HB 280-NATURAL GAS: STORAGE/ TAX CREDITS  5:40:41 PM CO-CHAIR JOHNSON announced that the next order of business is HOUSE BILL NO. 280, "An Act relating to natural gas; relating to a gas storage facility; relating to the Regulatory Commission of Alaska; relating to the participation by the attorney general in a matter involving the approval of a rate or a gas supply contract; relating to an income tax credit for a gas storage facility; relating to oil and gas production tax credits; relating to the powers and duties of the Alaska Oil and Gas Conservation Commission; relating to production tax credits for certain losses and expenditures, including exploration expenditures; relating to the powers and duties of the director of the division of lands and to lease fees for the storage of gas on state land; and providing for an effective date." [Before the committee was the proposed committee substitute (CS) for HB 280, Version 26-LS1185\C, Bullock, 3/9/10, adopted as a work draft on 3/12/10.] 5:41:06 PM REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, sponsor of HB 280, addressed two questions he was unable to answer at the 3/12/10 committee hearing. In regard to the bill's provision for recovery of tax credits when a storage facility stops cycling gas, Representative Guttenberg had asked what would happen if an operator failed to meet the requirement to cycle at least 100 million cubic feet of gas per year for reasons beyond the facility owner's control. Representative Hawker said he thinks the bill provides adequate protection in this regard because the threshold of cycling 100 million cubic feet per year for maintenance of commercial operation is relatively low. To provide a reference for just how small this amount is, he noted that 400 million cubic feet can be used on one peak day in the winter. In regard to Representative Tuck's question about how gas storage would inter-relate with either the closing or continued operation of the liquefied natural gas (LNG) export facility in Nikiski, Representative Hawker explained that storage would be needed either way: if the facility closed, a large amount of storage would be needed to meet peak demands; if the facility continued, a lesser amount of storage would be needed. 5:43:49 PM CO-CHAIR JOHNSON opened public testimony. STACEY SCHUBERT, Intergovernmental Affairs Director, Mayor's Office, Municipality of Anchorage, spoke as follows on behalf of Dan Sullivan, Mayor of Anchorage: The Municipality of Anchorage is concerned about the declining production of natural gas in the Cook Inlet, specifically as it relates to decreased deliverability through the gas system. Exploration in Cook Inlet is declining, which has prompted concern among the administration and others in the community. Railbelt utilities have been working with us on the Energy Watch Program, the green, yellow, and red system that implores customers to adjust their behavior in the event of an impending energy crisis. Last winter we nearly experienced a catastrophic event. This year we have been stable, but we cannot rely on the stability of the past to guide our future. The timeline for action is growing shorter. As a result, I am testifying in support of the concepts proposed in the [committee substitute] version of HB 280 to encourage gas storage and exploration in the Cook Inlet and, therefore, stability for Railbelt energy consumers. Specific features of the bill supported by the mayor are: the strong requirement that financial benefits flow through the utilities that contract for gas to the benefit of their customers; the provision for 40 percent credit for exploration expenses in Cook Inlet against production taxes that we hope will result in increased exploration; and the direction to the Department of Law to consider the impact to consumers in the event the [Regulatory Commission of Alaska (RCA)] rejects the utilities' gas supply contract. We concur with the bill sponsors that this encourages the RCA to take a long-term view and provides a long-term benefit to consumers. The mayor is committed to monitoring the bill as it continues to work its way through the legislative process. CO-CHAIR JOHNSON closed public testimony after ascertaining that no one else wished to testify. 5:47:28 PM REPRESENTATIVE SEATON inquired whether HB 280 would give the RCA the appropriate statutory authority to regulate gas storage in the Cook Inlet basin. STUART GOERING, Assistant Attorney General, Commercial/Fair Business Section, Civil Division (Anchorage), Department of Law, first noted that he is the representative for the RCA. He said Version C does contain sufficient language to clarify RCA's jurisdiction over natural gas storage to the extent that would be necessary at this time. Version C addresses all of the concerns raised by the RCA in its recent decision. Version C clarifies the RCA's jurisdiction over third party natural gas storage and also clarifies its lack of jurisdiction over proprietary storage, which is existing storage that is owned and operated by natural gas producers for their own benefit and to assure that they can meet their contractual obligations under their gas supply agreements with the utilities. 5:49:45 PM REPRESENTATIVE SEATON asked whether the provision giving direction to the RCA to consider failure to approve a contract is adequate. REPRESENTATIVE HAWKER pointed out that this guidance is provided to Regulatory Affairs & Public Advocacy (RAPA) under Section 20 and to the Regulatory Commission of Alaska under Section 5. MR. GOERING replied that this provision would require the RCA to consider certain things which, based upon an assessment of past RCA orders, have already been at the forefront of the commission's consideration. However, it would help the RCA's consideration in that it would allow parties to specifically address those criteria when making presentations to the commission either in favor of or in opposition to a gas sales agreement. The provision would not really result in the RCA considering anything new, but it would draw to the parties' attention the need to address that in their presentations to the commission. 5:52:18 PM REPRESENTATIVE SEATON requested Ms. Robynn Wilson to address the interactions that would result from the language in [Section 16, paragraph (1)] on page 14, lines 20-27. ROBYNN WILSON, Income Audit Manager, Tax Division-Income Audit Group, Department of Revenue, answered that AS 43.20.043 is the gas development credit. She said her reading of this paragraph is that the taxpayer can take a credit under AS 43.55 but not under AS 43.20.043. She asked Mr. Larry Ostrovsky whether he has a different reading than hers. LARRY OSTROVSKY, Petroleum Land Manager, Division of Oil & Gas, Department of Natural Resources, said he did not. 5:54:47 PM REPRESENTATIVE HAWKER said he believes Ms. Robynn Wilson is 100 percent correct in her answer. He requested that his staff member, Mr. Larry Persily, be able to further address Representative Seaton's question. LARRY PERSILY, Staff, Representative Mike Hawker, Alaska State Legislature, explained that Section 16 takes the 30 or 40 percent exploration credit, depending on distance from the existing hole in the ground, that is currently in statute and makes it 40 percent for Cook Inlet. Additionally, it expands the definition of allowable expenses for that credit to include all well-related lease expenditures. 5:55:59 PM REPRESENTATIVE SEATON noted that provisions under paragraph (1), page 14, would allow a producer or explorer to also elect to apply a tax credit against AS 43.55.011(e). He inquired whether this provision would allow lease expenditure to count as credits in multiple sections of the law. MR. PERSILY replied a taxpayer can only take a credit once, depending upon where there is a tax liability. In further response, he explained that AS 43.55.011(e) is the oil and gas production tax. MS. ROBYNN WILSON recalled that under revisions of that statute in 2006 and 2007, the credit could be given even though the expenditure was deductible in calculating the production tax value. 5:58:26 PM REPRESENTATIVE HAWKER interpreted Representative Seaton's question as asking whether double dipping would be allowed for the credit by applying the same credit against two different taxes. He said the answer is no and pointed out that line 22 in paragraph (1) contains the prefacing language, "unless a credit for that expenditure is taken under" someplace else, then a producer or explorer "may also elect to apply" it against the production tax. REPRESENTATIVE SEATON stated he will be fine if the state's tax lawyers agree with Representative Hawker's answer. MS. ROBYNN WILSON said a person cannot take two different credits for the same expenditure; they can, however, take a deduction for the expenditure in addition to a credit. The value of a deduction generally is a lot less than the value of a credit. So, although this section says a deduction and a credit may be taken, it also says that two different credits cannot be received for the same expenditure. 6:00:23 PM REPRESENTATIVE HAWKER expressed his willingness for the word "also" to be deleted if it would make members more comfortable. REPRESENTATIVE SEATON said this would help his comfort level. He moved to adopt Conceptual Amendment 1 as follows: Page 14, line 24: Delete "also" There being no objection, Conceptual Amendment 1 was passed. 6:02:10 PM REPRESENTATIVE P. WILSON understood that [paragraph (1)], lines 20-27, page 14, would provide that an expense may be deducted and also applied as a tax credit in the amount of 40 percent of that expenditure. REPRESENTATIVE HAWKER replied yes. He said this provision parrots the language and methodology that was established in the petroleum production tax (PPT) and Alaska's Clear and Equitable Share (ACES) debates in the legislature previously. By adding new subsections, no new concepts and no new credits are created; it sets aside a separate section of statute for specifically the activities within the Cook Inlet. REPRESENTATIVE P. WILSON posed a scenario in which a taxpayer has a cost of $10,000 that can be deducted. She surmised that under HB 280, Version C, the taxpayer could also receive a tax credit of 40 percent for this $10,000 expenditure. MS. ROBYNN WILSON answered correct. 6:04:04 PM REPRESENTATIVE SEATON asked whether AS 43.20.043 also allows a 10 percent deduction or credit on the corporate income tax. MS. ROBYNN WILSON responded no, that would not be a duplicative credit. She cited AS 43.20.043(g), the gas exploration and development tax credit that is creditable against the corporate income tax, which reads as follows: A taxpayer who obtains a credit under this section may not claim a tax credit or royalty modification provided for under any other title. MS. ROBYNN WILSON said the department's reading of this statute is that the same expenses that would generate the credit under AS 43.20.043 cannot then be used for another credit under the production tax or any other chapter within the title. 6:05:35 PM REPRESENTATIVE SEATON inquired whether a taxpayer could receive the 40 percent credit and royalty modification as well. MS. ROBYNN WILSON said her reading of 43.20.043(g) is that there would not be a credit against royalties; however, she deferred to the Department of Natural Resources because royalties are not her area. MR. OSTROVSKY allowed he is not an expert in regard to this particular question, but noted that AS 43.20.043(g) says, "A taxpayer who obtains a credit under this section may not claim a tax credit or royalty modification provided for under any other title." 6:06:44 PM REPRESENTATIVE SEATON asked whether the provision in HB 280, Version C, would allow a taxpayer to receive the 40 percent tax credit under 43.55.011(e) as well as a royalty modification. MR. OSTROVSKY replied he will have to get back with that answer. 6:07:48 PM REPRESENTATIVE HAWKER understood the question to be whether a taxpayer receiving the credits under Section 16 would be prevented from pursuing and receiving a royalty modification under the royalty modification statutes. He noted that it was the other reference that says if a deduction is taken under this section, then royalty modifications cannot be pursued. But, he pointed out, there is nothing in Section 16 that would preclude a taxpayer from pursuing royalty modification under the royalty modification statutes. 6:08:42 PM REPRESENTATIVE SEATON inquired whether it is the sponsor's intent to allow the taking of a 40 percent tax credit against production tax as well as royalty modification. REPRESENTATIVE HAWKER answered an application for royalty modification would still be available to a taxpayer that availed itself of deductions and credits under Section 16. However, royalty modification requirements have a very high bar. In making its decision the state would consider the deductions and credits available to that same taxpayer under Section 16. 6:10:26 PM REPRESENTATIVE SEATON asked if this 40 percent tax credit would be one of the things available for consideration when the Department of Natural Resources was making its decision on whether to grant the royalty modification. MR. OSTROVSKY responded yes, he believes the department takes all the tax credits into account when considering royalty modification. 6:11:08 PM REPRESENTATIVE SEATON said he would like to have a discussion on the record regarding how Section 11 would allow the tax credit generated from activity in Cook Inlet, which is ring fenced at a very low tax rate, to be applied without the deduction of considering that very low tax rate to the higher tax rate production taxes across the state. REPRESENTATIVE HAWKER said he appreciates this discussion because it is potentially the most significant change in tax regime components as they relate to maximizing Cook Inlet's attractiveness for capital investment in the exploration arena. He explained that when the PPT/ACES structure was passed it was focused primarily on North Slope activities. It was realized late in the debate that if the PPT/ACES structure was applied on a statewide basis it would result in a very significant increase in taxes in the Cook Inlet, just as it did on the North Slope. If those tax increases were applied to the Cook Inlet, the taxes would be recognized as legitimate expenses and would therefore be paid by Southcentral consumers through the energy pricing process. Because a massive increase in consumer energy prices was an undesirable outcome, the Cook Inlet was ring-fenced to remain at the economic limit factor (ELF) tax rate. Other legislation has extended this same treatment to other in-state locations where gas is produced and consumed in-state. 6:14:59 PM REPRESENTATIVE HAWKER explained that the PPT/ACES debates were truly focused on the North Slope. At the time, it was recognized that some producers worked in both the North Slope and the Cook Inlet, and a policy call was made that those producers would not be allowed to use a credit generated in the Cook Inlet on the North Slope or anywhere else in the state. While working on HB 280, he realized that the Cook Inlet is effectively being disadvantaged by this policy; a dollar invested in the Cook Inlet results in a lesser benefit to the investor than investing the same dollar elsewhere in the state, particularly on the North Slope. This provision in HB 280 says that investment in Alaska is good and that the state does not want to disadvantage the Cook Inlet as an attractive investment climate. This change allows investors the ability to take those credits/deductions anywhere they may be operating in the state, even if those credits/deductions were incurred in the Cook Inlet with a lesser tax structure. The outcome of this change should be to maximize the attractiveness and competitiveness of the Cook Inlet within the borders of Alaska to develop the gas that everyone hopes is there. He said HB 280 takes a multi-tiered approach to meeting Southcentral Alaska's energy security by providing storage capacity as well as improving production in the Cook Inlet. 6:17:54 PM REPRESENTATIVE SEATON stated that both the legislature and the public need to realize that areas are being ring-fenced with zero tax or tax rates that are so low they are effectively zero. This essentially gives 100 percent tax credit because whatever is done, it does not have to be offset against the tax because there is no tax being charged. When those expenses are allowed to offset the areas with a high tax, additional state participation is received with that reduction. Neither a low gross tax, nor an interaction of gross and net tax through ring- fencing, has yielded the exploration incentive that was desired. Now a 40 percent tax credit on investments on top of these extremely low tax rates is being proposed to provide that incentive. He said he is bringing this up because there are a number of other initiatives proposing to give big tax breaks to gas or oil if it takes place in a certain place. Every time this is done, the legislature gets in the situation where it is changing the entire theory of unified tax on profits that are made across the entire state. He said he thinks that if this is done, some companies will be significantly advantaged that have operations in both the low tax Cook Inlet and the high tax North Slope; whereas, those companies concentrating in a low tax area will not gain the benefit of being able to write these tax credits off against the high tax rates of elsewhere. When making these special rules for specific areas, the legislature may not be fully recognizing the impacts. 6:22:00 PM REPRESENTATIVE HAWKER responded that when coming forward with HB 280, the challenge identified by Representative Seaton was recognized. It is not the sponsors' desire to have a tax structure that is prejudiced against any individual explorer or investor in a region. In the aggregate, that is resolved here by making the credits refundable for small producers. REPRESENTATIVE OLSON moved to report HB 280, Version 26- LS1185\C, Bullock, 3/9/10, as amended, from committee with individual recommendations and attached fiscal notes. There being no objection, CSHB 280(RES) was reported from the House Resources Standing Committee.