Legislature(2009 - 2010)HOUSE FINANCE 519
03/18/2010 09:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB273 | |
| HB280 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 273 | TELECONFERENCED | |
| += | HB 280 | TELECONFERENCED | |
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."
10:48:19 AM
Co-Chair Hawker introduced Conceptual Amendment 4, which
clarifies that the benefit of the use of last-in, first-out
(LIFO) inventory management would apply only to open-access
storage facilities that qualify for the financial
incentives in HB 280. He emphasized that the LIFO
preferential accounting treatment would not apply to
privately-owned or proprietary storage, defined as the
warehouses in which a producer stores their own gas before
delivery.
Co-Chair Hawker MOVED to ADOPT Conceptual Amendment 4:
Page 6, line 17, following "facility"
INSERT "regulated under AS 42.05.990(4)"
Page 12, line 12, following "facility"
INSERT "regulated under AS 42.05.990(4)"
Co-Chair Stoltze OBJECTED for discussion.
MARCIA DAVIS, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE
testified that the department supported the amendment.
Co-Chair Stoltze WITHDREW his objection to the amendment.
There being NO further OBJECTION, Conceptual Amendment 4
was ADOPTED.
10:52:07 AM
Representative Gara queried the administration's position
on HB 280. Ms. Davis noted that the department supported
improving and encouraging a broader scope of well
expenditures, a concept applied statewide by the governor's
bill as well as to Cook Inlet. She pointed out that the
governor's bill differed in that it had a core concept of
exploration credits, whereas HB 280 had capital credits at
its core. She acknowledged that the issue could be
approached from both sides; each has different structural
changes that must be made.
Ms. Davis pointed out that the only other difference was
that the governor's bill has a 30 percent credit, while HB
280 has a 40 percent credit. She thought the change might
be justified as the 40 percent credit is targeted solely
for Cook Inlet.
Ms. Davis reported that the administration's first question
relates to HB 280's definition of the class of allowable
costs as Cook Inlet well lease expenditures for the
exploration and development phase. She thought the
definition was simplified as essentially a lease
expenditure that meets the Internal Revenue Code (IRC) 263
(intangible drilling cost rules). The department is
concerned because of two pending U.S. Congress bills that
would repeal the IRC provision, SB 1087 and SB 888. The
intangible drilling cost definition is close to the
department's qualified lease expenditure definition under
AS 43.55.023 [Alaska's Clear and Equitable Share (ACES),
Alaska oil and gas production tax credits, here called
"023"]. Since the definition of capital lease expenditures
is in place after a long regulatory process, she encouraged
the committee to consider using the same definition, which
includes the IRC 263 definition; this would enable Cook
Inlet explorers and developers to understand the rule
without waiting for further regulations.
Co-Chair Stoltze asked whether Congress would deal with the
IRC issue within the next 30 days. Ms. Davis replied that
regulations already in place that incorporate the same
concept and scope of cost might make the process easier.
Ms. Davis turned to the administration's second question;
on the production phase of the credit, HB 280 has done a
good job of restricting the costs allowed to those that are
wellhead and below. She cautioned that theoretically, the
costs associated with abandoning, plugging, or suspending a
well could directly relate to processes of operating a
well. She questioned whether the committee wanted a credit
for stopping production, when the intent is to add or
increase production.
10:57:40 AM
Representative Gara questioned whether the credit as
written in HB 280 would go to existing work that is not an
enhancement. Ms. David replied that the credit is broader
(although limited to Cook Inlet) and designed to cover
costs that are related to the operation of a well. The
credit is restricted to lease expenditure costs from the
wellhead down, including day-to-day operations. She pointed
out that lease expenditure is a broader concept than an
intangible drilling cost and not designed to encourage the
continued status quo operation of Cook Inlet wells as in
addition to the life-cycle of the production phase.
Representative Gara asked whether the credit as currently
written differentiates between capital costs that are
expended for enhancements and capital costs that are
expended for continuing operations. Ms. David replied that
he was correct.
10:59:52 AM
Co-Chair Hawker disagreed. He clarified that the
administration's concern related to Amendment 2 (previously
adopted by the committee). He stressed that the amendment
was intended to address intangible drilling costs related
to exploration and development and not the demobilization
period. He thought the department could clarify the intent
through regulation or the issue could be dealt with in the
legislative process. Ms. Davis agreed with Representative
Hawker's remarks about the exploration and development
phase. She was focusing on the on-going production phase.
She was referencing processes related to operating a well,
one of the categories. Another category is moving fluids to
assembly. She thought HB 280's definition of the cut-off at
the wellhouse was good.
Co-Chair Hawker noted that the well maintenance processes
facilitate and enhance recovery and lengthen the
productivity of an individual well site. He agreed that the
intent is to grant the benefit of the costs in calculating
lease operating expenses.
Representative Gara asked whether Co-Chair Hawker would be
open to language targeting the credit to enhanced
production, whether for a new well or a substantial
expansion of an existing production effort. Co-Chair Hawker
believed such language would be overly restrictive as the
bill is attempting to give the greatest possible latitude
to encourage production. He pointed out that the biggest
issue is wells at the end of production. He stressed that
maintaining production is a challenge; he did not want to
create anything that would require extensive regulation,
but wanted to promote production in Cook Inlet.
11:03:36 AM
Representative Gara also wanted to expand and continue
production and questioned how to make the distinction. Ms.
Davis responded that the governor's goal has clearly been
to provide tax relief or tax credits only where the state
receives some benefit in return. The question would be
whether the costs could be considered for wells at the end
of production. She claimed that language in the governor's
bill stipulated that well cost should increase or enhance
production from a known pool. She thought the definition
could establish that the well could be upgraded through the
expenditures.
Co-Chair Stoltze noted that the governor was historically
sensitive to Southcentral issues.
Co-Chair Hawker wanted to err on the side of promoting
investment in the Cook Inlet rather than erring on the side
of having the loss of credit compromise an investment
decision by an investor.
11:06:36 AM
Representative Gara hoped to work on language that would
not deprive someone of a credit if the credit would keep
them from closing a well; he also did not want to grant the
credit where it was not appropriate.
Ms. Davis turned to the administration's third question,
which related to Amendment 2. The department is concerned
about including an indirect cost element in a credit that
is supposed to be about direct costs. She stated that
subsection (o)(3) in the amendment represented a
substantial departure from other credits; a credit is
described in the subsection as being allowed based on a
cost associated with overhead expenditure. Under current
regulations describing lease expenditures (Section 165),
credits are supposed to be direct costs. A direct cost used
to include overhead, but 165(b) was amended to remove a
reference to overhead. Overhead is considered an indirect
cost. Current regulation tries to bypass the "nitpicking"
approach of trying to detail how overhead is calculated
under all the various agreements. Instead, calculation is
made by taking a flat percentage of direct costs; 4.5
percent of the taxpayer's total direct cost is allowed as
an indirect cost.
11:09:17 AM
CODY RICE, PETROLEUM ECONOMIST, TAX DIVISION, DEPARTMENT OF
REVENUE (via teleconference), reported that preliminary
information had been prepared and shared with the co-
chairs.
Ms. Davis added that the data regarding Cook Inlet credits
has been made available to the committee in written form.
11:11:01 AM
Co-Chair Hawker responded regarding subsection (o)(3),
stating that the degree to which the legislature wants to
allow credits for the lease operating expenses in Cook
Inlet is a policy call. He added that the intent of HB 280
was to maximize the attractiveness of investments in the
inlet for new drilling, expanded drilling, and maintenance
activities.
Representative Gara questioned whether the overhead
allowance would default to existing regulation if (o)(3)
were not in Amendment 2. Ms. Davis replied that there would
be the basic underlying lease expenditure allowance for
overhead, or 4.5 percent of the taxpayer's total direct
cost. The taxpayer would then take the dollar amount
identified and be able to deduct that overhead from the
gross profits. In this manner, the amount would be used as
a lease expenditure deduction against the sales price to
arrive at a production tax value and would not be
incorporated into any of the other credit provisions to
obtain an additional benefit associated with the
expenditure. She agreed that it was a policy call whether
to apply the 4.5 percent charge against the expenditures
identified as the Cook Inlet well lease expenditure
application and then add it to the credit amount. The
department would have to make a regulation describing the
process.
Representative Gara asked whether the number would default
to 4.5 percent without subsection (o)(3) in Amendment 2.
Ms. Davis noted that the 4.5 percent operating expense
deduction would be there regardless of what happens with HB
280.
Representative Gara asked whether HB 280 would add a credit
on top of the 4.5 percent. Ms. Davis responded that the
amount would be in addition; like other credits, the lease
expenditures are the base amount of all the costs that get
deducted from the proceeds to arrive at a production tax
value. In addition, different subsets of costs are
considered to calculate a credit; a specific expense might
get used as a deduction to create the net tax and also be
part of a credit.
11:15:51 AM
Representative Doogan queried the sponsor, related to
Amendment 2, subsection (o)(1), about possible problems
with "intangible drilling and development costs" under the
Internal Revenue Code. Co-Chair Hawker responded that he
did not know. He noted other concerns about Alaska codes
that are changing.
ROGER MARKS, CONSULTANT, HOUSE FINANCE COMMITTEE, explained
that there is precedent in statute for citing other tax
codes as they exist on certain dates. He suggested that it
would be very straightforward to say: "Cite the tax code as
it existed on the effective date of the bill."
Representative Doogan asked for clarification. Ms. Davis
responded that the challenge when a particular federal law
is repealed is finding out what it used to say. The
reference would be to the code not as an applicable law but
as a law that embodies acceptably descriptive language. The
department might have to embody the new language through
regulation if the code was repealed and became difficult
for taxpayers to find.
Representative Doogan wanted to make sure that the
legislature was not making a law that would "blow up." Co-
Chair Hawker discussed differences in the approaches.
Representative Doogan asked whether the language was
flexible enough to take into account the possibility that
the statute cited might go away.
11:19:56 AM
Ms. Davis offered to check with the Department of Law. She
assured the committee that language would be checked with
Legislative Legal Services to make sure the state statute
is viable.
Representative Gara asked how the provision could be
written to include the governor's proposal to apply the
credit to enhanced production or operations. Ms. Davis
explained that currently the bill has the underlying AS
43.55.023 (ACES) 20 percent capital credit, which would be
unaffected. The underlying AS 43.55.023(a) could not be
used to the extent that a taxpayer would prefer to utilize
subsection (m) [Section 11] as a credit. Instead of the 20
percent credit, the taxpayer would be electing a 40 percent
credit for a narrower subset of allowable expenses called
Cooked Inlet well lease expenditures. The option for the
taxpayer would be an AS 43.55.023 20 percent credit; to the
extent that the credit is related to exploration and
development, there is the AS 43.55.025 25 percent credit.
Cook Inlet would be a 40 percent credit. One of the options
has to be chosen.
Co-Chair Hawker noted that the enhanced investment credits
were originally applied to the North Slope. The difference
acknowledged higher risk with entitlement to higher credit.
He added that the perimeters did not apply to Cook Inlet.
Mr. Marks informed the committee how Amendment 2 was
intended to be structured and operate: in the universe of
lease expenditures, there are capital costs and operating
or non-capital costs. Under the statute, the capital costs
get a 20 percent credit under AS 43.55.023(a). Amendment 2
describes non-capital costs, which currently do not get
credits under the tax. The costs are a sub-set of operating
costs and do not include all operating costs. For example,
(o)(s) says "does not include the processes of gathering,
separating, and processing well fluids downstream from that
assembly." He pointed out that those would still be
considered lease expenditures under the statute, but the
costs being addressed in subsections (o)(1), (o)(2), and
(o)(3) are subsets of the costs that are not capital costs;
they do not include all operating costs but are a subset
that are involved with operating a well as described in
(2).
11:24:58 AM
Representative Gara summarized that HB 280 was written to
take advantage of the "m" credit, which has been amended by
Amendment 2. He asked whether the "m" credit is in place of
the existing credits, whether 20 or 25 percent. Ms. Davis
answered that the credit was an additional, alternative
credit.
Representative Gara asked for more information about the
"Cook Inlet penalty." Co-Chair Hawker replied that the
issue was addressed in Section 11. He explained that when
the Petroleum Production Tax (PPT)/ACES tax structure was
adopted, the Cook Inlet basin was set aside as an
exception; the Economic Limit Factor (ELF) tax mechanism
was grandfathered for the basin. The rest of state had
significant increases in production taxes that did not
apply to Cook Inlet.
Co-Chair Hawker continued that the PPT/ACES system
introduced the concept of credits that could be applied
against tax liability for certain expenditures. He noted
that it had been pointed out that spending a dollar in Cook
Inlet would result in less tax liability to apply it to by
special rule than if the dollar were invested elsewhere. He
explained that a credit derived from an investment in Cook
Inlet could be applied against a dollar of tax liability
anywhere in the state.
Co-Chair Hawker asserted that the biggest problem in the
state currently was production decline and that the only
way to address the problem was increasing investment in
exploration and development. He thought it was
inappropriate to disadvantage Cook Inlet in the competition
for the capital.
Representative Gara summarized his understanding of the
situation and asked for more clarification. Ms. Davis
explained that in Cook Inlet, a producer must first sell
production then go through the ACES process of deducting
Cook Inlet costs against that production to come up with
the production tax value. The production tax value is then
compared to a cap or ceiling on the tax (the ELF tax: zero
for oil, and $0.17 per Mcf). If the ACES tax is higher, the
producer only pays taxes to the cap. All of the lease
expenditures applied to get to the cap comparison stay in
Cook Inlet. Any other lease expenditures not needed to get
to the cap are now free to be exported by the taxpayer to
other regions (usually the North Slope).
Ms. Davis added that the reason for the de-coupling
legislation moving through the Senate was the discovery
that several Cook Inlet producers have Cook Inlet expenses
that they are able to utilize under the current system and
apply to reduce tax liability caused by North Slope oil.
She emphasized that credits resulting from an expense can
be used anywhere regardless of where the expense was. The
credit gets applied at the bottom line of the final tax
bill.
11:31:53 AM
Mr. Marks provided an example of how Section 11 was
intended to operate: If under ACES, the Cook Inlet tax was
$100 and under ELF the tax was $50, and a taxpayer had $200
in credits, the credits are reduced by the $50 difference.
The resulting $150 credits could then be used to offset
North Slope tax.
Representative Gara requested further clarification. His
understanding was that a producer who pays a lower Cook
Inlet tax does not have that much to write off from; he
believed the amendment would help a producer who also has
North Slope operations to write off the expenses.
11:33:17 AM
Co-Chair Hawker pointed out that the provision was not new,
but the producer had to discount the amount of credit
available to write off Cook Inlet tax liabilities.
Ms. Davis added that Section 11, subsection (m) related to
lease expenditures. She asserted that lease expenditures
are the larger expenses, and are the ones being emphasized:
specifically, Cook Inlet lease expenditures up to the
amount of the tax ceiling. The ones above the line can
currently get applied elsewhere; the ones below the line
cannot. She believed the provision would change the
situation and allow the ones below the line to also be
moved elsewhere.
Co-Chair Hawker interjected that the tax credit generated
in Cook Inlet is allowed to be used at full face value
anywhere in the state.
Representative Gara questioned whether the amendment would
change the current ability of a producer to write off more
lease expenditures than they are paying in taxes. Ms. Davis
replied that under current law, a producer cannot utilize
lease expenditures that were used to get to the cap. The
new provision would change that and let the producer add
the additional batch of lease expenditures to those that
can be used elsewhere.
Representative Gara queried the administration's opinion on
the provision. Ms. Davis replied that the administration
has not proposed a change in the current "ring-fencing"
laws as part the governor's bill. She noted that the
governor wanted to know what the trade-off would be for the
state for reducing the tax burden or providing a credit;
when credits are given, there should be a return. She
thought it was a policy question whether additional Cook
Inlet incentives would provide return for the state.
11:37:06 AM
Co-Chair Hawker asserted that there would be "full value"
and not doubling for investment. He stated that the
provision was intended to level the playing field in order
to encourage a developer/investor operating in both the
North Slope region and in Cook Inlet to put money into the
Cook Inlet. He emphasized the need for fuel in
Southcentral.
Co-Chair Stoltze noted that representatives from Chugiak
Electric Association were present and that they had about a
quarter of a million people with concerns about the issue.
Ms. Davis stated that the administration agreed that trying
to level the playing field is important; however, the
starting point is a bill that does not have a level playing
field with respect to tax rates because of substantial
incentives for the inlet. She stressed that the policy call
related to how much additional incentive the legislature
feels Cook Inlet producers need.
Co-Chair Hawker acknowledged that there is an inequitable
tax base. He argued that investor risk needed to be
recognized; attracting investment is currently very
difficult. The gas in Cook Inlet is expensive to access and
has disadvantages that offset much of the tax value
differentials. He agreed that a policy call is needed. He
asked whether the state wanted to make an effort to make
exploration and drilling in Cook Inlet more attractive to
either new, independent, well-capitalized producers, or to
existing explorer/producers. He argued that there was no
cost to the state to attempt the enhanced access to
existing tax credits offered in the bill.
11:41:32 AM
Representative Gara stated that he was more comfortable
with the governor's method of spending money for new work.
He thought that without enhancements, the bill could reduce
the tax payments the state would receive and increase the
credits it pays out. He opined that with the governor's
credit, the money would come only if production was
enhanced or extra action was taken to prevent the loss of
production.
Representative Fairclough queried the current tax rate on
gas outside the Cook Inlet. Ms. Davis replied that there is
not much gas. She conjectured that for a taxpayer on the
North Slope producing gas only, the tax would be 25 percent
of the production tax value (profit at the point of
production minus lease expenditures). She cautioned that
every taxpayer is different because of varied mixtures of
oil and gas. She calculated that given gas at $4.50 with
cost of $2.50, the rough estimate would be $0.50 to $0.70
per Mcf.
Co-Chair Hawker added that the cost depends on the market.
In addition, due to other legislation, gas produced and
consumed in-state pays ELF rates just like the Cook Inlet.
Ms. Davis agreed.
11:45:03 AM
Representative Gara was concerned that he had no way to
assess the tax credit being granted in HB 280 for gas
storage. He queried the administration's position on the
issue. Ms. Davis replied that there have been many other
bills relating to corporate income tax credits. She stated
that the administration regarded the issue as a policy call
with respect to what extent particular conduct should be
incentivized. She noted that in HB 280, the state would be
getting gas storage in exchange for granting a corporate
income tax credit, which would be consistent with the
administration's policy of providing credits in exchange
for an agreed-upon action.
Representative Gara requested more information about the
gas storage credit. He thought there would be a maximum
credit of $15 million based on an allowable cost of $1.50
per thousand cubic feet of storage capacity. He did not
know how to analyze whether the allowable cost was the fair
amount.
ROBYNN WILSON, INCOME AUDIT MANAGER, TAX DIVISION,
DEPARTMENT OF REVENUE (via teleconference), thought the
issue was a policy call. She believed the issue had been
addressed in the fiscal note.
11:48:35 AM
Mr. Rice pointed to page two of fiscal note 4 (attached to
CSHB 280(RES), a prior version of the bill) and quoted:
In 2004, the Federal Energy Regulatory Commission
(FERC) estimated the median cost-of-service rate for
[gas] storage at $0.64/Decatherm. One Decatherm is
equal to one Mcf of natural gas if the natural gas
contains 1,000 Btu/cubic foot. Escalating this cost
for inflation produces a 2009 cost-of-service rate of
approximately $0.72/Mcf of [gas] storage service.
Mr. Rice clarified that the calculation is not adjusted for
potentially higher costs in Alaska. However, he thought the
estimate was close.
Representative Gara asked whether the state would pay $1.50
when the cost of creating the storage would be $0.72. Mr.
Rice replied that he could not definitively say what the
cost of gas storage would be in Alaska. He could say that
escalating the median cost of service for providing gas
storage, according to FERC, results in a price of
approximately $0.72 per Mcf; the credit is $1.50 per Mcf,
or roughly double the median cost of service.
Representative Gara asked whether HB 280 would grant $1.50
per Mcf or up to $1.50 of the actual costs. Co-Chair Hawker
responded that the credit is calculated at $1.50 per Mcf of
new gas storage capacity opened within a certain timeframe
(before 2015).
Representative Gara asked whether an entity could be paid
more to create gas storage than it costs them. Co-Chair
Hawker responded absolutely not; the credit was benchmarked
based on available information (which is imprecise) to
approximate at 10 percent on cost.
Representative Gara questioned how the state could know
what the storage would cost. He pointed to differing
numbers.
11:52:51 AM
Co-Chair Hawker reported that proprietary conversations
were held with entities interested in investing and putting
together a major open-access gas storage facility in the
Cook Inlet.
Representative Gara stated that he had no way of analyzing
how much of the cost the state should be paying. Co-Chair
Hawker called attention to other information in fiscal note
4: an expectation that the amount of the credit would
approximate the corporate income tax from operating such a
facility for about 16 years. He stated that the goal was to
allow the investor to recover their costs. The costs would
ultimately be passed to the consumer, but the intent was to
not have the additional costs be burdened by additional
state taxes. He stressed that the bill was intended to be a
private sector bill and not a major government subsidy of
gas storage.
Mr. Marks pointed out that looking at the credit as being a
high percentage of the corporate income tax liability says
more about the liability than about the credit. He
maintained that in a gas storage facility, the only income
the facility would have is its return on equity; in the big
picture, that would be fairly small, depending on debt
equity and the length of the life of the asset. He stated
that for regulated facilities, the income piece would be
small, and the credit could dwarf the income tax liability.
Representative Gara did not care how the credit related to
how much someone would pay in taxes. He wanted to make sure
that the state would not pay more in the credit than an
entity paid to build the facility. Co-Chair Hawker stressed
that the credit was calculated to approximate 10 percent of
the cost of building the storage facility.
Representative Gara suggested adding that the credit could
not exceed ten percent of the costs. Co-Chair Hawker stated
that [exceeding ten percent of the costs] would be "highly
unlikely." He maintained that the point of the volume
metric approach to determining the credit was to
specifically avoid having to go through a huge regulatory
process in determining eligible and non-eligible costs. The
question was the cost of the facility and what would be
included. He emphasized that the intent was to determine
and easily calculate the credit available using a credible
third party as the benchmark, using the Alaska Oil and Gas
Conservation Commission (AOGCC) to certify the working
volume capacity of a facility.
HB 280 was HEARD and HELD in Committee for further
consideration.
11:57:54 AM
Co-Chair Hawker referred to potential amendments.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 280 Amendment #3.pdf |
HFIN 3/18/2010 9:00:00 AM |
HB 280 |
| HB 280 Amendment #4 Hawker.pdf |
HFIN 3/18/2010 9:00:00 AM |
HB 280 |
| HB 273 Amendments #1&2.pdf |
HFIN 3/18/2010 9:00:00 AM |
HB 273 |
| HB 273 Haines Map Backup to Amendment #2.pdf |
HFIN 3/18/2010 9:00:00 AM |
HB 273 |
| HB 273 Support Letter.pdf |
HFIN 3/18/2010 9:00:00 AM |
HB 273 |
| HB 280 DNR Map & exploration Incentives.pdf |
HFIN 3/18/2010 9:00:00 AM |
HB 280 |