Legislature(2007 - 2008)BUTROVICH 205

11/02/2007 05:00 PM JUDICIARY

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05:28:19 PM Start
05:28:45 PM SB2001
08:13:22 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Time Change --
Heard & Held
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE JUDICIARY STANDING COMMITTEE                                                                             
                        November 2, 2007                                                                                        
                           5:28 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Senator Hollis French, Chair                                                                                                    
Senator Charlie Huggins, Vice Chair                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator Lesil McGuire                                                                                                           
Senator Gene Therriault                                                                                                         
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
COMMITTEE CALENDAR                                                                                                            
SENATE BILL NO. 2001                                                                                                            
"An Act  relating to  the production  tax on oil  and gas  and to                                                               
conservation  surcharges  on oil;  relating  to  the issuance  of                                                               
advisory  bulletins and  the  disclosure  of certain  information                                                               
relating to the  production tax and the  sharing between agencies                                                               
of certain information relating to  the production tax and to oil                                                               
and gas or  gas only leases; amending the State  Personnel Act to                                                               
place in  the exempt service  certain state oil and  gas auditors                                                               
and their immediate supervisors; establishing  an oil and gas tax                                                               
credit  fund and  authorizing payment  from that  fund; providing                                                               
for retroactive  application of certain statutory  and regulatory                                                               
provisions  relating to  the production  tax on  oil and  gas and                                                               
conservation  surcharges on  oil;  making conforming  amendments;                                                               
and providing for an effective date."                                                                                           
     HEARD AND HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: SB2001                                                                                                                  
SHORT TITLE: OIL & GAS TAX AMENDMENTS                                                                                           
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
10/18/07       (S)       READ THE FIRST TIME - REFERRALS                                                                        
10/18/07       (S)       RES, JUD, FIN                                                                                          
10/19/07       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
10/19/07       (S)       Heard & Held                                                                                           
10/19/07       (S)       MINUTE(RES)                                                                                            
10/20/07       (S)       RES AT 8:00 AM BUTROVICH 205                                                                           
10/20/07       (S)       Heard & Held                                                                                           
10/20/07       (S)       MINUTE(RES)                                                                                            
10/21/07       (S)       RES AT 1:00 PM HOUSE FINANCE 519                                                                       
10/21/07       (S)       Heard & Held                                                                                           
10/21/07       (S)       MINUTE(RES)                                                                                            
10/22/07       (S)       RES AT 11:30 AM BUTROVICH 205                                                                          
10/22/07       (S)       Heard & Held                                                                                           
10/22/07       (S)       MINUTE(RES)                                                                                            
10/23/07       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
10/23/07       (S)       Heard & Held                                                                                           
10/23/07       (S)       MINUTE(RES)                                                                                            
10/24/07       (S)       RES AT 10:00 AM BUTROVICH 205                                                                          
10/24/07       (S)       Heard & Held                                                                                           
10/24/07       (S)       MINUTE(RES)                                                                                            
10/25/07       (S)       RES AT 10:00 AM BUTROVICH 205                                                                          
10/25/07       (S)       Heard & Held                                                                                           
10/25/07       (S)       MINUTE(RES)                                                                                            
10/26/07       (S)       RES AT 1:30 PM BUTROVICH 205                                                                           
10/26/07       (S)       Heard & Held                                                                                           
10/26/07       (S)       MINUTE(RES)                                                                                            
10/27/07       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
10/27/07       (S)       Moved CSSB2001(RES) Out of Committee                                                                   
10/27/07       (S)       MINUTE(RES)                                                                                            
10/28/07       (S)       RES AT 0:00 AM BUTROVICH 205                                                                           
10/28/07       (S)       -- MEETING CANCELED --                                                                                 
10/29/07       (S)       RES RPT CS  1NR 6AM   NEW TITLE                                                                        
10/29/07       (S)       NR: GREEN                                                                                              
10/29/07       (S)       AM: HUGGINS, MCGUIRE, STEVENS, STEDMAN,                                                                
                         WIELECHOWSKI, WAGONER                                                                                  
10/29/07       (S)       JUD AT 9:30 AM BUTROVICH 205                                                                           
10/29/07       (S)       Heard & Held                                                                                           
10/29/07       (S)       MINUTE(JUD)                                                                                            
10/30/07       (S)       JUD AT 9:00 AM BUTROVICH 205                                                                           
10/30/07       (S)       Heard & Held                                                                                           
10/30/07       (S)       MINUTE(JUD)                                                                                            
10/31/07       (S)       JUD AT 9:00 AM BUTROVICH 205                                                                           
10/31/07       (S)       Heard & Held                                                                                           
10/31/07       (S)       MINUTE(JUD)                                                                                            
11/01/07       (S)       JUD AT 9:00 AM BUTROVICH 205                                                                           
11/01/07       (S)       Heard & Held                                                                                           
11/01/07       (S)       MINUTE(JUD)                                                                                            
11/02/07       (S)       JUD AT 5:00 PM BUTROVICH 205                                                                           
WITNESS REGISTER                                                                                                              
DONALD BULLOCK, Attorney                                                                                                        
Legislative Legal and Research Services Division                                                                                
Legislative Affairs Agency                                                                                                      
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Explained changes in CSSB 2001, version K.                                                               
PATRICK GALVIN, Commissioner                                                                                                    
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:   Provided perspective on  CSSB 2001, version                                                             
ROBERT MINTZ, Consulting Attorney for the Administration                                                                        
Kirkpatrick & Lockhart Preston Gates Ellis LLP (K&L Gates)                                                                      
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:   Responded  to  questions  related to  CSSB                                                             
2001, version K.                                                                                                                
NANETTE THOMPSON, Petroleum Manager                                                                                             
Division of Oil & Gas                                                                                                           
Department of Natural Resources                                                                                                 
Anchorage, AK                                                                                                                   
POSITION  STATEMENT:   Responded  to  questions  related to  CSSB                                                             
2001, version K.                                                                                                                
ACTION NARRATIVE                                                                                                              
CHAIR  HOLLIS   FRENCH  called  the  Senate   Judiciary  Standing                                                             
Committee  meeting  to order  at  5:28:19  PM. Senators  McGuire,                                                             
Huggins, Therriault,  Wielechowski and Chair French  were present                                                               
at the call to order.                                                                                                           
               SB 2001 - OIL & GAS TAX AMENDMENTS                                                                           
5:28:45 PM                                                                                                                    
CHAIR FRENCH announced  consideration of SB 2001 and  asked for a                                                               
motion to adopt the committee substitute.                                                                                       
SENATOR WIELECHOWSKI moved to adopt  committee substitute (CS) to                                                               
SB 2001,  labeled 25-GS0014\K. Hearing  no objections,  version K                                                               
was before the committee.                                                                                                       
CHAIR FRENCH  asked Mr. Bullock to  explain the change in  the CS                                                               
that reinserted the progressivity tax rate but not the floor.                                                                   
5:29:54 PM                                                                                                                    
DONALD   BULLOCK,  Attorney,   Legislative  Legal   and  Research                                                               
Services Division,  said version K  is a combination of  the bill                                                               
that  came out  of  the Resources  Committee  and the  governor's                                                               
bill. The  biggest difference between the  Resources Committee CS                                                               
and this  version is that  two of  the three tax  provisions that                                                               
the governor  offered are  brought into  this bill.  The governor                                                               
proposed  moving the  nominal tax  rate from  22.5 percent  to 25                                                               
percent  and   lowering  the  floor   from  40  to  30   for  the                                                               
progressivity  tax. Her  bill also  proposed  a floor  tax of  10                                                               
percent of  the gross value  at the  point of production  for the                                                               
fields  that  have  been  in  production a  long  time  and  that                                                               
continue  at high  production. This  bill does  not include  that                                                               
last part of the  tax but it does include the  22.5 to 25 percent                                                               
increase and  it includes  lowering the  floor to  30 as  well as                                                               
changing the progressivity rate from  0.2 percent to 0.4 percent.                                                               
Sections 15, 16, and 17 of the bill address the tax changes.                                                                    
MR. BULLOCK said the progressivity  tax payment schedule has also                                                               
changed.  Currently payments  are  scheduled on  a monthly  basis                                                               
which   affects   calculating   the  installment   payment.   The                                                               
governor's  bill  determined  progressivity on  a  calendar  year                                                               
basis. The installment payment was  based on the nominal tax rate                                                               
and then a  pay-up at the end of  the year or by March  31 of the                                                               
year after the calendar year for  which the tax is due. Version K                                                               
goes back  to the monthly  calculation so the  installment should                                                               
keep current.                                                                                                                   
5:31:59 PM                                                                                                                    
MR. BULLOCK said  there are no substantive changes  in the credit                                                               
provisions  of   the  bill.  The   nominal  tax  rate   plus  the                                                               
progressivity are combined into one  section in this bill as they                                                               
were in the  governor's bill. Changes that  deal with eligibility                                                               
for  transitional investment  expenditure (TIE)  credits made  in                                                               
the  Senate Resources  Committee were  incorporated. Also  in the                                                               
section that  establishes the  tax rate there's  a maximum  of 50                                                               
percent, which is  a combination of 25 percent  nominal rate plus                                                               
the  multiple of  .4 percent  that applies  to the  progressivity                                                               
rate.  Other changes  in  this draft  compared  to the  Resources                                                               
Committee  CS  are  the  inclusion   of  a  class  of  disallowed                                                               
expenditures relating to poorly  maintained equipment. That's the                                                               
corrosion  issue from  SB  80, which  wasn't  addressed in  prior                                                               
versions.  Version  K  adds  the   provision  that  if  there  is                                                               
maintenance  that's the  result of  improper maintenance  before,                                                               
then  those costs  are disallowed.  That's in  section 44,  which                                                               
amends AS 43.55.165(e). This bill  also includes the expansion of                                                               
the  statute of  limitations  to  six years  as  proposed in  the                                                               
governor's bill. These  changes are found in Sections  1, 14, and                                                               
5:35:29 PM                                                                                                                    
MR.  BULLOCK  further  explained   that  this  bill  changes  the                                                               
classifications and reduces to four  the number of exempt oil and                                                               
gas  audit  manager  positions.  Intent  language  regarding  the                                                               
positions has been added to Section 51.                                                                                         
5:36:42 PM                                                                                                                    
MR. BULLOCK  explained the changes  regarding the  replacement of                                                               
transportation costs made in the  Petroleum Production Tax (PPT).                                                               
In  PPT three  conditions  were  required to  be  met to  replace                                                               
"actual" with  "reasonable" costs. Version  K changes it  back so                                                               
any one of the three conditions can trigger the substitution.                                                                   
SENATOR THERRIAULT asked which section he's referencing.                                                                        
MR. BULLOCK replied it's Sections 39 and 40.                                                                                    
MR.   BULLOCK  continued.   A  requirement   was   added  to   AS                                                               
43.55.165(b), stating  lease expenditures that may  be deductible                                                               
must be incurred  in the state. Additionally, a  new provision in                                                               
Section 33  gives the Department  of Revenue (DOR)  the authority                                                               
to require  a producer to report  and publish the gross  value at                                                               
the   point  of   production  for   a  calendar   year  and   the                                                               
corresponding lease  expenditures. Section  46 allows the  DOR to                                                               
publish  that  information. It  does  not  include reporting  the                                                               
5:40:11 PM                                                                                                                    
MR. BULLOCK  said Section 36  has a  new section -  AS 43.55.055.                                                               
This is  a new penalty  for understatements  of tax that  must be                                                               
shown on  the return.  He added  that there  will be  a technical                                                               
amendment in the near future to correct a misstated number.                                                                     
MR.  BULLOCK said  in Section  38  an amendment  to AS  43.55.110                                                               
gives DOR authority  to reward a person  who provides information                                                               
to the  department about non-compliance with  the requirements of                                                               
AS 43.55  that leads  to collection  of an  increase in  the tax,                                                               
penalty,  or interest.  The reward  is subject  to appropriation.                                                               
The  information  that  is  sought  is  information  related  to:                                                               
understated gross  value at the  point of  production; overstated                                                               
lease expenditures; or overstated transportation costs.                                                                         
5:41:36 PM                                                                                                                    
SENATOR THERRIAULT  referring to Section  38, page 27,  lines 15-                                                               
16, asked if the reward could  amount to millions of dollars even                                                               
with a 10 percent cap.                                                                                                          
MR.  BULLOCK  replied  it  could, but  the  department  is  given                                                               
discretion to determine the compensation.                                                                                       
5:42:43 PM                                                                                                                    
SENATOR THERRIAULT  asked if  the department  would be  given the                                                               
authority to cap the amount.                                                                                                    
MR.  BULLOCK replied  it's within  their discretion  to have  the                                                               
reward be less than 10 percent.                                                                                                 
CHAIR FRENCH noted that the bill  has many provisions that had to                                                               
be included because  of the ripple effect of bringing  in two out                                                               
of the three fiscal changes.                                                                                                    
MR.  BULLOCK  agreed, and  said  that  that the  governor's  bill                                                               
changed  the way  taxes were  described  in AS  43.55.011 so  any                                                               
references to former sections had to be changed.                                                                                
CHAIR FRENCH said  it might be easier to review  changes by topic                                                               
rather than section by section.                                                                                                 
CHAIR FRENCH called an at-ease at 5:45PM.                                                                                       
5:54:19 PM                                                                                                                    
CHAIR FRENCH called the committee back to order.                                                                                
PATRICK  GALVIN,  Commissioner,  Department of  Revenue,  Juneau,                                                               
reviewed Sections 16 and 17.  He explained that the Department of                                                               
Revenue (DOR) was  working with a "twenty-five  percent rate with                                                               
progressivity that starts  at a net $30 trigger with  a .4 degree                                                               
slope."  Credits  were  approached  as  provided  in  the  Senate                                                               
Resources CS. Based on those  assumptions he provided information                                                               
for fiscal  years 2008,  2009, and  2010. He  stated it  was also                                                               
important to note that the effective  date of the fiscal terms is                                                               
January 1, 2008.                                                                                                                
COMMISSIONER GALVIN said that  three different dollar assumptions                                                               
were run. He continued:                                                                                                         
     One was at our current  price forecast, which starts in                                                                    
     FY 2008  at $71.65.  And for  that priceā€¦this  CS would                                                                    
     result in  $2.699 billion. That compares  to status quo                                                                    
     PPT of  $1.915 [billion]. Continuing in  the forecasted                                                                    
     price for  2009 is $64.55-going  down. The draft  CS in                                                                    
     $2.732 billion compared to a  status quo PPT of $1.693.                                                                    
     Then  in 2010  the projected  price is  $60.05. The  CS                                                                    
     $2.356 billion compared to status quo PPT of $1.531.                                                                       
     We also ran  them at $60 price and then  $80 price. The                                                                    
     $60 we ran  as a nominal, which had  it increasing each                                                                    
     year. So  I'll tell you  the price at $60  basically in                                                                    
     today's dollars each year.                                                                                                 
     For 2008  it's $1.613  billion for  the CS  compared to                                                                    
     status quo PPT of $1.051  [billion]. For 2009 the CS is                                                                    
     $2.308 compared  to status quo  PPT of $1.435.  In 2010                                                                    
     the CS $2.398 compared to PPT $1.562.                                                                                      
CHAIR FRENCH asked for the nominal price in 2009.                                                                               
COMMISSIONER GALVIN answered $61.65 and in 2010 $63.35.                                                                         
5:59:36 PM                                                                                                                    
COMMISSIONER GALVIN clarified that the  price forecast is also in                                                               
today's dollars.  The forecasted price  for 2009 in  2009 dollars                                                               
is  $66.30 and  in  2010 it's  $63.40 so  the  numbers should  be                                                               
similar for the two runs in 2010. He continued:                                                                                 
     Finally  at $80.  2008 $3.619  for the  CS compared  to                                                                    
     $2.650  for status  quo [PPT].  In 2009  - running  all                                                                    
     your numbers  you've got  a nominal  price of  $82.20 -                                                                    
     the  CS  would  be  $4.709 [billion].  Status  quo  PPT                                                                    
     $3.031 [billion].  In 2010,  nominal price  $84.46. The                                                                    
     CS  $4.900   [billion]  and   status  quo   PPT  $3.266                                                                    
     Those  are the  numbers  that our  revenue model  shows                                                                    
     would be generated by the  fiscal terms proposed in the                                                                    
6:01:26 PM                                                                                                                    
CHAIR FRENCH  asked Commissioner Galvin for  the administration's                                                               
view of  the tax increases with  respect to giving Alaska  a fair                                                               
share and impacting industry.                                                                                                   
COMMISSIONER  GALVIN replied  the  Alaska's  Clear and  Equitable                                                               
Share (ACES)  proposal contains a  gross tax  floor as well  as a                                                               
progressivity  rate  that is  not  nearly  as  steep as  what  is                                                               
proposed in the CS. The  administration still supports that trade                                                               
off  but recognizes  that the  legislature is  taking a  slightly                                                               
different approach.  We don't see  that the  proposal necessarily                                                               
will  crimp investment,  but we  do recognize  that progressivity                                                               
based upon the margin as opposed  to the gross value will provide                                                               
investment  incentive  for  entities  looking  at  pursuing  more                                                               
economically   stressed  projects.   It's  a   reasonable  fiscal                                                               
CHAIR FRENCH asked if the change would be reasonable.                                                                           
COMMISSIONER GALVIN answered it would be reasonable and fair.                                                                   
SENATOR WIELECHOWSKI asked if the governor supports the change.                                                                 
COMMISSIONER  GALVIN answered  it's  an entire  package, but  she                                                               
would support this trade-off as it stands.                                                                                      
6:03:48 PM                                                                                                                    
SENATOR HUGGINS  said he  wants to see  qualifiers that  show how                                                               
the deduction was reached.                                                                                                      
COMMISSIONER  GALVIN responded  that  an  important component  of                                                               
this trade-off  is the operating  principle of making  gains when                                                               
prices are high  so that becomes the protection  for lower prices                                                               
in the future.                                                                                                                  
SENATOR HUGGINS  said he  hopes future  budgets will  reflect the                                                               
desire to save money and contain spending.                                                                                      
COMMISSIONER  GALVIN  said  the   governor  supports  saving  and                                                               
recognizes that in her budget.                                                                                                  
6:05:36 PM                                                                                                                    
SENATOR  WIELECHOWSKI clarified  that this  proposal is  a trade-                                                               
off. The state is  taking a little bit of risk at  the low end of                                                               
prices by  giving up  the gross,  hoping to make  it up  when oil                                                               
prices are high.                                                                                                                
COMMISSIONER GALVIN agreed.                                                                                                     
CHAIR  FRENCH asked  Mr. Bullock  to  talk about  the statute  of                                                               
limitations in Sections 1, 14, and 37.                                                                                          
MR. BULLOCK said Section 1  is a statement of legislative intent,                                                               
but it would  not be particularly helpful in  determining how the                                                               
section applies that extends the statute for six years.                                                                         
MR.  BULLOCK  said Section  14  is  a  conforming change  in  the                                                               
current statute of limitation.                                                                                                  
CHAIR  FRENCH asked  if the  statute  of limitation  will be  six                                                               
years when the bill is finished.                                                                                                
MR.  BULLOCK  replied  yes,  for  AS  43.55  taxes.  There  is  a                                                               
different statute  of limitation  in Chapter 5  of Title  43 that                                                               
generally applies to other taxes in the title.                                                                                  
CHAIR FRENCH asked if that is  why it says three years in Section                                                               
MR. BULLOCK answered yes.                                                                                                       
CHAIR FRENCH asked if AS 43.55.075 is the operative change.                                                                     
MR.  BULLOCK  said  yes;  it's  in Section  37.  It  was  in  the                                                               
governor's bill, but not in the Senate Resources CS.                                                                            
6:08:26 PM                                                                                                                    
CHAIR  FRENCH asked  for an  explanation  of how  the statute  of                                                               
limitations works.                                                                                                              
COMMISSIONER  GALVIN  explained  that  the  standard  statute  of                                                               
limitations  for  tax  issues  is three  years.  The  section  in                                                               
question  provides  an  exception.  For oil  production  tax  the                                                               
statute of limitations is six years as opposed to three.                                                                        
SENATOR  WIELECHOWSKI  said  the public  has  justified  concerns                                                               
about going  to a  net profit  tax, and to  dispel some  of those                                                               
concerns this is  one tool that will be critical.  The state will                                                               
conduct  many audits  and this  provision will  help protect  the                                                               
state's interests.                                                                                                              
SENATOR  THERRIAULT asked  for an  explanation of  the link  with                                                               
Section 1.                                                                                                                      
COMMISSIONER  GALVIN  said   Section  1  is  a   reference  to  a                                                               
particular regulation that references  a regulatory decision that                                                               
is made  after a taxpayer has  filed a tax return.  That decision                                                               
has a  retroactive application and  the taxpayer is  obligated to                                                               
provide notice  of the decision  to the department along  with an                                                               
amended  tax   return  that's   retroactive  to   the  particular                                                               
decision.  The  statute  of  limitations  would  start  with  the                                                               
amended  return.  This  is  to  ensure that  if  the  statute  of                                                               
limitations  is  changed  within   this  chapter,  then  for  the                                                               
purposes of  that regulation  the intent is  that it  applies the                                                               
full statute of limitations to that also.                                                                                       
SENATOR THERRIAULT  said an interpretation of  AS 43.05.260 would                                                               
embody that particular set of regulations.                                                                                      
COMMISSIONER GALVIN agreed; that's the cross reference.                                                                         
6:12:21 PM                                                                                                                    
CHAIR FRENCH asked  for an explanation of  auditors referenced in                                                               
Sections 9 and 51.                                                                                                              
MR.  BULLOCK explained  that Section  9 [Section  10] amends  the                                                               
statute that  lists all the  exempt positions in the  state. This                                                               
section differentiates  oil and gas audit  managers from auditors                                                               
that may  already be employed  with the department.  This section                                                               
adds emphasis  on their being  employed in a  professional policy                                                               
making  capacity,  which is  a  key  determination of  an  exempt                                                               
position.  Section 51  is intent.  It refers  to the  creation of                                                               
four auditor positions in the DOR.                                                                                              
CHAIR FRENCH said there has  been much discussion about auditors,                                                               
and  he thought  the  current number  of  auditors in  classified                                                               
service would  be maintained  at seventeen. He  asked if  this CS                                                               
would add four new positions to that number.                                                                                    
COMMISSIONER GALVIN  answered no.  His understanding is  four out                                                               
of the seventeen existing positions would become exempt.                                                                        
CHAIR FRENCH  said the  committee intent was  to create  four new                                                               
positions to  increase the size of  the staff. He believes  it is                                                               
necessary to create four new positions.                                                                                         
6:16:14 PM                                                                                                                    
COMMISSIONER  GALVIN  said  this  is  a  compromise  between  the                                                               
various  interests which  addresses his  primary request,  but it                                                               
doesn't  completely  tackle the  need  to  attract the  personnel                                                               
necessary for  the department's  audit staff.  Qualified auditors                                                               
are a  broader issue  that will need  to be  addressed statewide.                                                               
Department  of Natural  Resources (DNR)  audit needs,  which were                                                               
included in  the original bill,  are not addressed here.  He said                                                               
this is the starting point for getting the personnel he needs.                                                                  
CHAIR FRENCH said it is important to get this right.                                                                            
SENATOR HUGGINS said  auditing is the cornerstone  to success and                                                               
he wants  to err on the  side of "robustness." He  will recommend                                                               
follow-up in the Finance Committee.                                                                                             
6:18:17 PM                                                                                                                    
CHAIR FRENCH asked how many auditors are necessary.                                                                             
COMMISSIONER GALVIN  said he won't  know until he has  the people                                                               
in place. The system must be  designed first, and that might take                                                               
a couple  of years.  Consultants say  four highly  skilled people                                                               
are needed along with existing staff.                                                                                           
SENATOR MCGUIRE  said she doesn't  want this provision  to reduce                                                               
morale within  the department. She believes  the current auditing                                                               
staff at  DNR and  DOR works hard  and is doing  a good  job. She                                                               
said she believes that training is an important component.                                                                      
COMMISSIONER  GALVIN replied  that  he  shares Senator  McGuire's                                                               
sentiments  because  morale  is  important.  Training  and  other                                                               
experiences  that provide  a sense  of fulfillment  are vital  to                                                               
employee well-being and retention.                                                                                              
6:23:27 PM                                                                                                                    
CHAIR FRENCH said this provision was intended as a compromise.                                                                  
SENATOR  THERRIAULT  asked  if the  provision  affects  only  DOR                                                               
COMMISSIONER GALVIN answered yes.                                                                                               
SENATOR  THERRIAULT  asked if  the  original  bill addressed  DNR                                                               
COMMISSIONER  GALVIN  replied  yes; the  original  bill  provided                                                               
exempt tax auditor  positions for DOR and  exempt royalty auditor                                                               
positions for DNR.                                                                                                              
SENATOR THERRIAULT asked for the chair's intent regarding DNR.                                                                  
CHAIR  FRENCH said  the intention  was  to keep  DNR auditors  in                                                               
classified service. He understood  that what was really necessary                                                               
was to have high level analysts in DOR.                                                                                         
COMMISSIONER GALVIN  said he has  heard testimony that  there are                                                               
other solutions  to the  classified service  issues. He  wants to                                                               
continue to work in that direction as well.                                                                                     
CHAIR FRENCH  said right now  he wants  to craft a  solution that                                                               
works for DOR.                                                                                                                  
CHAIR  FRENCH asked  again  if the  number  of proposed  auditors                                                               
should be increased.                                                                                                            
COMMISSIONER GALVIN  answered no; four  is the number  that meets                                                               
his current expectations.                                                                                                       
6:27:48 PM                                                                                                                    
SENATOR  MCGUIRE encouraged  Commissioner Galvin  to look  at the                                                               
"like-pay for like-work" issue.                                                                                                 
Commissioner  Galvin replied  current employees  can be  impacted                                                               
when new employees  are brought into positions above  them. It is                                                               
an issue that must be dealt with.                                                                                               
6:30:56 PM                                                                                                                    
CHAIR FRENCH  asked for an  explanation of Section 43,  pages 30-                                                               
31, pertaining to in-state expenditures.                                                                                        
MR. BULLOCK said  it amends AS 43.55.165(b)  and addresses direct                                                               
costs  and spending activity restrictions.                                                                                      
CHAIR  FRENCH  asked  if  it   is  constitutional  to  limit  tax                                                               
deductions to expenditures that occur within the state.                                                                         
MR. BULLOCK  said these  types of requirements  are subject  to a                                                               
low level of scrutiny and are  a tax policy matter for the state.                                                               
In this case the state is  identifying what expenses can be taken                                                               
to reduce the value of the  oil and gas that's taxable. He thinks                                                               
federal  or state  constitutions would  not be  violated by  this                                                               
6:34:00 PM                                                                                                                    
CHAIR  FRENCH asked  if  this provision  allows  a deduction  for                                                               
steel, for  example, to be  bought in  Tulsa then shipped  to the                                                               
North Slope.                                                                                                                    
MR. BULLOCK  answered the steel would  have to make it  to Alaska                                                               
in order to be deducted.                                                                                                        
CHAIR FRENCH summarized it's a  deductible expense it the item is                                                               
shipped to Alaska and used in  Alaska; if it never gets to Alaska                                                               
then it's not deductible.                                                                                                       
MR.  BULLOCK added  that DOR  would ultimately  need to  adopt by                                                               
regulation conditions for identifying  costs that are incurred in                                                               
the state.                                                                                                                      
CHAIR FRENCH asked  about people who work in Alaska  and fly to a                                                               
home in Texas or Oklahoma.                                                                                                      
MR. BULLOCK  said if those  people are  working in the  state the                                                               
expenses would be deductible. If they  work out of state, even if                                                               
it is  Alaska related, the  deduction would not be  allowed under                                                               
this provision.                                                                                                                 
CHAIR  FRENCH  clarified  his  question using  an  example  of  a                                                               
petroleum engineer located in Houston  working on a lease for the                                                               
North Slope.  Those wages  would not  be deductible  because that                                                               
work  does not  take  place  in the  state.  Whereas a  petroleum                                                               
engineer working in Anchorage on  a North Slope expenditure would                                                               
be eligible for deduction.                                                                                                      
MR. BULLOCK agreed with his characterization of the issue.                                                                      
6:36:23 PM                                                                                                                    
SENATOR  HUGGINS  asked  Commissioner  Galvin if  there  are  any                                                               
activities that he is concerned about in this provision.                                                                        
COMMISSIONER  GALVIN replied  his  department does  not have  any                                                               
particular concerns.  This provision  came from  other interested                                                               
CHAIR  FRENCH addressed  the  question  and said  that  in a  net                                                               
profit regime, deductions for labor  costs should come from money                                                               
being spent in the state.                                                                                                       
SENATOR  THERRIAULT  asked if  there  is  information about  what                                                               
percentage  of   deductions  will  not  be   allowed  under  this                                                               
CHAIR  FRENCH  said  he  didn't  know. Part  of  the  reason  for                                                               
including this provision is to  address to what extent board room                                                               
discussions in  Houston will be  assigned as a  lease expenditure                                                               
against the state's gross revenue.                                                                                              
SENATOR THERRIAULT said  that component is probably  small in the                                                               
whole scheme. Perhaps at the  project design level this provision                                                               
would have more of an impact.                                                                                                   
CHAIR FRENCH said  this is the area where he  sees this provision                                                               
benefiting the state. He can  imagine engineering, geologic work,                                                               
or financial analysis  being outsourced. He sees this  as a trade                                                               
off  for  a net  profit  system  that  benefits industry  by  not                                                               
collecting taxes until they show  a profit. In exchange for that,                                                               
money will be spent in Alaska on jobs.                                                                                          
6:41:06 PM                                                                                                                    
MR. BULLOCK commented that the  PPT allows a one-dollar deduction                                                               
for  every dollar  in allowable  lease  expenditure. That  dollar                                                               
reduces the  taxable value for  PPT purposes by a  dollar thereby                                                               
creating  a 22.5  cent revenue  deduction. This  is a  legitimate                                                               
policy matter when looking at which expenditures to allow.                                                                      
SENATOR THERRIAULT  relayed that in production  sharing contracts                                                               
a local hire requirement is generally part of the agreement.                                                                    
6:42:30 PM                                                                                                                    
CHAIR FRENCH asked  for an explanation of  publication of profits                                                               
in Section 46.                                                                                                                  
MR.  BULLOCK  explained  that  the  section  has  two  parts.  He                                                               
referred to AS 43.55.040 on  pages 23-24, which authorizes DOR to                                                               
require a  producer that has  an average total production  in the                                                               
state of more than 100,000 barrels  a day for a calendar year, to                                                               
report  the  gross  value  at  the point  of  production  of  the                                                               
producer's taxable oil and gas and  the total amount of the lease                                                               
expenditures. Those are  two elements that are  used to determine                                                               
petroleum  production tax.  Turning  to Section  46  he said  the                                                               
first part  requires an  aggregation of  three or  more producers                                                               
for certain  types of information.  Page 37, lines 6-7  refers to                                                               
the  information  that  the department  would  be  authorized  to                                                               
request. It allows  the department to publish the  gross value at                                                               
the  point  of production  and  the  total  amount of  the  lease                                                               
expenditures that each  producer that met the  100,000 barrel per                                                               
day requirement was required to report.                                                                                         
SENATOR THERRIAULT asked if this  is a blanket requirement, or if                                                               
it  would  be  implemented  only  if a  company  wished  to  take                                                               
advantage of credits and deductions.                                                                                            
MR. BULLOCK answered there is  no contingency, the department can                                                               
simply ask for reporting.                                                                                                       
CHAIR FRENCH noted that this  is another trade-off provision in a                                                               
net-profit  system. If  the State  of Alaska  allows credits  and                                                               
deductions  against  certain  expenses, the  public  exchange  of                                                               
information is reasonable.                                                                                                      
6:45:58 PM                                                                                                                    
CHAIR FRENCH asked about the penalties provision in Section 36.                                                                 
MR.  BULLOCK  said  Section  36  inserts  a  new  penalty  in  AS                                                               
43.55.055  to address  substantial  and  gross understatement  of                                                               
tax.   Gross  understatement   brings  a   higher  penalty   than                                                               
substantial    understatement.   Definitions    of   "substantial                                                               
understatement"  and  "gross   understatement"  are  included  in                                                               
statute.  He  noted that  an  amendment  will arrive  shortly  to                                                               
correct an error. It will change 10 percent to 20 percent.                                                                      
CHAIR FRENCH said the amendment,  labeled 25-GS0014\K.8, reads as                                                               
     Page 25, line 22:                                                                                                          
          Delete "10"                                                                                                           
          Insert "20"                                                                                                           
CHAIR FRENCH set the amendment  aside temporarily. In response to                                                               
a question from Senator Therriault he labeled it Amendment 1.                                                                   
6:48:06 PM                                                                                                                    
CHAIR  FRENCH  turned  to  the   section  dealing  with  Qui  Tam                                                               
"whistle-blowers" and asked how it would work.                                                                                  
MR. BULLOCK  said this amends  AS 43.55.110, which is  in Section                                                               
38. The  provision is on  page 27, line  11. This section  of the                                                               
bill  offers  an  incentive  for someone  aware  of  a  reporting                                                               
problem, to inform the state and  thereby set an audit in motion.                                                               
If an  adjustment to a  tax results in  more money to  the state,                                                               
DOR is  allowed to pay  a reward to  the person who  provides the                                                               
tip based on the percentage that  the state gained as a result of                                                               
the tip.                                                                                                                        
CHAIR FRENCH asked for clarification  that the provision does not                                                               
give  anyone the  right  to  go to  court  to  proceed against  a                                                               
company whose deduction may or may not be lawful.                                                                               
MR. BULLOCK agreed;  DOR would take the action in  the form of an                                                               
audit. The provision allows DOR an "informant" tool.                                                                            
SENATOR WIELECHOWSKI  said the  committee should  consider making                                                               
the provision revenue  neutral by assessing the  reward amount in                                                               
addition to the penalty.                                                                                                        
MR.  BULLOCK  explained that  the  appropriation  for the  reward                                                               
would come from  the penalty assessment. The  state would receive                                                               
the tax that's due plus interest on that amount.                                                                                
SENATOR WIELECHOWSKI asked for clarification  of the provision as                                                               
currently written.                                                                                                              
MR.   BULLOCK  replied   the  legislature   has  the   option  of                                                               
appropriating  award   money  out  of  the   penalties  that  are                                                               
received.  The reward  may  not  exceed 10  percent  of the  tax,                                                               
penalty and interest that's collected.                                                                                          
CHAIR FRENCH understood Senator  Wielechowski's point which is to                                                               
avoid reducing the state's overall  collection. The difficulty is                                                               
that the legislature must appropriate the money, he added.                                                                      
MR. BULLOCK  acknowledged that and  pointed out that part  of the                                                               
issue is that  the state might not have  acquired the information                                                               
CHAIR FRENCH  said the  state has  to give  something up  for the                                                               
receipt of new tax revenue.                                                                                                     
6:54:08 PM                                                                                                                    
SENATOR WIELECHOWSKI asked if the  company could be penalized and                                                               
also be required to pay the cost of the informant's reward.                                                                     
MR. BULLOCK said he was not aware of any such precedence.                                                                       
SENATOR   THERRIAULT   asked    why   language   addressing   the                                                               
appropriation  for  the  "purpose from  penalties  collected"  is                                                               
included. Aren't the penalties general funds dollars?                                                                           
MR. BULLOCK  said the language  is identifying a source  that may                                                               
be considered  by the  legislature if  it chooses  to appropriate                                                               
reward money.                                                                                                                   
SENATOR  THERRIAULT  pointed  out   that  someone  might  provide                                                               
information where the state gets  additional tax and interest but                                                               
there might  not be a  penalty. The  benefit that's paid  is just                                                               
general fund dollars.                                                                                                           
MR.  BULLOCK replied  the reward  would not  be paid  out of  the                                                               
actual increase  to the  state. Money would  be available  at the                                                               
discretion of the  department to make an award based  on what the                                                               
state gained  as a  result of  the tip.  The provision  only says                                                               
that the  award cannot be  more than  10 percent of  whatever the                                                               
state recovered.                                                                                                                
SENATOR  THERRIAULT said  if the  reward is  a percentage  of the                                                               
tax, interest, and penalty, the  reward would clearly not be more                                                               
than the  worth of  what the  state gained;  thus, why  would the                                                               
source of reward money need to be indicated?                                                                                    
6:57:28 PM                                                                                                                    
MR.  BULLOCK  responded the  money  has  to be  appropriated  and                                                               
identified. There  is no link  between the appropriation  and the                                                               
SENATOR THERRIAULT  asked if the  provision would be the  same if                                                               
on  page  27,  lines  11-12  the  language  said  "subject  to  a                                                               
legislative appropriation the department  may compensate a person                                                               
who provides information."                                                                                                      
MR. BULLOCK replied yes.                                                                                                        
CHAIR FRENCH said a possible Amendment 2 has been identified.                                                                   
SENATOR MCGUIRE  asked about  the rationale  for the  ten percent                                                               
CHAIR FRENCH  replied he  did not  have a  specific cap  in mind,                                                               
except to  contain it so  there would be  a definite gain  to the                                                               
6:59:29 PM                                                                                                                    
SENATOR MCGUIRE  asked if a penalty  section was set up  when the                                                               
legislature privatized  attorney general and  consumer liability,                                                               
and if there was a uniform standard.                                                                                            
MR. BULLOCK said he didn't  know. His approach to this particular                                                               
reward is  money is being  spent to get information  that results                                                               
in more taxes to the state.                                                                                                     
SENATOR WIELECHOWSKI asked if the  provision exposes the state to                                                               
liability if an award is not appropriated.                                                                                      
MR.  BULLOCK  replied it  does  not;  any  reward is  subject  to                                                               
legislative appropriation.                                                                                                      
7:01:05 PM                                                                                                                    
CHAIR  FRENCH turned  to provisions  of the  bill that  deal with                                                               
MR.  BULLOCK  explained  that corrosion  is  a  disallowed  lease                                                               
expenditure  in  AS  43.55.165(e).   In  this  draft  Section  44                                                               
contains those exclusions. The "corrosion issue" is on page 34.                                                                 
CHAIR FRENCH asked what was changed in the provision.                                                                           
MR. BULLOCK  replied language  has been  added beginning  on page                                                               
34, line 10,  that's based on SB 80. It  disallows costs incurred                                                               
for  repair, replacement  or deferred  maintenance of  a facility                                                               
other than a well that was improperly maintained.                                                                               
CHAIR FRENCH said the provision  is meant to deal with unforeseen                                                               
problems not addressed specifically in the bill.                                                                                
SENATOR THERRIAULT  asked if Mr.  Bullock has any  concerns about                                                               
the interpretation and application of the provision.                                                                            
MR.   BULLOCK  replied   that  the   definition  of   "improperly                                                               
maintained"  could be  a factual  issue  for which  the DOR  will                                                               
develop standards over time.                                                                                                    
7:04:08 PM                                                                                                                    
COMMISSIONER  GALVIN said  the  difficulty  of implementing  this                                                               
type of standard is trying  to identify which definition fits any                                                               
given situation.  Auditors needed something to  trigger a further                                                               
review  and that  is  why the  department  chose interruption  of                                                               
service as a guideline.                                                                                                         
MR.  BULLOCK agreed  with Commissioner  Galvin,  and pointed  out                                                               
that the provision provides for  a standard of care evaluation as                                                               
to whether the costs are reasonable.                                                                                            
COMMISSIONER GALVIN  explained that  the reference to  "could not                                                               
have  been prevented  or  avoided  in the  exercise  of due  care                                                               
foresight" is a small exception to the provision.                                                                               
SENATOR THERRIAULT asked if a  previous situation would have been                                                               
addressed under the current language of the bill.                                                                               
7:09:37 PM                                                                                                                    
COMMISSIONER GALVIN  said it would not  reasonably be interpreted                                                               
that way.  Most likely, a  company would  admit to a  more narrow                                                               
SENATOR WIELECHOWSKI  recalled that the  administration supported                                                               
SB 80 and wondered when the thinking changed.                                                                                   
COMMISSIONER GALVIN  responded the administration  feels strongly                                                               
that this  issue has to  be addressed and recognizes  that during                                                               
the  previous   legislative  process  the  SB   80  approach  was                                                               
identified as  the appropriate direction. In  developing the ACES                                                               
plan  the administration  took  a  broader view  of  what it  was                                                               
trying  to  accomplish  and  walked   through  the  process  with                                                               
auditors. After  that the  administration came  up with  what was                                                               
thought to be a better approach.                                                                                                
7:12:00 PM                                                                                                                    
CHAIR FRENCH asked if the word  "unscheduled" on page 34, line 6,                                                               
modifies   the   word    "reduction."   Certainly   it   modifies                                                               
COMMISSIONER GALVIN asked Robert Mintz to respond.                                                                              
ROBERT  MINTZ,   Consulting  Attorney  for   the  Administration,                                                               
Kirkpatrick & Lockhart Preston Gates  Ellis LLP (K&L Gates), said                                                               
"unscheduled" modifies both "reduction" and "interruption."                                                                     
CHAIR FRENCH  said that's why  he wanted to include  the catchall                                                               
phrase from  SB 80.  He can imagine  huge tax  disputes revolving                                                               
around whether a shutdown was scheduled or not.                                                                                 
7:13:49 PM                                                                                                                    
COMMISSIONER GALVIN  said he recognizes  the need  for clarifying                                                               
regulations  to  make this  work  in  real world  scenarios.  One                                                               
particular aspect  is what  it means  to be  "unscheduled." These                                                               
standards would  be developed  through interaction  with industry                                                               
and the regulatory process.                                                                                                     
CHAIR  FRENCH  said  that  the   provision  is  meant  for  major                                                               
cataclysmic events and maintenance issues.                                                                                      
COMMISSIONER GALVIN agreed.  The purpose of this  provision is to                                                               
identify those major  cost components that should  not be subject                                                               
to state credit.                                                                                                                
7:16:00 PM                                                                                                                    
CHAIR FRENCH asked  if there were any other changes  that need to                                                               
be addressed.                                                                                                                   
MR. BULLOCK highlighted that tanker  transportation costs had not                                                               
been  fully   discussed.  There   were  three   requirements  for                                                               
substitution of "actual" costs with  "reasonable" costs and under                                                               
PPT all three conditions had to be  met. Now any one of the three                                                               
conditions can be met.                                                                                                          
SENATOR THERRIAULT  said he understands  that Sections 39  and 40                                                               
need to  be the same, but  he wants to make  certain the language                                                               
works as  intended. He also suggested  that on page 27,  line 30,                                                               
the word "conditions" should be singular.                                                                                       
MR. BULLOCK agreed.  He then said two things  happened. First the                                                               
section is triggered by any one  of the conditions in Section 39.                                                               
Once they're  triggered the actual  costs that were  reported are                                                               
replaced by reasonable costs. Then  the latter part of subsection                                                               
(b) in bill section 40 tells you  to look at fair market value of                                                               
like transportation  and the other  options. He doesn't  know the                                                               
policy behind putting  in the Regulatory Commission  of Alaska or                                                               
other regulatory commission.                                                                                                    
SENATOR THERRIAULT  gave an example  of an ongoing  dispute about                                                               
control   between  RCA   and   FERC.   RCA  controls   intrastate                                                               
transportation   down   the   TAPS   line   and   FERC   controls                                                               
transportation   out  of   state   under   the  TAPS   settlement                                                               
methodology. If he  were a non-TAPS owner shipper he  may pay the                                                               
TAPS  settlement rate.  That'd  be a  true  cost because  nothing                                                               
comes back through a subsidiary.  This language seems to say that                                                               
if a  regulatory body has  rendered a decision, it's  prema facia                                                               
that  the  department  should  use that  to  determine  just  and                                                               
reasonable. That could bind the department.                                                                                     
COMMISSIONER  GALVIN  said  he understands  Senator  Therriault's                                                               
reasoning. The  administration believes that the  substitution of                                                               
"or"  for  "and"  in  Section   39  is  appropriate.  Doing  both                                                               
undermines the  purpose of the first  change. The idea is  to say                                                               
that  all  three conditions  must  be  met  for the  prima  facia                                                               
standard to be used.                                                                                                            
7:20:57 PM                                                                                                                    
MR. BULLOCK said the section  rejects prices that a person taking                                                               
the deduction has control over,  in favor of standards over which                                                               
that person has less control.                                                                                                   
SENATOR  THERRIAULT  observed  that  the shippers  that  own  the                                                               
pipeline are  paying the  tariff, but  to themselves.  He doesn't                                                               
agree  that placing  the "or"  in subsection  (b) undermines  the                                                               
purpose because that would say conditions  1, 2, and 3 have to be                                                               
triggered.  There  was  testimony  that condition  3  never  gets                                                               
triggered  because a  pipeline off  the North  Slope is  the only                                                               
reasonable transportation.                                                                                                      
COMMISSIONER GALVIN suggested asking Mr. Mintz about this issue.                                                                
MR. MINTZ offered  the view that it's consistent  to change "and"                                                               
to  "or" in  both places.  Also he  agrees the  plural should  be                                                               
changed to the  singular. Finally, if the  committee is concerned                                                               
about the last sentence in subsection (b) it could be deleted.                                                                  
SENATOR  THERRIAULT  said he  is  unsure  of the  impact  because                                                               
sometimes the  RCA has made a  determination on what is  just and                                                               
MR. MINTZ  said the purpose  of the sentence might  seem unclear,                                                               
but  the  provision only  comes  into  play when  the  department                                                               
decides to substitute reasonable cost  for actual cost. The first                                                               
sentence lists several types of  evidence that the department can                                                               
use to determine  what reasonable costs are.  The second sentence                                                               
says  the tariff  rates on  file with  the agencies  mentioned is                                                               
powerful  evidence   of  what   reasonable  cost   is.  Generally                                                               
speaking, the tariff  paid by a shipper is  considered the actual                                                               
cost. It's only  if one or more  of the three criteria  in (a) is                                                               
triggered that the  department would use something  else based on                                                               
reasonable costs.  He also  noted that  on page  27, line  31, it                                                               
would be preferable to change the word "shall" to "may."                                                                        
7:26:00 PM                                                                                                                    
SENATOR   WIELECHOWSKI  wondered   if   the  section   addressing                                                               
reasonable costs for transportation should be cut altogether.                                                                   
7:26:49 PM                                                                                                                    
CHAIR FRENCH called a recess.                                                                                                   
7:47:35 PM                                                                                                                    
CHAIR  FRENCH called  the meeting  back to  order, and  mentioned                                                               
that Nan  Thompson with  the Department  of Natural  Resources is                                                               
available for questions.                                                                                                        
COMMISSIONER  GALVIN  asked  Ms.  Thompson  to  explain  how  the                                                               
language  in Sections  39 and  40  works together  to ensure  DOR                                                               
assesses   the  appropriate   reasonable   cost  deductions   for                                                               
NANETTE  THOMPSON,  Petroleum Manager,  Division  of  Oil &  Gas,                                                               
Department of  Natural Resources,  said deleting the  language on                                                               
lines 3-5  on page 28  is a good idea  because of the  way tariff                                                               
filings are  done with  the Regulatory  Commission of  Alaska and                                                               
FERC. Tariff rates are sometimes  filed and paid by the shippers.                                                               
A  process  for protesting  a  tariff  exists but  sometimes  the                                                               
process of adjudicating  those protests takes a  number of years.                                                               
If  the  standard is  only  "tariff  rates  properly on  file"  a                                                               
situation could exist where a  deduction that is much larger than                                                               
is  appropriate could  go on  for a  number of  years before  the                                                               
right  amount is  paid. Also,  transportation  rates properly  on                                                               
file are not  always reviewed by a regulatory  agency. More often                                                               
in  FERC  practice  than the  Regulatory  Commission  of  Alaska,                                                               
tariff rates  are negotiated. As  a practical matter  those rates                                                               
aren't reviewed unless there's a protest.                                                                                       
CHAIR FRENCH asked if negotiated rates go on file.                                                                              
MS. THOMPSON  replied they  are put  on file,  but not  all filed                                                               
rates  have  been   reviewed  and  determined  to   be  just  and                                                               
reasonable. In  fact a  filed rate  may be paid  for a  number of                                                               
years before it's  found not to be just and  reasonable. The TAPS                                                               
tariff is  a good example. It  was many years after  the original                                                               
filing  that  the RCA  made  a  finding  that  the rate  was  not                                                               
reasonable. Shippers  paid the  cost during  that time  and under                                                               
this provision those costs would be deductible.                                                                                 
7:52:13 PM                                                                                                                    
SENATOR  MCGUIRE  expressed  concerned  with  the  exceptions  in                                                               
Section  39.   The  second  "or"   on  line  25  gives   me  some                                                               
consternation, she said.                                                                                                        
MS. THOMPSON replied she too is  concerned with the first "or" in                                                               
the sentence.  She wants  to think  about it but  it may  work to                                                               
change  the "or"  to "and"  so that  the exception  requires both                                                               
SENATOR  THERRIAULT asked  Ms. Thompson  to also  ponder changing                                                               
"shall" to "may" on page 27, line 31.                                                                                           
7:55:43 PM                                                                                                                    
SENATOR   THERRIAULT    asked   Commissioner   Galvin    if   the                                                               
administration  supports the  seismic data  language that  was in                                                               
the original bill.                                                                                                              
COMMISSIONER  GALVIN said  yes. The  administration continues  to                                                               
support   the  entire   proposed  exploration   incentive  credit                                                               
amendments.  He understands  this committee  isn't going  to deal                                                               
with that issue, but they'd be happy  to see any part get back in                                                               
the bill. He asked if Mr. Mintz had anything to add.                                                                            
7:57:13 PM                                                                                                                    
MR. MINTZ  highlighted that the relationship  between monthly and                                                               
annual calculations  in Sections  15 and  16 on  pages 10  and 11                                                               
needs to be reconciled.                                                                                                         
MR. BULLOCK, referring to Section 21  on page 13, said one of the                                                               
changes from the governor's bill  was to look at progressivity on                                                               
a monthly basis  rather than over a calendar  year. The intention                                                               
is to  look each month  to see  if the progressivity  tax applied                                                               
and  if it  did, calculate  it and  make the  installment payment                                                               
under AS 43.55.020(a). The  administration's approach changed the                                                               
installment payments so the progressivity  tax would be paid when                                                               
the final return was filed, or by April 1 of the following year.                                                                
CHAIR FRENCH said  his intent is to change to  monthly across the                                                               
8:02:00 PM                                                                                                                    
MR. MINTZ  said in that  case the calculation of  the installment                                                               
payment  before credit  would be  the actual  tax payment.  There                                                               
wouldn't  be  a  difference  between  the  estimated  and  actual                                                               
payments.  There's no  problem,  but it  should  be clarified  in                                                               
Section 15.                                                                                                                     
COMMISSIONER GALVIN  noted that the  monthly rate is based  on an                                                               
estimate  of  annual  costs,  and  asked  if  there  would  be  a                                                               
reconciliation of those costs at the end of the year.                                                                           
MR. MINTZ  said that is  still covered in the  bill. Conceptually                                                               
this can  still be  viewed as  an annual  tax composed  of twelve                                                               
monthly parts.                                                                                                                  
MR.  BULLOCK  added  that  the   installment  payments  are  like                                                               
estimated  tax  payments.  For  example, the  failure  to  pay  a                                                               
penalty   wouldn't   necessarily   apply  for   underpayment   of                                                               
installment. In  this case there  would be interest  penalty from                                                               
the  time of  the underpayment  until it's  paid. When  the final                                                               
return is due, it is an annual true-up.                                                                                         
CHAIR FRENCH  asked Mr.  Mintz if he  could conform  the sections                                                               
MR. MINTZ replied he could try.                                                                                                 
MR. BULLOCK commented the old tax  is paid on a monthly basis, so                                                               
each  year there  were twelve  different starting  dates for  the                                                               
statute of limitation  period. With the annual tax  it's just the                                                               
one date so it's clearer.                                                                                                       
8:04:43 PM                                                                                                                    
MR. MINTZ  referred to page 24,  paragraph 6 and said  he assumed                                                               
it meant  the oil and gas  produced during the year.  He asked if                                                               
that's correct.                                                                                                                 
CHAIR FRENCH replied it's meant to  be what their gross tax value                                                               
MR. MINTZ questioned why that's required in the annual return.                                                                  
MR. BULLOCK explained  the difference is that this  is a required                                                               
report that  will be made  public under AS 43.55.890.  It's added                                                               
by bill section  46. Paragraph 2 says the  department may publish                                                               
the gross value  at the point of production and  the total amount                                                               
of the  lease expenditures for  each producer required  to report                                                               
under AS 43.55.040.                                                                                                             
8:06:45 PM                                                                                                                    
MR. MINTZ,  referring to Section  36, page 25, suggested  that if                                                               
this penalty  is meant to be  in addition to or  instead of other                                                               
penalties provided under existing law,  it would be beneficial to                                                               
clarify that. It  might be preferable to say that  the penalty is                                                               
in addition to other penalties that are provided by law.                                                                        
MR. BULLOCK agreed that's been done elsewhere in tax laws.                                                                      
CHAIR FRENCH said  that'd be addressed in the  amendment phase of                                                               
the proceedings.                                                                                                                
SENATOR  WIELECHOWSKI referred  to Qui  Tam and  suggested adding                                                               
the cost  of the informant  reward to  the penalty incurred  by a                                                               
COMMISSIONER GALVIN  pointed out  that the  administration hasn't                                                               
taken  a position  on Qui  Tam,  but it  makes sense  to make  it                                                               
revenue neutral.                                                                                                                
MR.  BULLOCK  warned against  dedicated  fund  issues; the  money                                                               
would go into the general fund and then it'd be reappropriated.                                                                 
COMMISSIONER GALVIN  interpreted it  as an additional  10 percent                                                               
penalty; it  doesn't necessarily designate that  the penalty goes                                                               
to the informant.                                                                                                               
SENATOR THERRIAULT  noted that the  penalty is not to  exceed ten                                                               
percent of  the money gained  by the state and  demonstrated that                                                               
it could become mathematically complicated.                                                                                     
8:10:06 PM                                                                                                                    
MR. MINTZ said  he concurs that the provision in  Sections 42 and                                                               
43  on page  30 to  limit  lease expenditures  to costs  incurred                                                               
within the state, does raise  questions about the commerce clause                                                               
and constitutionality.                                                                                                          
CHAIR  FRENCH  agreed it's  an  issue,  but  he believes  it's  a                                                               
challenge that's worth taking.                                                                                                  
SENATOR WIELECHOWSKI added that the  stipulation only kicks in if                                                               
the company wants to take  deductions. It's beyond rational basis                                                               
to say  as a state  that we want  to promote Alaska  business and                                                               
Alaska hire.                                                                                                                    
MR.  MINTZ  said he  wonders  whether  Section 38  that  provides                                                               
incentives to  whistle blowers is  a substantial enough  issue to                                                               
be  mentioned in  the bill  title. Also,  on lines  6-7 where  it                                                               
refers to civil  penalties related to oil and  gas production tax                                                               
payments, he suggests  it would be more complete  to also mention                                                               
MR. BULLOCK  explained that  bill titles  are a  compromise. This                                                               
generally  relates to  everything  about oil  and gas  production                                                               
There being  no further  business to  come before  the committee,                                                               
Chair French adjourned the meeting at 8:13:22 PM.                                                                             

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