Legislature(2009 - 2010)

04/14/2010 03:19 PM Senate FIN

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                 SENATE FINANCE COMMITTEE                                                                                       
                      April 14, 2010                                                                                            
                         3:19 p.m.                                                                                              
3:19:15 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 3:19 p.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Charlie Huggins, Vice-Chair                                                                                             
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Larry  Hartig,  Commissioner,  Department  of  Environmental                                                                    
Conservation;  Representative Mike  Hawker, Sponsor;  Marsha                                                                    
Davis,  Deputy  Commissioner,  Department  of  Revenue;  Dan                                                                    
Sullivan,   Mayor,   Anchorage;    Tadd   Owens,   Director,                                                                    
Government and Public Affairs, Pioneer Natural Resources                                                                        
PRESENT VIA TELECONFERENCE                                                                                                    
Kevin Banks,  Director, Division of Oil  and Gas, Department                                                                    
of Natural Resources                                                                                                            
SB   4    COASTAL MANAGEMENT PROGRAM                                                                                            
          CSSB 4 (FIN) was REPORTED out of Committee with a                                                                     
          "do not pass" recommendation and with a new                                                                           
          fiscal note by the Department of Revenue and a                                                                        
          new fiscal note by the Department of                                                                                  
          Environmental Conservation.                                                                                           
SB 309    GAS EXPLORATION\DEVELOPMENT TAX CREDIT                                                                                
          SB 309 was scheduled but not heard.                                                                                   
HB 365    FISH PROCESSOR FEES, LICENSES, RECORDS                                                                                
          HB 365 was scheduled but not heard.                                                                                   
HB 424    G.O. BONDS:EDUC./LIBRARY/RESEARCH FACIL.                                                                              
          HB 424 was scheduled but not heard.                                                                                   
HB 280    NATURAL GAS:  STORAGE/ TAX CREDITS                                                                                    
          HB 280 was heard and HELD in Committee for                                                                            
          further consideration.                                                                                                
SENATE BILL NO. 4                                                                                                             
     "An Act relating to the Alaska coastal management                                                                          
     program; and establishing the Alaska Coastal Policy                                                                        
3:19:43 PM                                                                                                                    
LARRY  HARTIG,  COMMISSIONER,  DEPARTMENT  OF  ENVIRONMENTAL                                                                    
CONSERVATION,  stated  that the  bill  is  important to  the                                                                    
committee, as  well as  to the  sponsors. The  Department of                                                                    
Environmental  Conservation  works   with  the  North  Slope                                                                    
Borough  and   other  communities  on  Village   Safe  Water                                                                    
Projects. He  stressed that  the department  understands how                                                                    
important  this bill  is  to rural  communities  and to  all                                                                    
Alaskans.  He   related  that  the   bill  provides   for  a                                                                    
fundamental  change  in  state   policy  to  allow  for  the                                                                    
transfer of  Alaskan resource  projects from  state agencies                                                                    
to  local boards.  He expressed  respect  for the  community                                                                    
leaders  in coastal  communities,  but  maintained that  the                                                                    
department has a fundamental difference in policy.                                                                              
Commissioner Hartig emphasized that  the state believes that                                                                    
the decisions  on major  projects, like  oil, gas,  and port                                                                    
projects, must  reside with state  agencies. One  reason for                                                                    
this  belief  is fairness  throughout  the  state. The  same                                                                    
rules  should apply  to every  community.  Every Alaskan  is                                                                    
entitled to  the same level of  environmental protection and                                                                    
each community  should have the  same standards in  order to                                                                    
be  assured  of  protection  from the  consequences  from  a                                                                    
project.  He stated  that the  department  has research  and                                                                    
studies available  to them. He  noted that the  projects are                                                                    
not  easy and  come  with  a lot  of  pressure and  opposing                                                                    
interests.  He maintained  that  fair,  open, and  impartial                                                                    
decisions would be  difficult to make at  a community level.                                                                    
Mr. Hartig concluded  that the bottom line, with  a shift in                                                                    
policy  that SB  4  represents, is  that the  administration                                                                    
does  not support  transferring the  authority and  creating                                                                    
the risk just described.                                                                                                        
3:24:45 PM                                                                                                                    
Mr.   Hartig   reported   that    the   governor   and   the                                                                    
administration  would like  to  see communication  continue,                                                                    
but does not  see the legislation as the  vehicle toward the                                                                    
objective  because of  the differences  in philosophy  as to                                                                    
how decisions  are made.  The department  could not  come to                                                                    
terms  with the  language in  the  bill. He  wished to  keep                                                                    
communication open. He spoke of respect for local issues.                                                                       
Co-Chair  Hoffman took  issue with  the words  "continue the                                                                    
dialogue"  saying that  he had  requested dialogue  with the                                                                    
governor's  office, as  has  the mayor  of  the North  Slope                                                                    
Borough, and no dialogue has  taken place. He suggested that                                                                    
the  dialogue  needs to  begin.  He  asked what  changes  in                                                                    
Version S need to be addressed.                                                                                                 
3:27:15 PM                                                                                                                    
Mr.  Hartig maintained  that the  governor's door  is always                                                                    
open.  He  thought  there  was  a  misunderstanding  and  he                                                                    
apologized.  As far  as  changes,  until the  administration                                                                    
comes  to   terms  with  the   philosophical  underpinnings,                                                                    
especially  regarding large  resource  projects that  affect                                                                    
the whole  state, not much  can be accomplished. He  did not                                                                    
want to close the door on communication.                                                                                        
Senator  Olson  thanked  the  commissioner  for  coming.  He                                                                    
thought   it   was   not   a    good   indication   of   the                                                                    
administration's good  will to not have  a representative in                                                                    
the  discussion. He  stressed that  prior to  2003 when  the                                                                    
Coastal  Management Plan  was gutted,  there  was plenty  of                                                                    
development money.  He wanted  to get  back to  the previous                                                                    
model. He talked about the  issue of fairness. He emphasized                                                                    
the level of frustration felt by his district.                                                                                  
3:30:47 PM                                                                                                                    
Senator Olson MOVED to report  CSSB 4 (FIN) out of Committee                                                                    
with individual recommendations  and the accompanying fiscal                                                                    
Senator  Huggins   OBJECTED  for  discussion   purposes.  He                                                                    
commented   on  the   extreme  frustration   regarding  this                                                                    
Senator Huggins WITHDREW his OBJECTION.                                                                                         
There being NO further OBJECTION, it was so ordered.                                                                            
CSSB 4  (FIN) was REPORTED out  of Committee with a  "do not                                                                    
pass"  recommendation and  with  a new  fiscal  note by  the                                                                    
Department  of  Revenue  and  a   new  fiscal  note  by  the                                                                    
Department of Environmental Conservation.                                                                                       
RECESSED            3:33:14 PM                                                                                                
RECONVENED          5:16:58 PM                                                                                                
CS FOR HOUSE BILL NO. 280(FIN) am                                                                                             
     "An Act relating to a gas storage facility; relating                                                                       
     to the Regulatory Commission of Alaska; relating to                                                                        
     the participation by the attorney general in a matter                                                                      
     involving the approval of a rate or a gas supply                                                                           
     contract; relating to an income tax credit for a gas                                                                       
     storage facility; relating to oil and gas production                                                                       
     tax credits; relating to the powers and duties of the                                                                      
     Alaska Oil and Gas Conservation Commission; relating                                                                       
     to production tax credits for certain losses and                                                                           
     expenditures,   including   exploration   expenditures;                                                                    
     relating to the powers and duties of the director of                                                                       
     the division of lands and to lease fees for a gas                                                                          
     storage facility on state land; and providing for an                                                                       
     effective date."                                                                                                           
REPRESENTATIVE MIKE  HAWKER, SPONSOR, explained  his reasons                                                                    
for  proposing HB  280,  the "Cook  Inlet  Recover Act".  It                                                                    
addresses a very critical issue  that all communities in the                                                                    
Railbelt  are facing.  Consumer energy  is based  nearly 100                                                                    
percent on natural gas from  Cook Inlet. The productivity of                                                                    
those fields has reached its  natural decline point and peak                                                                    
demands  won't be  met within  two winters  becoming a  life                                                                    
safety  issue.   It  is  a  lead   priority  of  Anchorage's                                                                    
administration. Stakeholders have  reached conclusions as to                                                                    
what is needed to meet and to resolve this issue.                                                                               
5:20:58 PM                                                                                                                    
Representative Hawker referred to  a study that listed seven                                                                    
immediate needs  for Cook  Inlet. HB  280 addresses  four of                                                                    
those needs.  Most importantly, there  is a need  to develop                                                                    
major  gas storage  facilities for  new  gas and  increasing                                                                    
deliverability in order to meet  peak requirements. The bill                                                                    
provides  a  Facilities  Development Credit  against  income                                                                    
taxes.   He  emphasized   that  the   facilities  would   be                                                                    
delivering gas for utilities.                                                                                                   
5:22:38 PM                                                                                                                  
Representative Hawker  explained the  credit would  become a                                                                    
mandatory "flow  through" to reduce  the cost of gas  to the                                                                    
Representative Hawker  discussed the storage  facilities and                                                                    
whether they would be regulated  by the Regulatory Authority                                                                    
of Alaska  (RCA). The  bill defines  RCA's responsibilities.                                                                    
The bill also provides for  storage for a company's own gas,                                                                    
which is not  RCA regulated. It also  provides for technical                                                                    
5:25:46 PM                                                                                                                    
Representative Hawker  spoke of  the difficulty RCA  has had                                                                    
in   approving  long-term   contracts.  The   bill  provides                                                                    
guidance  when  evaluating  such contracts.  The  Regulatory                                                                    
Commission of Alaska  is directed to consider  the impact on                                                                    
consumers  if   it  rejects  a   proposed  contract   -  the                                                                    
"consequence  of  saying  no"  provision. The  RCA  is  also                                                                    
directed  to recognize  the  value of  a  utility holding  a                                                                    
diversified   portfolio  of   gas   supply  contracts   with                                                                    
different  pricing mechanisms.  The  bill  provides for  the                                                                    
Regulatory  Affairs  and  Public Advocacy  Division  of  the                                                                    
Department of  Law (RAPA) to  peruse the  proposed contracts                                                                    
and  abide   by  the  same   requirement  to   consider  the                                                                    
consequence of denying a contract.                                                                                              
5:28:20 PM                                                                                                                    
Representative  Hawker stated  that  the  bill provides  for                                                                    
increased  access  to  existing development  incentives  the                                                                    
state offers in current statute.  This will help promote the                                                                    
exploration of remaining gas in  Cook Inlet, which exists in                                                                    
much smaller  concentrations than  in previous  "domes", and                                                                    
costs more to extract.                                                                                                          
Representative  Hawker added  that the  bill eliminates  the                                                                    
Cook  Inlet  penalty, which  was  built  around North  Slope                                                                    
issues. He recalled the ELF  process and the allowing of ELF                                                                    
to apply to Cook Inlet,  which does not have a progressivity                                                                    
feature.  Cook Inlet  has a  lower tax  rate than  the North                                                                    
Slope and  the penalty should  not apply. The  ELF provision                                                                    
is  counterproductive  to Cook  Inlet.  The  bill allows  "a                                                                    
dollar  spent  and  credits  earned" in  Cook  Inlet  to  be                                                                    
applied  universally  across  the  state  as  anyone  else's                                                                    
5:34:29 PM                                                                                                                    
Representative   Hawker  talked   about  production   credit                                                                    
amortization.  The bill  allows credits  to be  amortized in                                                                    
full the year  incurred, instead of over  a two-year period.                                                                    
The bill also  allows for CAPEX credit  for well enhancement                                                                    
and recovery work. That language  has been carefully drafted                                                                    
with the Department of Revenue.                                                                                                 
Representative Hawker noted that  the bill eliminates tiered                                                                    
credit  and goes  straight to  40 percent.  Cook Inlet  is a                                                                    
small  region  that  is in  need  of  promotion.  Production                                                                    
credits are  allowed to be sold  back to the state  in order                                                                    
to  capitalize  explorers.  The Cook  Inlet  region  is  not                                                                    
particularly  attractive  to  international  companies.  The                                                                    
bill intends  to attract the appropriate  scale of explorers                                                                    
and developers.                                                                                                                 
5:38:43 PM                                                                                                                    
Senator Thomas asked if the  tax credits could be applied to                                                                    
a  producer in  Prudhoe Bay  or sold.  Representative Hawker                                                                    
clarified that  the benefit of  having a credit is  in order                                                                    
to receive  a tax refund.  He added that the  credit section                                                                    
of the  bill is  for Cook Inlet;  however, the  gas facility                                                                    
development section would apply to  the North Slope, as well                                                                    
to anyone developing gas storage facilities.                                                                                    
Senator Thomas  asked if it  was for storage,  not drilling.                                                                    
Representative  Hawker  said  credits apply  to  Cook  Inlet                                                                    
only. Senator  Thomas asked  for the  reason. Representative                                                                    
Hawker  noted concern  about  expanding  credits across  the                                                                    
state. The  intent of the bill  is to leave that  issue to a                                                                    
statewide bill.                                                                                                                 
5:42:06 PM                                                                                                                    
Senator Thomas  noted some are  concerned about  not drawing                                                                    
and storing  gas consistently and  the loss of  a percentage                                                                    
of gas when  shutting down. He wondered if  exporting is the                                                                    
solution to  maintaining consistency.  Representative Hawker                                                                    
replied that  it is a multi-faceted  approach issue. Storage                                                                    
is  one  element.  Maintaining  an  export  component  is  a                                                                    
production buffer. He said that  gas wells don't turn up and                                                                    
turn down well.  It would be ideal to  maintain a continuous                                                                    
flow.   The   export   buffer  expires   March   31,   2011.                                                                    
ConocoPhillips said  they would  pursue an extension  of the                                                                    
export  permit. He  suggested that  storage facilities  were                                                                    
needed in order to meet peaking demands.                                                                                        
Co-Chair Stedman  noted the remaining agenda  would be taken                                                                    
up in the morning.                                                                                                              
5:46:26 PM                                                                                                                    
Senator  Egan   asked  how   many  facilities   are  needed.                                                                    
Representative  Hawker   did  not  know.   Anecdotally,  DOT                                                                    
envisions  one   large,  open  access  facility   and  other                                                                    
facilities  to address  storage  requirements.  He spoke  of                                                                    
credit  limits  which  determine facility  size,  and  other                                                                    
5:49:06 PM                                                                                                                    
Co-Chair Stedman  noted four  zero fiscal  notes: Department                                                                    
of Natural Resources, Department  of Commerce, Community and                                                                    
Economic  Development,  Department  of  Administration,  and                                                                    
House Finance Committee.                                                                                                        
MARSHA  DAVIS, DEPUTY  COMMISSIONER, DEPARTMENT  OF REVENUE,                                                                    
introduced herself.                                                                                                             
Co-Chair  Stedman asked  why the  committee should  pass the                                                                    
bill. Ms. Davis explained  that the department was satisfied                                                                    
with the  size criteria  for the  gas storage  facility, the                                                                    
capital credit, and the reinvestment requirements.                                                                              
5:50:58 PM                                                                                                                    
Co-Chair Stedman  asked if  the administration  supports the                                                                    
bill. Ms. Davis said it did.                                                                                                    
Co-Chair  Stedman  referred to  page  7  and requested  more                                                                    
information  about the  jack up  drill. He  wondered if  the                                                                    
credits could "go negative" with  the state ending up paying                                                                    
over 100 percent. Ms. Davis asked  if he was referring to SB
309. Co-Chair Stedman  said yes. Ms. Davis  explained that a                                                                    
review of the  jack up rig has been done  and the department                                                                    
is satisfied  with it. It would  cost up to $54  million for                                                                    
the three rigs  with the potential for the  state to receive                                                                    
a 50 percent reimbursement of about $27 million.                                                                                
Co-Chair Stedman asked if Kevin Banks supported the bill.                                                                       
KEVIN BANKS,  DIRECTOR, DIVISION OF OIL  AND GAS, DEPARTMENT                                                                    
OF  NATURAL  RESOURCES  (via  teleconference),  related  the                                                                    
department's view  of HB 280.  The bill expands  tax credits                                                                    
to pay  for the kinds of  wells needed in Cook  Inlet. Under                                                                    
today's  tax  system,  only  exploration  wells  would  have                                                                    
received  a credit.  He commented  that  the department  has                                                                    
spent a good  deal of time on the  storage facility language                                                                    
and has  reached a compromise  regarding how  storage leases                                                                    
would be administered.                                                                                                          
5:55:01 PM                                                                                                                    
DAN SULLIVAN, MAYOR, ANCHORAGE,  testified in support of the                                                                    
bill. He said energy is of  critical concern to his area. He                                                                    
highlighted the  current lack of  gas in Cook Inlet  and the                                                                    
creation of a  task force to find solutions. He  said it was                                                                    
a top priority.  Gas storage is one solution  on high demand                                                                    
days.  He noted  that HB  280  addresses three  of the  task                                                                    
force's goals:  storage and  credit for  storage, incentives                                                                    
and  credits  for  production,   and  working  with  RCA  on                                                                    
deliverability and contract terms.                                                                                              
5:57:44 PM                                                                                                                    
Mr. Sullivan spoke  of the uniqueness of Cook  Inlet and the                                                                    
challenges there of a small,  expensive, isolated market. He                                                                    
thought the bill  was a short-term solution for  about 10 to                                                                    
15 years. He restated the key components of the bill.                                                                           
Mr. Sullivan spoke of the  balance between the state's needs                                                                    
and  producers'   needs.  He   maintained  that   people  in                                                                    
Southcentral  are willing  to pay  more for  gas as  long as                                                                    
they have reliability.                                                                                                          
5:59:54 PM                                                                                                                    
TADD  OWENS,   DIRECTOR,  GOVERNMENT  AND   PUBLIC  AFFAIRS,                                                                    
PIONEER  NATURAL RESOURCES,  listed  his company's  projects                                                                    
and history.  He suggested  Cook Inlet  could be  a valuable                                                                    
asset in  spite of its  challenges. He testified  in support                                                                    
of HB 280.                                                                                                                      
6:02:31 PM                                                                                                                    
Co-Chair  Stedman   asked  Senator  Thomas  if   there  were                                                                    
amendments  forthcoming.  Representative Hawker  noted  that                                                                    
the administration is  working with ENSTAR to  extend a line                                                                    
to Homer.  The administration  is proposing an  amendment to                                                                    
that affect.                                                                                                                    
HB  280  was  heard  and   HELD  in  Committee  for  further                                                                    
SENATE BILL NO. 309                                                                                                           
     "An Act amending and extending the exploration and                                                                         
     development incentive tax credit under the Alaska Net                                                                      
     Income Tax Act for operators and working interest                                                                          
     owners directly engaged in the exploration for and                                                                         
     development of gas from a lease or property in the                                                                         
     state; providing for an effective date by amending the                                                                     
     effective date for sec. 2, ch. 61, SLA 2003; and                                                                           
     providing for an effective date."                                                                                          
SB 309 was scheduled but not heard.                                                                                             
HOUSE BILL NO. 365                                                                                                            
     "An Act relating to sharing records regarding fish                                                                         
     purchased by fish processors with certain federal                                                                          
     agencies, to requirements to obtain and maintain a                                                                         
     fisheries business license, and to payment of industry                                                                     
     fees required of fish processors; and providing for an                                                                     
     effective date."                                                                                                           
HB 365 was scheduled but not heard.                                                                                             
CS FOR HOUSE BILL NO. 424(FIN) am                                                                                             
     "An Act providing for and relating to the issuance of                                                                      
     general obligation bonds for the purpose of paying the                                                                     
     cost of design and construction of library, education,                                                                     
     and educational research facilities; and providing for                                                                     
     an effective date."                                                                                                        
HB 424 was scheduled but not heard.                                                                                             
The meeting was adjourned at 6:03 PM.                                                                                           

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