Legislature(2015 - 2016)BELTZ 105 (TSBldg)
01/28/2016 03:30 PM Senate COMMUNITY & REGIONAL AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SB100 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 100 | TELECONFERENCED | |
SB 100-NORTH SLOPE GAS PROJ PROP TAX; ASSESSMENT
3:31:40 PM
CHAIR BISHOP announced the consideration of SB 100. He noted
that the bill was reviewed during the interim and the purpose of
the meeting is to provide the committee and the public with an
update. He stated that no action would be taken on the bill
today.
3:32:33 PM
SENATOR MACKINNON asked whether public testimony would be taken
today.
CHAIR BISHOP answered yes.
3:32:49 PM
RANDALL HOFFBECK, Commissioner, Alaska Department of Revenue
(DOR), presented information on Payment in Lieu of Taxes (PILT).
He explained that last year DOR submitted SB 100 as a structure
for negotiating a PILT under the provisions of SB 138. The bill
was structured on "how to negotiate a PILT," however, soon the
department realized that a different strategy was needed. The
structure of negotiating a PILT was not going to result in a
final resolution; the numbers had to be negotiated.
3:33:00 PM
CHAIR BISHOP noted the arrival of Senator Hoffman.
COMMISSIONER HOFFBECK reported that a tentative alignment had
been reached with the producer parties on the amount of
construction-related payment in lieu of tax (CPILT) and on the
structure and target amount for operations-related payment in
lieu of tax (OPILT). These agreements have to do with how the
state will deal with impacts during construction and with PILT
payments during the operation of the pipeline.
3:35:01 PM
COMMISSIONER HOFFBECK further explained CPILT. The total amount
of impact payments during construction is $800 million and
includes BP, Conoco-Phillips, Exxon, and AGDC because the
project will be paying the PILT. There is some question still
regarding AGDC's portion, whether the state will pay itself a
PILT, and how much the municipalities will get.
3:36:01 PM
SENATOR MACKINNON asked whether the project and the state's
ownership of the project would be exempt from federal taxes.
COMMISSIONER HOFFBECK offered to get back to Senator MacKinnon.
SENATOR MACKINNON explained her question relates to the benefit
of the state's 25 percent ownership of the project.
3:36:52 PM
COMMISSIONER HOFFBECK explained that the expected payout would
be over the five-year construction period. The schedule of
payments has not been finalized.
SENATOR STEDMAN requested a breakdown of the total amount of
$800 million and to know whether DOT has a list of targeted
infrastructure improvements.
COMMISSIONER HOFFBECK explained that the $800 million was
negotiated and is about four times the amount negotiated under
"stranded gas," as far as impact payments. He noted it was early
in the process and there is no project design or construction
schedule. It would be difficult to construct a PILT at this
time. The amount does not include infrastructure, which will be
paid elsewhere in the project. It does cover impacts to
communities, such as the need to hire police, teachers, fire
fighters, etc.
SENATOR STEDMAN asked how the number was derived and the
mechanics behind it. He pointed out that some projects do not
require a PILT.
3:39:14 PM
COMMISSIONER HOFFBECK answered that the allocation of the $800
million is under discussion with the Municipal Advisory Gas
Project Review Board (MAGPRB). There are two sides to the issue,
the cost of the PILT - which is critical for the project, and
the allocations - which are between the state and the impacted
communities. The dollar amount was settled and now the
department is working on the allocations. He said they are
looking at a "grant" program where the municipalities would
apply for impact funds. He stressed that it is early in the
process.
CHAIR BISHOP noted there would be a more in-depth discussion in
the future.
3:41:12 PM
COMMISSIONER HOFFBECK provided information on the OPILT, whose
target amount totals $15.7 billion to be paid out over the 25-
year period of the contract. The actual payment amounts will
vary based on the average five-year flow rate against project
design. The payments could exceed, or be less than, $15.7
billion in the case of expansion or interruptions. He said BP,
Conoco-Phillips, Exxon, and AGDC are included in the contract.
The payment schedule incorporates a 1 percent increase in
payment each year, which is included in the target amount.
He related that currently there is discussion between the state
and local jurisdictions regarding payout allocations.
3:42:56 PM
COMMISSIONER HOFFBECK addressed the methodology used to
determine the OPILT. He explained the initial formula that was
used. It was the first iteration of taking current property tax
statutes and simplifying them into a formula that would derive
an estimated payment that would be equivalent to what status quo
would have generated under property tax structure. There were
simplifying assumptions and projections made in order to run out
25 years. He said the idea was to replicate current statutory
language, as interpreted by the Supreme Court in the TAPS
litigation.
COMMISIONER HOFFBECK highlighted the initial formula: the
capital cost times an inflation factor, times a depreciation
factor, times a functional obsolescence calculation for
throughput, with a scaling factor attached, times the mill rate.
He noted that is how TAPS is being valued currently. He said
MAGPRB also made recommendations for inputs and said the capital
costs should be the FID estimate times 1.1, the cover overrides,
with the inflation factor at 4 percent, appreciation based on a
50-year floating life, with actual throughput on a five-year
floating average, and the actual scaling factor would be one.
3:45:10 PM
SENATOR STEDMAN pointed out that it appears that property taxes
would be a big portion of the value the state would receive and
the weighing of that will be significantly higher than that of
the oil line. For example, when TAPS was set up there were 20
mills and the weighting of the property tax was not that
significant, yet today, the property tax is a significant
portion. He questioned the use of 20 mills today and cautioned
to not drive too much value to too few communities because the
asset is owned by everyone in the state. He stated great
interest in the impact of the dollar flow.
3:48:28 PM
COMMISSIONER HOFFBECK explained that the reason 20 mills is part
of the formula is because the starting point for PILT is what
would have been paid in property tax if the PILT did not exist.
He stressed that in all the hearings it was made clear to the
municipalities that they should not have an expectation that
monies would flow the same as they did under the current tax
statutes. Within the PILT structure will be an allocation method
whereby the state would reserve a substantially greater portion
to themselves and use statewide allocations, as well as direct
impact allocations. He said that is the position MAGPRB is
taking right now. He predicted the discussion of allocations
would be a difficult one. He stressed that the decision-making
was up to the legislature.
3:50:22 PM
SENATOR MACKINNON asked if the state owns a portion of the
property the proposed route will take and whether the state will
receive a PILT payment.
COMMISSIONER HOFFBECK answered that a good portion of the
property runs through unincorporated portions of the state where
the state would have the taxing authority.
SENATOR MACKINNON noted her interest in seeing charts depicting
how the money will move; the $200 million fronted money and the
receiving money.
COMMISSIONER HOFFBECK offered to provide that information.
3:51:35 PM
COMMISSIONER HOFFBECK described the modified OPILT formula,
which he called a simplified version of the TAPS litigation and
the basis of SB 100. The formula is the original cost, times the
inflation factor, times the depreciation factor, times a
throughput factor, times 20 mills. The inputs were not defined
and will be negotiated. He explained that the original cost
would be fixed by pre-FID project specific data. The inflation
factor and the depreciation factor would be fixed by the fiscal
agreement. The actual throughput is the operational measurable
throughput. The design throughput would be fixed by pre-FID
project specific data, and the mill rate would be fixed by
statute.
3:52:43 PM
COMMISSIONER HOFFBECK highlighted the current OPILT formula,
which was reached by tentative alignment and includes input. The
formula includes original cost, times an escalation factor,
times a depreciation factor, times a throughput adjustment,
times a blended mill rate. The original cost was assumed to be
$55 billion, which the project participants want to lower. There
is no true up included against actual cost.
3:53:56 PM
SENATOR MACKINNON asked if the gas treatment plant and off point
are included, or if just pipeline is included.
COMMISSIONER HOFFBECK replied that it includes the feeder
pipelines, the gas treatment plant, the pipeline, and the LNG
plant.
SENATOR MACKINNON asked whether the valuation method uses
property values in distant communities and all capital costs are
included, not just the cost of the pipe and the transmission of
volume.
COMMISSIONER HOFFBECK said that was correct.
CHAIR BISHOP asked if the $55 billion amount is "hard and fast,"
even if there is a $5 billion overrun.
COMMISSIONER HOFFBECK said that was correct. It is also hard and
fast if it comes in at $50 billion.
COMMISSIONER HOFFBECK continued with an explanation of the
current formula's escalation factor of 2.5 percent, which is a
composite of a 3.25 percent inflation rate, minus a .75 percent
adjustment for obsolescence of technology that would occur over
25 years.
3:55:42 PM
COMMISSIONER HOFFBECK explained that the depreciation factor is
based on a 30-year life and is a modified floating/fixed life.
There were two positions regarding the pipeline. The floating
life position was for gently reserved growth over the life of
the assets with an expectation of more reserves at the end of
the 25th year than were estimated at the beginning of the life
of the pipeline and the pipeline would not be empty at 30 years.
The department proposed that for every year the pipeline aged,
it would "grow a year," as well. So, at 30 years, the pipeline
would be 30 years old with a 60-year life.
He said the producers' position was that the life of the
pipeline should be fixed over 30 years and its value would
decline. A compromise was reached that blended the two
positions, ending up that the life would increase by a half a
year every year of the life of the asset.
3:57:31 PM
SENATOR STEDMAN asked what would happen after 30 years.
COMMISSIONER HOFFBECK answered that the assumption is that the
pipeline valuation would revert to standard property tax. The
expectation is that before the end of the contract, the parties
would seek to negotiate an extension. The Municipality Advisory
Group's report to the Governor provides for the option to re-
negotiate the PILT.
SENATOR STEDMAN noted Sitka's paper mill used to have a 3.5 mill
rate that worked fine for the community. He pointed out that
there is a big difference between 3.5 mills and 20 mills. He
said property tax is a heavy burden. He requested the department
explain the estimated split on the value stream coming into the
state, including royalties and property tax.
4:01:10 PM
COMMISSIONER HOFFBECK commented that the relative size is driven
by the price point on the gas. He agreed that there is a price
point on gas where this project is still viable where the
property tax could be as much as a third of the total take. That
is also a benefit to the state because if gas prices fluctuate,
there will be variable revenue. The property tax stream would be
the one fixed revenue stream that the state could count on which
the others don't have.
SENATOR STEDMAN noted his concern about the one-third value and
how it is split up. He called attention to British Columbia's
solution of an impact fund. He pointed out that Southeast Alaska
is not going to have much control over this project, but he
expected fair allocation of resources.
COMMISSIONER HOFFBECK related that under any of the proposals,
the state would get the largest share from PILT.
4:03:57 PM
COMMISSIONER HOFFBECK turned to the actual throughput under the
current formula, which is based on operational measurable
throughput on a five-year rolling average that buffers loss by
interruptions in revenues. He said design throughput has yet to
be determined. The department is reviewing a proposal by the
producers on how to allocate the PILT to the various portions of
the pipeline, where to measure the gas, and how much value to
associate with each section in order to reach the $15.7 billion
total.
SENATOR BISHOP commented that throughput is measured at pump one
for TAPS. He asked if there would be three measurements taken
along this project.
COMMISSIONER HOFFBECK said that was correct. He explained that
the reason was to deal with expansion or introduction of gas
into the pipeline at some point downstream.
4:05:38 PM
COMMISSIONER HOFFBECK addressed the mill rate under the current
formula, which is a blended rate at 13.75 mills. That is 20
mills for the gas treatment plant, 20 mills for the pipeline,
and 7.5 mills for the LNG plant. The reason for a lower rate for
the LNG plant is because it is locally assessed under current
statute. The 7.5 mill rate for the Kenai Peninsula Borough was
done by the state in consultation with the Borough.
SENATOR STEDMAN asked what taxing authority the Kenai Borough
may gain or lose due to the new $25 billion plant.
4:07:25 PM
COMMISSIONER HOFFBECK replied that currently their mill rate is
slightly over 10 mills and a new asset will have an effect on
the mill rate. The Borough estimated a mill rate range, and
Commissioner Hoffbeck said he chose a number within that range.
CHAIR BISHOP clarified that with the upcoming plethora of assets
soon to appear in the Kenai Peninsula Borough, they tentatively
agreed to handicap themselves down to a 7.5 mill rate.
4:09:10 PM
COMMISSIONER HOFFBECK said that was true only to the extent when
trying to calculate what the status quo property tax would have
yielded. There will ultimately be a PILT regarding the LNG
asset.
SENATOR MACKINNON discussed how property taxes use valuation to
extract a payment for services in a community. She said it begs
the question of what needs for new services the new asset will
create. She shared her experience in Anchorage with taxation.
She questioned the fairness of using valuation as a base. She
asked if it was defined like that in statute.
4:11:27 PM
COMMISSIONER HOFFBECK said it was. He related that under
property tax theory, land ownership and ownership of assets is
an indication of ability to pay. Taxation is not tied to the
impact a development might have on the community or the needs it
engenders, but is an indication of the ability of the entity to
pay the tax.
SENATOR MACKINNON spoke of California's impact fees for new
housing developments based on a "cost causer/cost payer" idea.
4:12:56 PM
COMMISSIONER HOFFBECK said the current formula "got us to the
$15.7 billion," but must be converted to a PILT. There were two
ideas that need to be embedded in the PILT. The first one is
that governments do better with escalating revenues. This can be
done by starting at a lower starting point to get to $15.7
billion. It also reduces early payments when the project is most
economically challenged.
SENATOR MACKINNON asked what the thousand cubic feet (MCF) gas
price in the model was.
COMMISSIONER HOFFBECK answered that it is not sensitive to the
gas price, only the cost of construction and the throughput.
SENATOR MACKINNON noted the state's facing a $4 billion deficit
currently and not much profit in oil. She said she has been told
there is less profit in gas. She inquired what MCF number would
generate half a billion dollars a year going forward to pay
property taxes, which could be a third of the state's profits.
4:15:21 PM
COMMISSIONER HOFFBECK said they could run that analysis, but it
would be largely based on producer information of costs and
return investments.
SENATOR MACKINNON requested that information.
SENATOR STEDMAN asked if PILT, at one-third, was a fixed cost
and whether the remaining royalty share would be very sensitive
to the gas end price and would fluctuate depending on the market
environments.
COMMISSIONER HOFFBECK said yes, to the extent that on the spot
market, versus on long-term contracts, that price could
fluctuate. He clarified that the one-third amount was just at a
price point where the pipeline was still a viable project. If
the gas is at a substantially higher rate, the one-third goes
down very quickly.
4:17:17 PM
SENATOR MACKINNON wished to know "the ballpark we're playing in"
and if local communities are assuming $15 billion is coming
their way. She said she wants to be realistic in discussions
with communities.
CHAIR BISHOP commented that the state has 25 percent of the
risk, too.
COMMISSIONER HOFFBECK agreed. He noted that most of the mayors
were sensitive to the fact that some of their early decisions
were made in order to help accommodate the project to move
forward.
4:18:44 PM
COMMISSIONER HOFFBECK discussed the conceptual project benefits
from PILT target payments. He said there are two areas where the
agreement provides some relief on the front end where the
project is most challenging due to low cash flow. One is the
CPILT at $800 million, which is between a half and a third of
what the project would have collected under a standard property
tax regime. For the first five years of the project, CPILT would
lessen the burden. He explained that the second economic benefit
is the five-year floating average of throughput. It also
benefits municipalities by providing stability of payments in
the out years.
4:20:39 PM
COMMISSIONER HOFFBECK turned to OPILT target payment components
yet to be determined. He said the agreement still needs work on
the volume for setting the design rate.
CHAIR BISHOP asked if those numbers have yet to be determined
due to a possible change to a 48-inch pipeline.
COMMISSIONER HOFFBECK said that was correct, however, the
contract has been negotiated so the throughput will be based on
a design that is commensurate with $55 billion. If the pipeline
goes to 48 inches instead of 42 inches, that would allow for
greater throughput and would increase the target payments.
Rather than having to go back and re-calculate everything, tying
everything to the throughput allows those kinds of changes in
the discussion. The process is dynamic.
4:22:31 PM
SENATOR STEDMAN asked how hard the numbers actually are. He
stated a goal to move smoother than during the TAPS process.
COMMISSIONER HOFFBECK explained that this would be a part of the
fiscal package for the pipeline and part of the contract, and
the PILTs would be set for 25 years.
SENATOR STEDMAN stated that he looks at it as the difference
between "how we engage and make agreements with our three
partners, versus how we interact with the state's portion." He
said he understood that this would be tied down for 25 years and
the state would be giving up its appropriating power when
dealing with the property tax issue on the gas line for that
period. He stated that he is talking about changing the state's
internal 25 percent, not the partnership split. He asked why the
state should do that.
COMMISSIONER HOFFBECK clarified that "this is not part of the
cash flow for our 25 percent, this is a separate cash flow with
the project." He explained that the allocation between the state
and the municipalities can be left as open-ended as the
legislature feels necessary. The important part for the project
is total dollars, in order for the producers to calculate the
economics of the project in relation to all the other negotiated
components. The statutory language regarding the state and the
municipalities would be in the hands of the legislature.
4:24:53 PM
SENATOR STEDMAN asked if this is in addition to the 25 percent.
COMMISSIONER HOFFBECK said it was.
SENATOR MACKINNON clarified that the state is part of a
megaproject and has a 25 percent ownership in that project.
COMMISSIONER HOFFBECK agreed.
SENATOR MACKINNON asked whether Governor Walker is bringing
forward a fiscal package with various components that affect
project viability and the economics of that project. There are a
variety of fiscal certainties needed in order for the state and
its partners to enter the project and make it successful.
COMMISSIONER HOFFBECK said yes - there are certain contracts
that give certainty on both sides that need to be negotiated.
SENATOR MACKINNON summarized that there is a gas price, as far
as taxing on a production level, in a different bill and a
second component, property tax, in SB 100, and that value is
made certain for the state and its parties through a PILT.
4:26:37 PM
COMMISSIONER HOFFBECK said that was correct.
SENATOR MACKINNON understood that as long as the fixed total of
the property tax stays the same, the state can do what it wants
with its share and it will not affect the project's economics.
She asked whether it is up to the legislature to decide to share
more or less with the municipalities or whether the
municipalities can count on that agreement staying fixed over 25
years.
COMMISSIONER HOFFBECK said that answer is still to be determined
and MAGPRB is clarifying their position. It has been made clear
to MAGPRB by the state that the expectation is the legislature
will determine the proper way to make allocations.
SENATOR STEDMAN noted comments on the royalty share made at a
Senate Resources Committee meeting the previous day, where it
was stated that the property tax component was part of the 25
percent. He asked for clarification.
COMMISSIONER HOFFBECK offered to look into it.
4:28:34 PM
COMMISSIONER HOFFBECK returned to the subject of OPILT target
payment components yet to be determined. It has not been decided
whether the flow rate measurements will be based on Mcf
(thousands of cubic feet) or mmbtu (millions of British Thermal
Units). Whether the measurement location will be taken at each
component (GTP, Pipeline, LNG) individually or at one location
for the entire project has not been decided. Also undecided is
whether the measurement will be taken at the inlet or the outlet
of project components.
SENATOR MACKINNON questioned the flow rate measurement and asked
whether there would be individual propane offtakes for
communities in rural Alaska.
COMMISSIONER HOFFBECK said that would be part of the discussion
and there could also be gas offtakes. The PILT would have to be
set at the place it is measured.
SENATOR STEDMAN voiced concern about the possibility of
disproportionate payments to small areas of the state and the
state's appropriating power.
4:30:45 PM
CHAIR BISHOP thought that the flow rate measurement was already
known based on Prudhoe Bay gas and might be quickly decided.
COMMISSIONER HOFFBECK said the producers have provided the
department with multiple scenarios to choose from.
4:31:45 PM
COMMISSIONER HOFFBECK addressed the next steps for MAGPRB: they
need to provide recommendations on proposed structure and target
amounts for CPILT and OPILT in their report to the Governor,
provide recommendations on allocation and disbursement of
payments among state and local jurisdictions, draft the 2015
MAGPRB Annual Report, and provide recommendations legislation.
4:32:49 PM
CHAIR BISHOP noted that this is an early discussion of the PILT.
SENATOR STEDMAN commented that it would be nice to see how other
jurisdictions deal with this issue.
COMMISSIONER HOFFBECK replied that there were discussions with
the producers, particularly on construction impact payments,
where some of their other agreements were shared. He pointed out
that a PILT agreement to cover construction impacts is common.
4:34:31 PM
CHAIR BISHOP asked that Commissioner Hoffbeck provide the
committee with the scenarios, if possible.
COMMISSIONER HOFFBECK agreed to do so. He stressed that the
agreement with the producers is tentative, the MAGPRB has been
brought along and informed and is in general alignment.
4:35:27 PM
CHAIR BISHOP opened public testimony.
4:35:36 PM
JEFF STEPP, Special Assistant, Office of the Mayor, Fairbanks
North Star Borough, testified in support of SB 100. He related
that Mayor Kassel has been a member of MAGPRB since November of
2015. Much of the work on PILT had already been completed at
that time. He voiced appreciation for the work that has been
done on PILT by various entities, but said there is still much
work to be done by all stakeholders so the commercialization of
gas becomes a reality and benefit all Alaskans.
4:37:54 PM
CHARLOTTE BROWER, Mayor, North Slope Borough, testified in
support of SB 100, with revisions. She recalled the passage of
SB 138, which created the framework for the Alaska Gas Pipeline
Project. She noted a primary concern regarding how the state
would address property taxes on the project. She said that
taxable oil and gas properties represent 97 percent of the North
Slope Borough's full value determination. The Borough has a good
working relationship with the oil companies and experience with
property taxes and PILT.
She said the Borough is looking at further development with the
LNG project and would like to see the project also benefit
fellow Alaskans. She suggested that the system SB 100 determines
should be allocated with respect to the location and value of
the respective assets. Once the system and allocation plan has
been agreed upon by the municipalities, state, and producers,
the Borough would like to see annual payments made directly from
the taxpayers to the impacted municipalities. She stressed the
importance of a direct payment.
4:42:25 PM
CLAY WALKER, Mayor, Denali Borough, testified in support of SB
100, with revisions. He said he has served on MAGPRB for the
past two years and supports their work. He pointed out that PILT
language is included in SB 138. He said he saw SB 100 as a
starting point, but it needs revisions. He described the MAGPRB
as being fair and reasonable for municipalities, the state, and
project partners regarding the tax structure. He thanked the
committee for its work.
4:44:03 PM
At ease.
4:44:35 PM
CHAIR BISHOP called the committee back to order.
4:45:20 PM
CHARLES MCKEE, representing himself, testified during the
discussion of SB 100. He requested transparency during the
process.
4:49:07 PM
CHAIR BISHOP closed public testimony.
4:49:44 PM
CHAIR BISHOP commented that he feels honored to work with such a
fine committee. He held SB 100 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 100 Fiscal Note.pdf |
SCRA 1/28/2016 3:30:00 PM |
SB 100 |
| DOR MAGP Board Review Final - 1 28 16.pdf |
SCRA 1/28/2016 3:30:00 PM |
SB 100 |
| SB 100 Mayor Brower Testimony 1.28.16.docx |
SCRA 1/28/2016 3:30:00 PM |
SB 100 |