  capital appropriations  for  deferred                                                                    
     maintenance   projects,   equipment  replacement,   and                                                                    
     emergency  repairs;  and  providing  for  an  effective                                                                    
     date."                                                                                                                     
                                                                                                                                
                 Department of Corrections                                                                                    
                                                                                                                                
LESLIE HOUSTON, DIRECTOR, DIVISION OF ADMINISTRATIVE                                                                            
SERVICES,   DEPARTMENT   OF   CORRECTIONS,   discussed   the                                                                    
appropriation and deferred maintenance requests.                                                                                
                                                                                                                                
DM  AMD 49376                                                                                                                   
     Deferred Maintenance Projects                                                                                              
     $6,500,000                                                                                                                 
                                                                                                                                
The department requested general fund dollars to support 11                                                                     
projects. The projects, listed by priority, were as                                                                             
follows:                                                                                                                        
                                                                                                                                
   · Anvil Mountain: Replace security control system                                                                            
     located in both security control stations. Fire/Life                                                                       
     safety code requirement                                                                                                    
     $750,000                                                                                                                   
                                                                                                                                
   · Anvil Mountain: Construct new utilidor. Fire/Life                                                                          
     safety code requirement                                                                                                    
     $1,500,000                                                                                                                 
                                                                                                                                
   · Anvil Mountain Correctional Facility: Replace failing                                                                      
     septic tank with waste water treatment plant.                                                                              
     $1,500,000                                                                                                                 
                                                                                                                                
   · Palmer: Replace fire pump and fix sprinkler piping.                                                                        
     $750,000                                                                                                                   
                                                                                                                                
   · Wildwood: Replace roofing system.                                                                                          
     $940,000                                                                                                                   
                                                                                                                                
   · Spring Creek: Analyze security control system and                                                                          
     perimeter security.                                                                                                        
     $145,000                                                                                                                   
                                                                                                                                
   · Ketchikan: Design secure efficient lighting system.                                                                        
     $55,000                                                                                                                    
                                                                                                                                
   · Ketchikan: Replace existing lighting system with                                                                           
     secure and efficient lighting system.                                                                                      
     $390,000                                                                                                                   
                                                                                                                                
   · Palmer: Replace obsolete fire alarm panels in medical,                                                                     
     administration, warehouse and maintenance shop.                                                                            
     $200,000                                                                                                                   
                                                                                                                                
  · Hiland Mountain: Replace and expand exterior freezer.                                                                       
     $140,000                                                                                                                   
                                                                                                                                
   · Wildwood: Replace fire alarm system.                                                                                       
     $130,000                                                                                                                   
                                                                                                                                
                                                                                                                                
Co-Chair  Stedman  solicited  questions  pertaining  to  the                                                                    
project  list.  No  questions   being  offered,  Ms.  Huston                                                                    
continued  to the  FY11 capital  budget  request. Two  items                                                                    
comprised the departmental request:                                                                                             
                                                                                                                                
CAP  RN 45637                                                                                                                   
     Anchorage    Correctional   Complex    Renovation   and                                                                    
     Remodeling                                                                                                                 
     $350,000                                                                                                                   
                                                                                                                                
CAP  RN 41516                                                                                                                   
     Community Jails Repairs, Renovations, and Equipment                                                                        
     $100,000                                                                                                                   
                                                                                                                                
                                                                                                                                
Co-Chair  Stedman  solicited  questions  pertaining  to  the                                                                    
project requests.                                                                                                               
                                                                                                                                
                                                                                                                                
                     Department of Law                                                                                        
                                                                                                                              
CAP  49182                                                                                                                      
     Fairbanks and Anchorage Key Card Office Access                                                                             
     $150,000                                                                                                                   
                                                                                                                                
DAVE BALISDELL, DIRECTOR,  ADMINISTRATIVE SERVICES DIRECTOR,                                                                    
DEPARTMENT  OF LAW,  explained that  the request  would fund                                                                    
implementation   of  a   Key   Card   system  in   Anchorage                                                                    
facilities.  Metal keys  were currently  being  used in  the                                                                    
facilities.  When  the  keys  are lost,  all  locks  in  the                                                                    
building must  be changed, which is  of considerable expense                                                                    
to the department. Key Cards would alleviate the issue.                                                                         
                                                                                                                                
Senator  Thomas wondered  about future  technology involving                                                                    
retinal scans. Mr. Blaisdale replied  that the technology is                                                                    
available but expensive.                                                                                                        
                                                                                                                                
Co-Chair  Stedman   invited  questions  pertaining   to  the                                                                    
request.                                                                                                                        
                                                                                                                                
              Office of the Governor Language                                                                                 
                                                                                                                                
LINDA   PEREZ,  ADMINISTRATIVE   DIRECTOR,  OFFICE   OF  THE                                                                    
GOVERNOR,  gave  an  overview  of  the  two  capital  budget                                                                    
project requests.                                                                                                               
                                                                                                                                
CAP  49388                                                                                                                      
     Division of Elections Technology Refresh                                                                                   
     $123,800                                                                                                                   
                                                                                                                                
The request represents the  scheduled replacement of desktop                                                                    
computers,  software,  and  operating  systems,  within  the                                                                    
department, every four years.                                                                                                   
                                                                                                                                
CAP  RN AMD 48416                                                                                                               
     Elections Reform Under the Federal Help America Vote                                                                       
     Act                                                                                                                        
     $1,499,900                                                                                                                 
                                                                                                                                
Ms. Perez explained  that the request was  to expend federal                                                                    
monies received in  the election fund from  the Help America                                                                    
Vote  Act,  which  is  an  ongoing  appropriation  from  the                                                                    
federal  government  to  better  the  process  of  elections                                                                    
throughout the state.                                                                                                           
                                                                                                                                
KAREN REHFELD,  DIRECTOR, OFFICE  OF MANAGEMENT  AND BUDGET,                                                                    
OFFICE OF THE  GOVERNOR, pointed out changes  in the capital                                                                    
language sections of the budget.  There were four amendments                                                                    
in the  language section that had  already been transmitted.                                                                    
Section 7 allows for state  agencies to refer to Legislative                                                                    
Budget and  Audit concerning  incoming requests  for federal                                                                    
or other program  receipts. Section 8 is  the Fund Transfers                                                                    
portion of the  bill. Sub-section (a), speaks  to the Alaska                                                                    
Capital  Income  Fund.  Sub-section   (b)  pertains  to  the                                                                    
federal Help America Vote Act  funds; Line 24 was amended to                                                                    
read $1,425,000.  Line 25 was  amended to read  $74,900 from                                                                    
the  general  fund for  the  matching  portion. Because  the                                                                    
Division  of  Elections had  been  notified  that the  match                                                                    
requirements  had  been met  and  no  additional funds  were                                                                    
necessary, the administration planed  to submit an amendment                                                                    
that would remove the general fund match requirement.                                                                           
                                                                                                                                
3:23:11 PM                                                                                                                    
                                                                                                                                
                                                                                                                                
Ms.  Rehfeld discussed  Sub-sections  (c), which  was a  $25                                                                    
million request  for the Renewable  Energy Fund.  The amount                                                                    
in Sub-section (d)  was amended to read  $140 million, based                                                                    
on the  latest information available from  the Department of                                                                    
Revenue (DOR).                                                                                                                  
                                                                                                                                
Co-Chair Stedman  requested a detailed breakdown  of who was                                                                    
being  paid  by  TransCanada,  and  how  much.  Ms.  Rehfeld                                                                    
replied that DOR compiled a  monthly report, and that copies                                                                    
would be made available for the committee.                                                                                      
                                                                                                                                
Ms. Rehfeld  continued to Sub-section  (e), which  speaks to                                                                    
the Alaska  Industrial Development Export  Authority (AIDEA)                                                                    
dividend  into the  power  project fund.  Section  9 is  the                                                                    
insurance  claim   section.  Section  10  is   the  National                                                                    
Petroleum Reserve-  Alaska Impact  Grant Program,  which was                                                                    
reduced to $4,847,165, for specific  grants. The revenue was                                                                    
derived  from leasing,  and the  additional revenue  had not                                                                    
been anticipated  during this period, thus  the reduction of                                                                    
the grant  amount in the  budget. Section 11 deals  with the                                                                    
cost of certificates of participation.                                                                                          
                                                                                                                                
3:25:24 PM                                                                                                                    
                                                                                                                                
Ms. Rehfeld highlighted that one  of the proposed amendments                                                                    
concerns  the Alaska  Class  Ferry.  The amendment  requests                                                                    
access to $60 million that had  been set aside in the vessel                                                                    
replacement fund,  and the redirection of  two prior federal                                                                    
appropriations for  fast ferries  to the Alaska  Class Ferry                                                                    
Project.  Section  12  provides  for the  lapse  of  various                                                                    
capital appropriations and an effective date.                                                                                   
                                                                                                                                
Co-Chair  Hoffman  asked  for  a  list  of  lapse  extension                                                                    
projects. Ms.  Rehfeld explained that the  section describes                                                                    
appropriations made in the various  components of the entire                                                                    
capital  budget  that  would  have  a  lapse  extension  for                                                                    
capital projects.                                                                                                               
                                                                                                                                
3:26:56 PM                                                                                                                    
                                                                                                                                
Senator  Thomas noted  similar  Information Technology  (IT)                                                                    
project requests  within different departments.  He wondered                                                                    
if individual  contractors had been hired  by departments to                                                                    
research  the  IT  requests. Ms.  Rehfeld  replied  that  an                                                                    
extensive  IT  planning  process was  employed  yearly,  and                                                                    
projects  went  through  internal  review.  The  departments                                                                    
share  information  in  order   to  prevent  duplication  of                                                                    
information between  agencies. She felt that  the items that                                                                    
had been  brought forward were of  significant importance to                                                                    
the  department.  All  IT  projects   are  reviewed  by  the                                                                    
Enterprise  Investment  Board,  which is  comprised  of  Ms.                                                                    
Rehfeld,    the    Commissioner   of    Administration,    a                                                                    
representative of the technical  group and one other member.                                                                    
The  board  goes  through  the   review  process  of  agency                                                                    
requests    and    formulates     budget    decisions    and                                                                    
recommendations to the governor.                                                                                                
                                                                                                                                
Co-Chair   Hoffman   asked   why  Alaska   Housing   Capital                                                                    
Corporation  funds, and  not the  general funds,  were being                                                                    
considered  as the  funding source  for the  $150,000 Alaska                                                                    
Gas Inducement  Act reimbursement  fund. Ms.  Rehfeld stated                                                                    
that  the administration  felt that  the funding  source was                                                                    
the most appropriate source for the project.                                                                                    
                                                                                                                                
3:31:05 PM AT EASE                                                                                                            
4:10:28 PM RECONVENE                                                                                                          
                                                                                                                                
                                                                                                                                
SENATE BILL NO. 305                                                                                                           
                                                                                                                                
     "An Act relating to the tax on oil and gas production;                                                                     
     and providing for an effective date."                                                                                      
                                                                                                                                
Co-Chair Stedman introduced the bill.                                                                                           
                                                                                                                                
Co-Chair Hoffman  MOVED to adopt  CSSB 305 26-LS1577\S  as a                                                                    
working document. Co-Chair Stedman  OBJECTED for the purpose                                                                    
of discussion.                                                                                                                  
                                                                                                                                
4:11:35 PM                                                                                                                    
                                                                                                                                
ROGER MARKS, LB&A CONSULTANT,  LOGSDON AND ASSOCIATES, began                                                                    
the  power  point presentation,  "SB  305:  CS Version  S  &                                                                    
Amendments" (copy  on file). He discussed  Slide 2, "Version                                                                    
S Committee  Substitute", which lists the  recent changes in                                                                    
the language of the bill:                                                                                                       
                                                                                                                                
   · Title has tightened scope further                                                                                          
                                                                                                                                
   · Technical changes in Section 5                                                                                             
     ƒSome of the proposed changes to AS 43.55.020(a)(1)                                                                       
        did not need to be there- CS reverses those changes.                                                                    
                                                                                                                                
   · Technical change- new Section 8                                                                                            
     ƒGives authority to department to adopt regulations                                                                       
        to allocate AS 43.55.170 adjustments to lease                                                                           
        expenditures between oil and gas.                                                                                       
                                                                                                                                
Co-Chair Stedman requested further  discussion on Section 8.                                                                    
Mr.  Marks   explained  that  in  lease   expenditures  were                                                                    
discussed in  AS 43.55.170. The  accounting could  be tricky                                                                    
and care should be taken  that neither costs nor revenue was                                                                    
double counted.  When discussing  the split  of oil  and gas                                                                    
progressivity, it  becomes necessary  to define  which lease                                                                    
expenditures apply to oil and  which apply to gas. Section 8                                                                    
gives the administration the  authority to adopt regulations                                                                    
concerning how the lease expenditures should be divided.                                                                        
                                                                                                                                
4:15:39 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman REMOVED  his  OBJECTION to  the CS.  There                                                                    
being  NO OBJECTION,  the CS  26-LS1577\S was  ADOPTED as  a                                                                    
working document.                                                                                                               
                                                                                                                                
4:16:14 PM                                                                                                                    
                                                                                                                                
PAT GALVIN,  COMMISSIONER, DEPARTMENT OF  REVENUE, discussed                                                                    
the fiscal note. He stated  that the method of acquiring and                                                                    
managing  information  from  taxpayers   would  need  to  be                                                                    
changed prior to the decoupling  of oil and gas, and funding                                                                    
was necessary in order to  implement the changes. Currently,                                                                    
oil   and  gas   production  statewide   is  combined   when                                                                    
determining the  progressive tax rate. The  potential change                                                                    
in state revenue was indeterminate.                                                                                             
                                                                                                                                
4:18:37 PM                                                                                                                    
                                                                                                                                
Commissioner  Galvin   continued.  The  bill   would  affect                                                                    
current producers and the  department had examined potential                                                                    
annual financial impact through  the tax receipts. Refernced                                                                    
in the  fiscal note  was the  range of  tens of  millions to                                                                    
hundreds   of  millions   in  a   given  year.   The  number                                                                    
fluctuates, which has added to uncertainty.                                                                                     
                                                                                                                                
4:20:49 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  understood the numbers had  been flexible.                                                                    
Commissioner  Galvin agreed.  He  added  that the  potential                                                                    
impact  was that  more revenue  could be  expected when  the                                                                    
price  of gas  and oil  were  divergent, and  less than  the                                                                    
status quo when prices were closer to the 10 to 1 ratio.                                                                        
                                                                                                                                
Co-Chair  Stedman   requested  that   the  fiscal   note  be                                                                    
rewritten  due  to  changes  made   by  the  amendments.  He                                                                    
referenced  the language  in the  fiscal note.  Commissioner                                                                    
Galvin said  he would provide  as many numbers  as possible.                                                                    
Co-Chair  Stedman said  the committee  would  work with  the                                                                    
department   to   craft   a   comprehensive   fiscal   note.                                                                    
Commissioner  Galvin stated  that  the languase  was not  in                                                                    
reference  to the  expected market  price. Co-Chair  Stedman                                                                    
and   Commissioner  Galvin   discussed   the  semantics   of                                                                    
"normalcy" as  it was written  in the fiscal  note. Co-Chair                                                                    
Stedman's  maintained that  the  normalcy,  under the  price                                                                    
relationship between  gas and oil, was  a different normalcy                                                                    
than between the British Thermal Unit (BTU) equivalency.                                                                        
                                                                                                                                
Co-Chair Stedman MOVED to adopt Amendment 1.                                                                                    
                                                                                                                                
Co-Chair Hoffman OBJECTED for the purpose of discussion.                                                                        
                                                                                                                                
Mr.  Marks   continued  to  Slide   3,  "Amendment   1:  Tax                                                                    
Neutrality on  Current Activity", which explains  the intent                                                                    
of the amendment:                                                                                                               
                                                                                                                                
     · Currently some producers produce oil and gas.                                                                            
                                                                                                                                
     · If you separate oil & gas for calculating                                                                                
        progressivity, progressivity on oil will be                                                                             
        undiluted by gas and taxes will increase.                                                                               
                                                                                                                                
     · It is not intent of bill to raise taxes on current                                                                       
        oil and gas activity                                                                                                    
                                                                                                                                
     · Amendment 1                                                                                                              
        ƒCredit equal to difference between tax determined                                                                     
          under bill and tax determined now                                                                                     
        ƒCredit expires in 2015                                                                                                
                                                                                                                                
4:26:45 PM                                                                                                                    
                                                                                                                                
                                                                                                                                
Co-Chair  Stedman  noted that  the  credit  would expire  in                                                                    
2015.                                                                                                                           
Mr.  Marks explained  that the  2015  expiration date  would                                                                    
protect the state from a collapse  in oil revenue if an AGIA                                                                    
plan  is  implemented,  without  causing  taxes  on  current                                                                    
activity.  Hopefully discussions  on  a tax  regime for  gas                                                                    
will have occurred by the 2015 date.                                                                                            
                                                                                                                                
Senator  Thomas inquired  about Cook  Inlet gas  production.                                                                    
Mr. Marks responded  that there were sets  of producers that                                                                    
had North  Slope oil  and Cook  Inlet gas.  Those producers,                                                                    
based on  current activity, would see  tax increases without                                                                    
the amendment.                                                                                                                  
                                                                                                                                
Co-Chair  Stedman  REMOVED  his OBJECTION  to  Amendment  1.                                                                    
There being no further OBJECTION the amendment was ADOPTED.                                                                     
                                                                                                                                
Co-Chair Hoffman MOVED Amendment 2.                                                                                             
                                                                                                                                
Co-Chair Stedman OBJETED for the purpose of discussion.                                                                         
                                                                                                                                
4:30:52 PM                                                                                                                    
                                                                                                                                
Mr.  Marks continued  his  presentation.  He explained  that                                                                    
Prudhoe Bay  was producing 270,000  barrels of oil  per day.                                                                    
Oil   cannot  be   removed  from   the  earth   without  the                                                                    
accompaniment of natural gas. The  gas is separated and some                                                                    
is placed back in the  ground to re-pressurize the field for                                                                    
oil production. If  in the future the gas  is also marketed,                                                                    
Prudhoe  Bay would  become  an oil  and  natural gas  field,                                                                    
which most fields are. The costs  to produce oil and gas are                                                                    
joint, which  makes it necessary  to allocate  costs between                                                                    
oil  and gas  in  order  to tax  them  separately. Slide  5,                                                                    
"Amendment 2: Cost Allocation",  details the changes made by                                                                    
amendment 2, and are as follows:                                                                                                
                                                                                                                                
   · Retain current agency authority, and                                                                                       
                                                                                                                                
   · Consider BOE approach                                                                                                      
                                                                                                                                
   · Costs to produce oil and gas are truly joint costs:                                                                        
     the same process that produces one produces the other                                                                      
                                                                                                                                
   · Benefit of current approach (AS 43.55.165(h)) that                                                                         
     gives department authority to adopt regulations for                                                                        
     allocation costs between oil and gas:                                                                                      
     ƒAs recipient of confidential cost data they are in                                                                       
        the best position to evaluate costs                                                                                     
     ƒA regulatory process allows more time                                                                                    
     ƒThe regulator process is public                                                                                          
                                                                                                                                
Mr.  Marks   explained  the  BTU  Equivalent   Barrel  (BOE)                                                                    
Approach. He stated  that it was the same  approach that was                                                                    
currently  embraced  in  the departmental  regulations.  The                                                                    
mechanics (AS 43.55.900(3)) read:                                                                                               
                                                                                                                                
1 barrel of oil= 1 BOE                                                                                                          
6 mmbtu's to the barrel                                                                                                         
Gas mmbtu's/6= gas BOE's                                                                                                        
                                                                                                                                
Mr. Marks  said that the  rationale for the BOE  approach is                                                                    
that the same  costs that produce oil also  produce gas. The                                                                    
BOE method puts  oil and gas on an "apples  to apples" basis                                                                    
in terms of relative produced volumes.                                                                                          
                                                                                                                                
4:34:50 PM                                                                                                                    
                                                                                                                                
Mr.  Marks   continued.  Slide   7,  "Problems   with  other                                                                    
Methods", which details the  different approaches that could                                                                    
be  taken  to  allocate  costs.  He  discussed  the  various                                                                    
approaches and the scenarios that could come into play:                                                                         
                                                                                                                                
   · Item by item attribute                                                                                                     
     ƒInappropriate where costs are truly joint                                                                                
                                                                                                                                
   · Dominant use (either all oil or all gas)                                                                                   
     ƒInappropriate when large volumes of both are                                                                             
        produced                                                                                                                
                                                                                                                                
   · Deemed approach (deemed one unless item id 100 percent                                                                     
     the other                                                                                                                  
     ƒInappropriate when large volumes of both produced                                                                        
                                                                                                                                
   · Reserves                                                                                                                   
     ƒUncertain numbers/subject to taxpayer control                                                                            
                                                                                                                                
   · Gross value                                                                                                                
     ƒUpstream costs should not change with downstream                                                                         
        prices                                                                                                                  
                                                                                                                                
                                                                                                                                
4:36:55 PM                                                                                                                    
                                                                                                                                
Mr. Marks continued to Slide 8, "A Note on 15 AAC 55.220":                                                                      
                                                                                                                                
   · Department of Revenue's proposed regulation on AGIA                                                                        
     uses the Gross value approach to allocate the total                                                                        
     tax between oil and gas                                                                                                    
                                                                                                                                
   · Allocation tax is different than allocating costs                                                                          
                                                                                                                                
   · Gross value is a very material determinant of the                                                                          
     differences in tax value between oil and gas                                                                               
                                                                                                                                
   · Allocating tax by gross value for this purpose is                                                                          
     reasonable                                                                                                                 
                                                                                                                                
Mr. Marks addressed  the concern for the  treatment of Point                                                                    
Thomson. Slide  9, "A  Note on  Allocation of  Capital Costs                                                                    
Associated with Developing Pt. Thomson", reads:                                                                                 
                                                                                                                                
   · High development costs will be incurred prior to gas                                                                       
     sales: these costs will allocated against oil                                                                              
                                                                                                                                
   · Pt. Thomson is also an oil (condensate) field (est.300                                                                     
     million barrels)                                                                                                           
                                                                                                                                
   · Could be developed such that it produces condensate                                                                        
     years before it produces gas                                                                                               
                                                                                                                                
   · PPT/ACES were deliberately designed so that cost                                                                           
     deductions and credits would be utilized immediately                                                                       
                                                                                                                                
                                                                                                                                
4:41:59 PM                                                                                                                    
                                                                                                                                
Mr.  Marks   reiterated  that   the  amendment   allows  the                                                                    
department  to  maintain  authority for  the  allocation  of                                                                    
lease expenditures.                                                                                                             
                                                                                                                                
Co-Chair  Stedman removed  his OBJECTION  to the  amendment.                                                                    
There being NO OBJECTION, Amendment 2 was ADOPTED.                                                                              
                                                                                                                                
Commissioner Galvin expressed  appreciation for the language                                                                    
in Amendment  2. The  desire of the  department would  be to                                                                    
put the language into statute  in order to avoid problems in                                                                    
the regulatory process.                                                                                                         
                                                                                                                                
4:45:55 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  stated that  the committee  was determined                                                                    
to work  with the department  on the language  pertaining to                                                                    
cost  allocation. He  asserted that  this was  not the  main                                                                    
reason  that  the bill  was  on  the  table but  hoped  that                                                                    
significant conversation  on the  issue would be  had before                                                                    
2015.   Commissioner Galvin replied  that if  the allocation                                                                    
was to  be based on  current or projected costs,  there were                                                                    
significant costs  that would be joint  costs in production.                                                                    
He felt other  considerations would need to  be examined. He                                                                    
assured the committee that the  department would continue to                                                                    
work  with the  committee,  but felt  that further  guidance                                                                    
would be necessary.                                                                                                             
                                                                                                                                
4:48:12 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman said  that a  solution  was necessary.  He                                                                    
requested that the department provide  records from the last                                                                    
three  years on  the impact  of the  dilution, dealing  with                                                                    
Cook Inlet and the North  Slope, to educate the committee on                                                                    
the  numbers.  Commissioner  Galvin said  that  Amendment  1                                                                    
makes the  fiscal note  moot. Co-Chair  Stedman said  that a                                                                    
new fiscal  note would be  needed to ensure that  the public                                                                    
has  the opportunity  to  see the  language  and the  fiscal                                                                    
impact.                                                                                                                         
                                                                                                                                
4:50:09 PM                                                                                                                    
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 4:50 PM.                                                                                           
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
New CSSB305-REV-TAX-03-16-10 Oil and Gas Decoupling.pdf SFIN 3/18/2010 3:00:00 PM
SB 305
SB 305 031810 Proposed CS SFC Version S.pdf SFIN 3/18/2010 3:00:00 PM
SB 305
SB 305 Amendment 2 031810 SFIN .pdf SFIN 3/18/2010 3:00:00 PM
SB 305
SB 305 031810 Amendment 1 .pdf SFIN 3/18/2010 3:00:00 PM
SB 305
SB 305 2010 04 18 Marks SB305 CS&Amends SFC.pdf SFIN 3/18/2010 3:00:00 PM
SB 305
CSSB 305(FIN) 031910 Version P.pdf SFIN 3/18/2010 3:00:00 PM
SB 305