Legislature(2001 - 2002)
04/26/2002 09:25 AM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 519
"An Act authorizing priority treatment under the Right-
of-Way Leasing Act for an Alaska North Slope natural
gas project; expanding the scope for the kinds of gas
development projects that may become qualified projects
under the Alaska Stranded Gas Development Act;
extending the deadline for submitting applications
under the Alaska Stranded Gas Development Act;
exempting an Alaska North Slope natural gas project
from state property tax and all municipal taxes during
construction; and providing for an effective date."
Representative Mulder observed that committee substitute 22-
LS1651\W was adopted on 4/25/02(copy on file).
Representative John Davies MOVED to ADOPT Amendment 1, 22-
LS1651\R.2, which was drafted to the previous R version. Co-
Chair Mulder OBJECTED for the purpose of discussion.
Representative John Davies explained that the amendment
would allow the municipalities to apply for grants through
the Department of Community and Economic Development to deal
with the impact of the pipeline construction. The grants
would be subject to legislative appropriation and would
separate the issue of impacts to communities from the tax
holiday. The state would front the funds through the normal
appropriation process. The amendment was modeled on
provisions, which applied to the Trans-Alaska Pipeline
System construction.
Co-Chair Mulder spoke in support of the amendment. He
stressed that it would be appropriate for the state to take
responsibility and offer support to communities since the
state is providing the exemption. He acknowledged that
roads, schools, police and fire protection would be direct
costs, which should be assisted by the state.
Representative Lancaster questioned if an emergency would
have to be declared to receive funding. Representative John
Davies understood that "emergency" had been used in prior
provisions without difficulty. Co-Chair Mulder noted that it
would be his intent that any [future] legislature step
forward to help the communities.
Representative Harris spoke in support of the amendment. The
amendment would help communities and give some oversight to
the state legislature.
Representative Whitaker clarified that state general fund
dollars would be made available for emergency impact.
Representative John Davies explained that "emergency" would
be extra ordinary impact.
There being NO OBJECTION, it was so ordered and Amendment 1
was adopted.
Co-Chair Mulder MOVED to ADOPT Amendment 2:
(c) Before issuing bonds to provide the financing
described in AS 42.40.250(31), whether for a facility
to be owned by the corporation or for a facility to be
owned as described in (b) of this section, the
corporation shall obtain the prior approval of the
governor.
Co-Chair Mulder explained that the amendment would relate to
the railroad provisions and issuance of bonds. The amendment
clarifies that the governor would be in charge.
Representatives Whitaker and Davies expressed support for
the amendment.
There being NO OBJECTION, it was so ordered and Amendment 2
was adopted.
Representative John Davies MOVED to ADOPT Amendment 3:
(9) requires that its agents and contractors, the agents
and contractors of a person acting under contract,
or the agents and contractors of a project sponsor,
negotiate to obtain, a project labor agreement for
the employment of laborers and mechanics for the
construction, operation, and maintenance of the
project.
Co-Chair Mulder OBJECTED. Representative John Davies
explained that the amendment would speak to the Alaska hire
issue. The amendment would require those that contract for
labor to obtain labor agreements for employment.
Co-Chair Mulder noted that producers acknowledge the need
for project labor agreements. The amendment was offered, but
not adopted, in federal legislation. He spoke against the
amendment and pointed out that oil companies would like to
negotiate any Project Labor Agreement (PLA). He stressed
that it is a legitimate tool and a good way to ensure Alaska
hire, but that he would like to see the producers do the
negotiations, as opposed to a legislative mandate.
Representative Croft pointed out that the intent of the
legislation is to take some items out of negotiation. He
acknowledged that it is appropriate to have a "tax holiday"
but emphasized that the state could require a labor
negotiation contract. He noted that, under the state
Constitution, the state cannot require that Alaskan workers
and contractors be hired, but the state can influence Alaska
hires through negotiations. The best way to assure Alaskan
hiring is through a PLA. He emphasized that as the state
gives away a substantial amount of state and municipal
property tax that there should be a requirement to hire
Alaskans by the most effective manner [a PLA].
Representative Hudson summarized that the amendment would
require a PLA as opposed to requiring an attempt to
negotiate where possible. He noted the difficulty of
reaching agreements in all cases and stated that he would
support the amendment with the addition of "where possible".
Representative John Davies clarified that the amendment
would only require a negotiation.
Representative Whitaker questioned what would happen if the
negotiations were unsuccessful. Representative Davies
indicated that the project would continue unhindered.
Representative Hudson reiterated his desire to see "where
possible" added to the amendment.
Representative John Davies MOVED to AMEND Amendment 3: add
"where possible" after "obtain" on line 5. There being NO
OBJECTION, it was so ordered. Amendment 3 was adopted.
Co-Chair Mulder WITHDREW his OBJECTION. There being NO
OBJECTION, it was so ordered and Amendment 3 was adopted.
Representative Whitaker MOVED to ADOPT Amendment 4. Co-Chair
Mulder OBJECTED.
Representative Whitaker explained that the amendment would
change the tax holiday to a tax deferral. The potential
revenues would be deferred until they could be paid back.
Sometime in the future the tax repayment would be negotiated
if the project were successful. Section 4 would clarify that
there is no new tax referral on the existing infrastructure.
He observed that the intent is to help with the upfront
costs to the producers while protecting the interests of the
citizens.
Vice-Chair Bunde spoke against the amendment. He stressed
that producers would be content to go elsewhere. He
emphasized that "100 percent of something is better than
100 percent of nothing."
Representative Hudson clarified that the cutoff date would
be 2015.
Co-Chair Mulder spoke against the amendment. He did not
characterize the legislation as a "give away". He observed
that this is the first time that producers have been
interested [in developing an Alaskan natural gas project]
due to positive changes in federal legislation. He stated
that he is willing to make a $500 - $700 million dollar
investment in order to get 50 years at $250 million dollars
a year. When the gas pipeline comes on line the state should
negotiate to recover costs. It is a legitimate negotiated
item, which should occur under HB 393. He pointed out that
the tax holiday is tied to the Stranded Gas Act. The holiday
would only occur if there were negotiations.
PAT POURCHOT, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
provided information on the legislation. He noted that the
department prefers the overall negotiation structure of the
Stranded Gas Act to address the issues involved. He observed
that once specifics are separated, difficulties occur in
backtracking. He stated that how municipalities would be
compensated for very real impacts during construction, when
there is a statutory exemption from property tax, is a
legitimate concern. He acknowledged that adoption of
Amendment 1 would help to mitigate concerns, but stressed
that it is complicated to negotiate after the fact. He felt
that it was conceivable that there would not be a
resolution. He argued that it would be appropriate to
[negotiate repayment] up front. He acknowledged that the
Administration would try to negotiate further under the
terms of the Stranded Gas Act, but emphasized that something
would have to be given up in the negotiations if taxes have
already been taken off.
Representative Hudson asked if the intention of the
amendment would be to allow some forgiveness. He questioned
if a new subsection could be added: "When in the state's
best interest the deferral could be made permanent." He
observed that there might be occasions when the best
interest would be to make a deferral permanent.
Representative Whitaker stressed that the current language
would allow the option of a permanent deferral.
Co-Chair Mulder interpreted the amendment to mandate a
deferral. Representative Whitaker pointed out that the
amendment states that: the commissioner shall negotiate the
amount of and the period of repayment of tax deferred". He
stated that he would accept a friendly amendment to change
the amendment to "may".
Co-Chair Mulder referred to section 4: deferral of state tax
collections. Section 4 notes that the collection of the tax
imposed by the amendment is deferred for collection. He
concluded that the amendment is a mandate.
Representative Whitaker interpreted "negotiate" to mean that
the range of possibilities is not limited. He stressed that
if there is no money to pay back, then the conclusion would
be that the negotiation would not allow for a repayment
schedule.
Representative John Davies questioned what would be the
hammer that closes the negotiation. He noted that a company
could continue negotiations indefinitely. Representative
Whitaker responded that the court system would determine a
negotiation impasse.
Vice-Chair Bunde asked if there is anything in the
legislation that would prevent an increase.
Representative Croft observed that taxpayer and commissioner
would negotiate the amount of and period of repayment. He
concluded that the addition of "amount" indicates that there
could be a holiday, but that it would need to be proved that
a holiday is necessary. He felt that the state was
negotiating poorly on the issue [by giving a tax holiday].
Producers have provisions in federal legislation pending
that would set a minimum price on the gas, which would take
the risk out of the project. The only question becomes: How
much money can be made at that price. The risk is taken out.
There is a structure under the Stranded Gas Act for
producers to demonstrate to the state of Alaska that it is
not enough. He questioned why the state is circumventing the
Stranded Gas Act to give away something that is no longer
needed with the federal floor for the project to proceed.
The amendment would presume deferral but ask to be shown the
necessity.
Representative Croft referred to the method of negotiation.
He stressed that the main negotiation point is being given
away before the necessity is demonstrated. There should be a
presumed deferral unless they show a holiday is needed. He
compared state employee negotiations and questioned if it
would make sense to pass a pay raise and then try to
negotiate working conditions. The main issue would be given
away before anything was conceded.
Representative Whitaker maintained that it would be
unreasonable to try to tax the industry if the state finds
that the project is not profitable. The intention is to
further a project in a reasonable manner that precludes
unreasonable action in the future. He observed that the
Stranded Gas Act allows negotiation if a need is
established.
Co-Chair Mulder questioned what is "reasonable". He
maintained that a $700 million dollar "kick start" is
reasonable when the return to the state is considered. He
observed that no one has negotiated to this point in time.
No one has come to the table; no one has negotiated under
the Stranded Gas Act. The intent is to bring producers to
the table and to get them to put an application in if HB 393
takes place. He did not think the project would happen
without [the tax holiday].
TAPE HFC 02 - 95, Side B
Co-Chair Mulder noted that the federal delegation has
indicated its desire to see a state effort toward
encouragement of the project.
Representative Hudson summarized that the choice is between
an out right holiday or a deferral. He suggested that the
amendment be amended: to insert "terms of" and "forgiven".
Representative Whitaker stated that he would welcome the
amendment.
Representative Hudson emphasized that the deferral would be
subject to negotiation, which is a holiday, depending on the
contractual relationship with the state of Alaska.
Representative Whitaker spoke in support of the amendment to
Amendment 4. Representative Croft felt that the federal
provisions, which provide a floor and tax credits (to make
the floor of $3.25) should be mirrored. He noted that the
federal government does not just give without a quid pro
quo. There would still be a significant advantage.
Representative Hudson MOVED to Amend Amendment 4: to insert
"terms of" and "forgiven". Representative Whitaker stated
that he would welcome the amendment. There being NO
OBJECTION, Amendment 4 was amended.
RECESSED
The meeting was recessed at 10:13 A.M.
RECONVENED
The meeting was reconvened at 2:35 P.M.
Representative Hudson observed that the references to the
Stranded Gas Act in Amendment 4 amended would need to be
added. He MOVED to AMEND Amendment 4 by adding:
*5ec --. AS 43.82.210(a)(2) is amended to read:
(2) oil and gas exploration, production, and
pipeline transportation property taxes under AS 43.56;
a periodic payment in lieu of the tax described in this
paragraph shall include an amount that takes into
consideration amounts of the tax that, after
negotiation, are deferred or forgiven under AS
43.56.035(c)
*Sec -- . AS 43.82.210(a)(6) is amended to read:
(6) municipal property taxes under AS 29.45.010 -
29.45.250 or 29.45.550 - 29.45.600; to the extent that
taxes described in this paragraph include oil and gas
exploration, production, and pipeline transportation
property taxes under AS 43.56 on a qualified project
that are subject to limitation of municipal levy by AS
29.45.080, a periodic payment in lieu of the tax
described in this paragraph shall include an amount
that takes into consideration amounts of the tax that,
after negotiation, are deferred or forgiven under AS
43.56.035(c)
There being NO OBJECTION, Amendment 4 was amended.
Representative Lancaster questioned what would happen with a
change of ownership. Representative Whitaker thought that
liabilities, responsibilities and opportunities would
transfer with the ownership.
Co-Chair Mulder noted that in addition to changing the
"exemption" legislation to a "loan" bill that the loan would
expire when the project is placed in service. The
legislation currently allows 24 months after the project
comes on line to allow for ramp up.
Representative Whitaker noted that Amendment 5 would not be
offered, which would have addressed the issue. Amendment 4
would end the deferral period when the project is placed
into operation, or no later than December 31, 2015.
Co-Chair Mulder spoke against the amendment. He pointed to
the size of the project and emphasized that the project
would not be operating at peak capacity for a period of time
while the details of operation are worked out.
Vice-Chair Bunde envisioned that the project would occur in
stages. He questioned when the pipeline would be considered
to be in operation. Co-Chair Mulder responded that as soon
as the first molecule goes through.
Representative Croft noted that the automatic deferral ends
when the project is placed in service, but that there would
be an opportunity to negotiate a longer period; there is no
mandate.
Representative Whitaker stated that he would not object to
reinstituting the two-year deferral from the project date.
MICHAEL HURLEY, PHILLIPS PETROLEUM COMPANY, ALASKA, stated
that the amendment would change the legislation from an
exemption to a loan. The payback would be unspecified. He
stressed that the assumption would be that the loan would be
repaid as soon as possible. The deferral sends a different
message. The value of the bill would be in how the project
is negotiated, but it would not provide a tool that he could
take to his management. He would assume a conservative
position in regards to the project.
Representative Harris noted that the producers are receiving
a boost from Congress and questioned how much difference the
change in the legislation would make. Mr. Hurley stated that
it would make a difference. Sub-economic projects would not
become economic through the adoption of the legislation.
The size of the exemption with the impact of lower tariffs
on increased royalty and severance taxes to the state is a
lot smaller. The exemption would reduce the tariff by a
nickel; that nickel flows through the oil head value and
generates additional value in severance and royalty to the
state.
Representative Croft asked if the federal legislation would
be in the form of a tax deferral. Mr. Hurley explained that
the floor is setup to score zero. He did not anticipate the
floor to be used and it has no impact on the economics; it
changes the risk profile of the project. The intent is to
reduce the risk with market volatility.
Representative Croft questioned if there are provisions to
payback the tax credit. Mr. Hurley affirmed and explained
that the repayment would occur at 150 percent of the floor
value.
Representative Whitaker summarized that the legislation with
the addition of Amendment 4 amended would be an interest
free loan that would not be paid back until 2017, subject to
negotiations in 2017; and as result of the negotiations the
loan could never be paid back.
Representative Hudson explained that he added a negotiation
for deferral and forgiveness to provide something more
substantial to take to the investors. Mr. Hurley noted the
value of clarity and certainty regarding the tax status, but
emphasized that oil companies do not want to be in a
position to pay a lot in lawyer fees in order to achieve
clarity.
Vice-Chair Bunde asked if the state would be more or less
likely to see the construction of a gas pipeline in the next
five years [with adoption of Amendment 4 as amended]. Mr.
Hurley responded that it would be less likely.
Representative Whitaker noted that it would be more likely
if all taxes were taken off forever. He observed that over
the term of its life the project would be worth $1 billion
dollars. He emphasized that the Legislature must refer to
the Constitution and maximize the public interest and
benefit. He concluded that Amendment 4 as amended would
allow the possibility to achieve maximum benefit, while
providing incentive. He observed that the gas pipeline has
been in consideration for a long time. He stressed that it
is the duty of the Legislature to uphold the provisions of
section 8 of the Constitution.
Co-Chair Mulder stressed that there is little benefit if
resources stay in the ground.
A roll call vote was taken on the motion to adopt Amended
Amendment 4.
IN FAVOR: Davies, Hudson, Lancaster, Moses, Whitaker, Croft
OPPOSED: Foster, Harris, Bunde, Mulder
Co-Chair Williams was absent from the vote.
The MOTION PASSED (6-4).
Representative Whitaker WITHDREW Amendment 5.
Representative Whitaker MOVED to ADOPT Amendment 6:
"deferral is not allowed as to taxable property used
by the taxpayer
(A) that, on the effective date of this section
or at any time before that date, is subject to
tax under this chapter;
(B) to inject natural gas into a reservoir in the
course of operations for purposes of
repressuring or conservation, including
enhanced recovery; or
(C) in conjunction with gas consumed for
production operations for the lease or property
from which it is recovered.
Co-Chair Mulder OBJECTED.
Representative Whitaker explained that the amendment would
clarify exemptions and leave no gray area in regards to what
is covered.
Co-Chair Mulder summarized that the thrust of the amendment
is to assure that only those things associated with the gas
pipeline be exempted. He observed that Commissioner Pourchot
is working on an amendment to implement the intent. He noted
that he did not disagree with the concept but questioned if
the amendment would succeed. The issue is complex.
Representative Croft noted that the pipeline should
automatically be exempted. Other items might be part of the
negotiations.
Representative Whitaker WITHDREW Amendment 6.
Representative John Davies MOVED to ADOPT Amendment 7. Co-
Chair Mulder OBJECTED. Representative John Davies stated
that the intent is to draw the line with the pipeline and
take other conditions out of the exemption. He WITHDREW
Amendment 7.
Representative John Davies WITHDREW Amendments 8 and 9.
Co-Chair Mulder MOVED to ADOPT Amendment 10:
Page 7, lines 21 - 22:
Delete "until December 31 of the second calendar year after
the calendar year in
which the project is placed in service"
Insert "until 24 full calendar months after the project is
placed in service"
Page 7, line 23:
Delete "December 31, 2015"
Insert "December 31, 2012, but the cc
project construction has commenced if that
construction is delayed due to litigation or to
shortages of supplies for construction that are not
due to or under the control of a
taxpayer who is a producer, as that term is defined in
AS 31.05.170, or not due to or
under the control of a project sponsor"
Co-Chair Mulder explained that the amendment would provide
certainty and allow the commissioner to extend the
exemption.
Representative Croft questioned if [the deferral] could go
past the year 2015. Co-Chair Mulder stated that it could. He
explained that it is difficult to determine the reasonable
point. The three biggest issues are permitting, litigation
and type of availability. If the permitting and litigation
aspects are extended the timeline could be continued. The
amendment encourages prompt development but recognizes that
there may be some circumstances beyond the producer's
control.
Representative John Davies MOVED to AMEND Amendment 10:
delete "24" and insert "12".
Representative Hudson thought that testimony indicated that
it would take at least a year and perhaps another 6 months
to come into full production. He spoke in support of 24
months.
A roll call vote was taken on the motion.
IN FAVOR: Croft, Davies, Moses
OPPOSED: Bunde, Foster, Harris, Hudson, Lancaster,
Whitaker, Williams, Mulder
Co-Chair Williams was absent from the vote.
The MOTION FAILED (3-7).
There being NO OBJECTION, Amendment 10 was adopted without
amendment.
HB 519 was heard and HELD in Committee for further
consideration.
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