Legislature(2015 - 2016)ANCH LIO AUDITORIUM

07/13/2016 01:30 PM FINANCE

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01:35:22 PM Start
01:36:06 PM SB5005
03:39:23 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
SENATE BILL NO. 5005                                                                                                          
     "An Act  relating to  the oil  and gas  production tax,                                                                    
     tax  payments, and  credits; relating  to  oil and  gas                                                                    
     lease  expenditures  and  production  tax  credits  for                                                                    
     municipal   entities;   relating    to   the   interest                                                                    
     applicable  to delinquent  tax;  and  providing for  an                                                                    
     effective date."                                                                                                           
Co-Chair MacKinnon welcomed the presenters.                                                                                     
1:37:13 PM                                                                                                                    
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
introduced  Jenny Rodgers,  the Audit  Master. She  has been                                                                    
with  the division  for  28 years.  She was  a  part of  the                                                                    
production tax group.                                                                                                           
JENNY  ROGERS, AUDIT  MASTER,  TAX  DIVISION, DEPARTMENT  OF                                                                    
REVENUE, introduced herself.                                                                                                    
Mr. Alper  introduced the PowerPoint presentation:  "Oil and                                                                    
Gas  Tax Credit  Reform SB  5005."  He began  with slide  3:                                                                    
"Purpose of the Bill":                                                                                                          
     SB5005 is  a smaller,  more targeted credit  reform and                                                                    
     minimum tax package than HB247                                                                                             
     · Addresses "North Slope NOL" issue                                                                                        
     ·  Re-introduces several  smaller parts  of HB247  that                                                                    
        did not pass                                                                                                            
     · Increases the minimum tax at certain prices                                                                              
     ·  Technical fixes  to  HB247  sections that  may  have                                                                    
        implementation issues                                                                                                   
Mr. Alper indicated that the  current tax bill addressed the                                                                    
North  Slope net  operating losses  (NOLs). He  informed the                                                                    
committee that  the bill  was a  smaller and  more cognitive                                                                    
tax reform  and minimum  tax package. It  was a  far simpler                                                                    
bill than  what was  passed through  the legislature  in the                                                                    
previous session.  It did a few  things including addressing                                                                    
the North Slope  net operating issue. It brought  up some of                                                                    
the smaller  parts of  HB 247  [Legislation passed  in June,                                                                    
2016  - Short  Title: Tax;  Credits; Interest;  Refunds; Oil                                                                    
and Gas].                                                                                                                       
Senator Dunleavy asked  if the bill went  beyond tax credits                                                                    
into tax policy.                                                                                                                
Mr. Alper  responded in the  affirmative. He  explained that                                                                    
there were issues in the  bill that affected the minimum tax                                                                    
and how it was calculated.                                                                                                      
Senator  Dunleavy   asked  if  the  bill   addressed  SB  21                                                                    
[Legislation  passed in  2013  - Short  Title:  Oil and  Gas                                                                    
Production Tax] beyond tax credits.                                                                                             
Mr. Alper responded that the  bill addressed the tax system.                                                                    
The administration had stayed  away from the core provisions                                                                    
of  SB 21  including the  tax rate,  the per-barrel  credit,                                                                    
etc.  He furthered  that  by adjusting  the  minimum tax,  a                                                                    
portion of statute that had  been around since the Petroleum                                                                    
Production Tax  (PPT) regime came  into being,  it addressed                                                                    
some of the residual older oil  and gas tax laws rather than                                                                    
the  parts  placed  into  SB  21.  He  reaffirmed  that  the                                                                    
legislation was beyond the world of credits.                                                                                    
Co-Chair  MacKinnon asked  if  there was  a  reason why  the                                                                    
administration  introduced several  of the  smaller measures                                                                    
that had already been denied.                                                                                                   
Mr.  Alper  responded  that  the  governor  thought  it  was                                                                    
important to revisit the issues.  He expounded that they fit                                                                    
into  the rest  of  the reform  package.  He commented  that                                                                    
sometimes the third time was a charm.                                                                                           
Co-Chair MacKinnon responded that the committee would see.                                                                      
Mr. Alper continued that the  bill addressed the minimum tax                                                                    
(the so  called "floor")  and how  it was  calculated. There                                                                    
were also a  couple of technical fixes that  if another bill                                                                    
was  going  to  move,  they would  address.  Otherwise,  the                                                                    
department would  address the issues through  the regulation                                                                    
process.  He moved  to  slide  4: "History  of  Oil and  Gas                                                                    
Production Tax Credits":                                                                                                        
     Update: FY 2007 thru '16, $8.0 Billion in Credits                                                                          
     North Slope                                                                                                                
     · $4.4 billion credits against tax liability                                                                               
        · Major producers; mostly 20% capital credit in                                                                         
          ACES and per-taxable-barrel credit in SB21                                                                            
     · $2.3 billion refunded credits                                                                                            
        · New producers and explorers developing new fields                                                                     
     · Non-North Slope (Cook Inlet & Middle Earth)                                                                              
     · $0.1 billion credits against tax liability                                                                               
        · Another $500 to $800 million Cook Inlet tax                                                                           
          reductions (through 2013) due to the tax cap                                                                          
          still tied to ELF                                                                                                     
     · $1.2 billion refunded credits (most since 2013)                                                                          
He explained that in the  previous year the governor limited                                                                    
the credits  to $500  million. Although  the books  were not                                                                    
100  percent  closed, he  anticipated  the  number would  be                                                                    
similar, about $498  [million]. He relayed that  if a person                                                                    
were to  add the FY 16  number of $498 million  to the prior                                                                    
history, about  $8.0 billion had  been put into  tax credits                                                                    
in  the so-called  tax credit  era going  back 10  years. He                                                                    
detailed  that  of the  $8.0  billion  in tax  credits  $4.4                                                                    
billion went to  credits against tax liability  on the North                                                                    
Slope.  The  majority of  credits  were  used by  the  major                                                                    
producers. He  reported $2.3 billion going  towards refunded                                                                    
credits to  new producers, explorers, and  developers on the                                                                    
North Slope.  He relayed that  of the $500 million  spent in                                                                    
the prior  year a little  over $200 million was  invested in                                                                    
the  North Slope  and less  than $300  million was  invested                                                                    
outside of the North Slope.                                                                                                     
1:42:22 PM                                                                                                                    
Co-Chair  MacKinnon  had  several questions.  She  mentioned                                                                    
that from  FY 16 to  FY 17 the  state had issued  $8 billion                                                                    
worth of credits.  She was aware that when  the state issued                                                                    
a credit it did not always  receive revenue in the same time                                                                    
period. Under  the same  time period  how much  revenue came                                                                    
from production in the oil and gas industry.                                                                                    
Mr. Alper  mentioned he had  documented the  information Co-                                                                    
Chair MacKinnon was  asking about. However, he  did not have                                                                    
it  with him.  He  noted  that the  number  was roughly  $60                                                                    
billion  in  overall  oil  and  gas  revenues  comprised  of                                                                    
royalties, production taxes, and  corporate income taxes. He                                                                    
thought the number was about  $62 billion, the bulk of which                                                                    
came from the legacy fields like Prudhoe Bay.                                                                                   
Co-Chair  MacKinnon  had  asked   Mr.  Alper  to  bring  the                                                                    
information with him. She mentioned  the importance of being                                                                    
able  to convey  to the  general  public not  only what  the                                                                    
state was paying  out but also what the  state was receiving                                                                    
from  the  industry,  an  amount  large  in  magnitude.  She                                                                    
referred back to slide 3.  Director Alper had indicated that                                                                    
if the  administration was  not able  to accomplish  some of                                                                    
the policies proposed  in SB 5005 then it would  move to the                                                                    
regulatory process to begin  implementation of those things.                                                                    
She asked  him to point  out where the  administration would                                                                    
make  regulatory  changes  should  the  legislature  deny  a                                                                    
change in state statute.                                                                                                        
Mr.  Alper  responded  affirmatively  and  assured  Co-Chair                                                                    
MacKinnon it  was none  of the  larger pieces.  He clarified                                                                    
that  he was  talking about  technical language  relating to                                                                    
the piece  that dealt  with the  pro-rationing of  a utility                                                                    
that owned  its own gas  field and  how its costs  might get                                                                    
apportioned. There was a technical  issue with how the final                                                                    
language  was  written that  the  department  was hoping  to                                                                    
clean up.  The administration believed it  could be resolved                                                                    
through  the regulatory  process  without  doing anyone  any                                                                    
harm. He assured the committee  large changes to the tax law                                                                    
would not be made without going through the legislature.                                                                        
1:44:58 PM                                                                                                                    
Co-Chair MacKinnon  thought it depended on  perspective. She                                                                    
suggested that  if an entity's  tax credits were  not coming                                                                    
in, the entity might think it  was more important than if it                                                                    
was  receiving   tax  credits  based  on   regulations.  She                                                                    
requested that Mr.  Alper point out items  that the division                                                                    
could change  through regulation if the  legislation did not                                                                    
move forward.                                                                                                                   
Mr. Alper was  happy to point out the two  places the public                                                                    
could expect to see changes.                                                                                                    
Senator  Dunleavy  asked  Mr.   Alper  to  explain  why  the                                                                    
governor  was  introducing  a  new bill.  He  asked  him  to                                                                    
clarify  the  purpose  of  changing   the  tax  credits.  He                                                                    
wondered if was  to generate new revenue  or something else.                                                                    
He  wondered if  the  goal was  generating  more revenue  or                                                                    
spending less. He asked him to highlight the goals.                                                                             
Mr. Alper responded  that it was important to  view the bill                                                                    
in  the context  of the  rest of  the package.  The governor                                                                    
introduced the passage of bills  for regular session and had                                                                    
been  trying  to  move  the  administration's  comprehensive                                                                    
fiscal package, the New Sustainable  Alaska Plan. It was the                                                                    
governor's  goal to  pass the  overall package.  The current                                                                    
bill  before the  committee was  only one  component of  the                                                                    
whole. Regarding  oil and  gas there was  a broader  goal to                                                                    
pass  a  series  of  bills  that would  place  Alaska  on  a                                                                    
sustainable  footing given  the  state's constrained  fiscal                                                                    
circumstances. In looking at the  specifics of the bill, the                                                                    
fiscal note reflected  a savings to the state  of about $100                                                                    
million to  $150 million per  year and would raise  a little                                                                    
bit of money in some  years through the minimum tax changes.                                                                    
For  the most  part, it  was a  savings to  the state  which                                                                    
would help in reducing the state's deficit.                                                                                     
1:47:32 PM                                                                                                                    
Senator Dunleavy, as an educator,  had seen certain benefits                                                                    
for schools when  oil had taken off in the  80s. He wondered                                                                    
how  the   bill  would   ensure  ongoing   oil  exploration,                                                                    
development, and production to keep  oil in the pipeline. He                                                                    
mentioned that there were two  camps; pro-oil and pro-other.                                                                    
However, he  believed everyone was pro-Alaska.  He wanted to                                                                    
make  sure that  whatever policy  was  put in  place by  the                                                                    
legislature helped Alaska in the  short, mid, and long-term.                                                                    
He wondered how the approach would ensure investment.                                                                           
Mr. Alper could not ensure  anything. As a state government,                                                                    
the executive  in the legislative  branch could  not ensure,                                                                    
guarantee,   or  force   private  companies   to  act.   The                                                                    
government could  encourage and incentivize. Things  such as                                                                    
resources and  the price of  oil (currently very  low) would                                                                    
influence investment. He concluded  it was reasonable to say                                                                    
that  there  might  be fewer  investors  in  the  short-term                                                                    
because of oil  prices. He added that the  state's taxes and                                                                    
tax  credits  were  considerations  but were  not  the  only                                                                    
consideration.  The bill  reduced the  state's participation                                                                    
in  and incentives  for new  players which  could result  in                                                                    
fewer  investors.   However,  tax  credits  were   only  one                                                                    
consideration. The overarching question  was could the state                                                                    
afford the level of support it was currently providing.                                                                         
Senator Dunleavy  asked about the  administration's response                                                                    
to  a  negative   effect  on  the  oil   industry  with  the                                                                    
Mr.  Alper was  sure  the administration  would be  engaging                                                                    
with  the  oil  industry.   He  acknowledged  that  the  oil                                                                    
industry   was  the   state's   "bread   and  butter."   The                                                                    
administration  would be  looking  to  maximize the  state's                                                                    
position to  develop its resources  for the  maximum benefit                                                                    
of the  people of Alaska and  to make sure the  maximum were                                                                    
developed. He suggested  that if the state moved  too far in                                                                    
one direction  there would be  a movement to bring  it back.                                                                    
He stated that it was  an inherently dynamic process as seen                                                                    
from year-to-year.                                                                                                              
1:50:52 PM                                                                                                                    
Co-Chair  Kelly thought  it was  important  to describe  the                                                                    
approach  the legislature  was  taking  versus the  approach                                                                    
some  members  around the  table  would  take regarding  oil                                                                    
revenue.  He relayed  that the  legislature  was looking  at                                                                    
revenue stream.  He believed the administration  was looking                                                                    
at an expense stream. He  mentioned that Mr. Alper's opening                                                                    
comments had to do with the  amount of revenue the state had                                                                    
received. The  state spent $8  billion on tax  credits which                                                                    
resulted in  $61 billion in  revenue. Most people  would say                                                                    
that that was  a pretty good deal.  The legislature realized                                                                    
that the tax regime in 2009,  2010 and 2011 was going in the                                                                    
wrong  direction. The  state was  attempting  to extract  as                                                                    
much  revenue  as  possible  from  oil  companies,  but  the                                                                    
legislature  realized that  it  was discouraging  production                                                                    
and  exploration. Therefore,  the state  adopted SB  21 with                                                                    
the approval  of the people  of Alaska. He pointed  out that                                                                    
the  sometimes   more  investment  was  needed   to  achieve                                                                    
additional revenue.  He reiterated  his question  about what                                                                    
the  bill did  to increase  production. He  wondered if  the                                                                    
legislation would increase  production, leave production the                                                                    
same, or  decrease production.  He supposed  the legislation                                                                    
would decrease production. The state  might extract a little                                                                    
more money,  but would ultimately tilt  the production curve                                                                    
downward  again. He  wanted to  see a  tax or  credit regime                                                                    
from the  governor that increased production  or, if changes                                                                    
had to be  made, at least kept it from  declining. The state                                                                    
should be  in the business  of getting more oil  through the                                                                    
line resulting in more money for the state.                                                                                     
Mr.  Alper  could  not  argue  that  the  legislation  would                                                                    
increase  production. The  bill reduced  incentives for  the                                                                    
oil industry  and, there was  nothing inherently in  it that                                                                    
would make producers  want to do more. He  wondered how much                                                                    
less production  the state  would see  and whether  the cost                                                                    
benefit analysis  would show the  state giving up  more than                                                                    
what  it was  gaining. The  credits were  put into  place to                                                                    
invest  in Alaska's  future  during a  time  when the  state                                                                    
understood it  had a  large amount of  money coming  in from                                                                    
the  industry. The  state  wanted to  reinvest  some of  its                                                                    
surplus  revenue  in future  production.  At  the time,  the                                                                    
state  was receiving  $3  billion to  $6  billion just  from                                                                    
production tax and putting about  $300 million back into tax                                                                    
credits,  which  made intuitive  sense  and  was a  rational                                                                    
behavior towards the  future. With the drop in  the price of                                                                    
oil, the state's  revenue shrunk to a level of  less than $1                                                                    
billion. Currently,  it appeared  that oil prices  would not                                                                    
be returning  to previous levels  anytime soon.  He wondered                                                                    
if the  state could afford  the same level of  investment in                                                                    
the  industry  at  a  time   when  there  was  no  longer  a                                                                    
reinvestment of  surplus profits. He suggested  there was an                                                                    
entire  diversion  of  the bulk  of  Alaska's  revenue.  The                                                                    
paradigm  had shifted  to the  point that  Alaska needed  to                                                                    
look more  aggressively at ramping  back its support  of the                                                                    
industry  based on  fiscal reality.  He  argued that  Alaska                                                                    
could  not   afford  the  level  of   participation  it  had                                                                    
1:56:18 PM                                                                                                                    
Co-Chair MacKinnon  asked if the  committee would  be seeing                                                                    
some  statistical  analysis  on where  the  administration's                                                                    
proposal  set Alaska's  tax regime  in  comparison to  other                                                                    
sovereigns around  the world and  in comparison to  other US                                                                    
states. She recalled a previous  conversation about the past                                                                    
oil  regime.   Some  felt   Alaska's  government   take  was                                                                    
excessive  overall.  The  state  tried to  balance  its  tax                                                                    
regime nationally between Texas,  North Dakota, Wyoming, and                                                                    
other  sovereigns  that  had   production.  Alaska  was  not                                                                    
looking  so much  at the  goal of  what it  took to  pay for                                                                    
state government. Alaska was looking  at how to compete with                                                                    
other  state  structures.  Alaska  then went  to  a  broader                                                                    
perspective  looking   at  how  Alaska  compared   to  other                                                                    
nations. There was a debate  about who Alaska should compare                                                                    
itself  to. She  restated  her question.  She  asked if  the                                                                    
committee   would   see    statistical   analysis   on   the                                                                    
administration's proposal during the special session.                                                                           
Mr.  Alper responded  that the  Department of  Revenue (DOR)                                                                    
did  not  currently have  outside  analysis  on contract  to                                                                    
provide such  work. If the  conversation continued  into the                                                                    
next  regular session  the  administration  would expect  to                                                                    
provide  the information.  The  administration  had been  in                                                                    
touch  with the  new  consultant, Mr.  Meyer,  hired by  the                                                                    
Legislative  Budget  and  Audit Committee.  He  was  putting                                                                    
together  his   modeling,  presentation,  and   package.  He                                                                    
believed Mr.  Meyer would be  bringing the type  of analysis                                                                    
the  legislature  was  looking  for  to  the  committee.  He                                                                    
mentioned  that the  current bill  was not  touching on  the                                                                    
core government  take issues that were  being discussed. The                                                                    
comparable  total government  take  percentage of  different                                                                    
price  points was  the significant  analysis of  SB 21.  The                                                                    
credits were not  a part of the calculation  or analysis for                                                                    
SB 21.  The change in  the legislation before  the committee                                                                    
was a tax  increase between prices of around $55  to $80 per                                                                    
barrel. Taxes remained neutral above  $80 per barrel. He did                                                                    
not believe  there would be  significant movement  than what                                                                    
was brought before the legislature with SB 21.                                                                                  
1:59:11 PM                                                                                                                    
Co-Chair  MacKinnon  asked if  Mr.  Alper  saw a  difference                                                                    
between tax credits and a net operating loss (NOL).                                                                             
Mr. Alper was unclear about the senator's question.                                                                             
Co-Chair  MacKinnon relayed  that  in  the previous  special                                                                    
session the  legislature passed a billed  that removed about                                                                    
$400  million  from available  funds  for  the oil  and  gas                                                                    
industry, more  specifically in the  Cook Inlet  Region. The                                                                    
gross value  was touched  and the floor  was hardened  a bit                                                                    
with  allowable deductions.  She explained  that NOL's  were                                                                    
similar to a federal income  tax. She relayed an example. If                                                                    
she  submitted her  federal income  tax and  had an  expense                                                                    
that qualified,  it was  a deduction  rather than  a credit.                                                                    
Net operating losses were  allowable expenses. She specified                                                                    
that  a tax  credit  was  a tool  used  to incentivize.  She                                                                    
speculated  if  the  committee  was  talking  about  how  to                                                                    
incentivize or  not incentivize  exploration in  Alaska. She                                                                    
also wondered  if the committee was  discussing a structural                                                                    
change  concerning allowable  deductions. She  was not  sure                                                                    
there was a difference between the two.                                                                                         
Mr. Alper replied that much of  the language in the bill was                                                                    
similar  to  what  the  House passed  late  in  the  regular                                                                    
session.  He explained  that it  prevented operating  losses                                                                    
from being  carried forward, moved, and  turned into credits                                                                    
by the  major producers. He  understood that it was  a large                                                                    
and controversial step. Alaska had  a large and broad fiscal                                                                    
system  related  to oil  and  gas.  Many of  the  comparable                                                                    
countries had one tax with  a fixed percentage. Norway had a                                                                    
78  percent tax.  Alaska  had a  property  tax, a  corporate                                                                    
income tax, a  royalty, and there was a  federal income tax.                                                                    
Alaska's  royalty was  strictly a  gross tax,  regressive at                                                                    
low prices.  The state had  a corporate income tax  in which                                                                    
losses carried forward and were  recaptured in a future year                                                                    
receiving full value. Alaska's production  tax was a hybrid;                                                                    
it  was  not a  pure  income  tax or  a  pure  royalty or  a                                                                    
severance tax. Commissioner Hoffbeck had  done a good job of                                                                    
explaining that Alaska had a  net profit tax at high prices.                                                                    
As  the prices  decreased and  a  minimum tax  kicked in  it                                                                    
became a  gross tax. Once  the break-even point  was crossed                                                                    
at about  $45 per barrel it  became a net profits  tax again                                                                    
in the  negative. The producers  received the full  value of                                                                    
their  loss  at  the  35 percent  rate.  The  administration                                                                    
thought it  was unbalanced.  He reported  that if  the state                                                                    
was at the gross at a  relatively small tax, between $45 and                                                                    
$80 per  barrel, he questioned  why the state  should return                                                                    
to  a  net below  $45  per  barrel.  He suggested  the  more                                                                    
appropriate approach would be that  if a producer was losing                                                                    
money only a  small minimum tax would apply or  no tax would                                                                    
apply.  However, a  producer  should not  be  allowed to  go                                                                    
negative carrying  the losses forward, specifically  for the                                                                    
production tax. No one was  questioning the ability to carry                                                                    
forward loses within the corporate income tax structure.                                                                        
Co-Chair  MacKinnon asked  Mr. Alper  to remind  her whether                                                                    
the 35  percent NOL  dropped to 25  percent at  a particular                                                                    
Mr.  Alper confirmed  that it  remained at  35 percent.  The                                                                    
bill that  passed by the  other body ramped it  down towards                                                                    
25 percent.  It did not  stay in  the version passed  by the                                                                    
Senate Finance Committee.                                                                                                       
Co-Chair  MacKinnon was  trying to  recall the  credits that                                                                    
were supposed to sunset in  2017 but were extended under the                                                                    
bill that was just passed.                                                                                                      
Mr. Alper  responded that for  the North  Slope specifically                                                                    
there were no  material changes to the  credits. The capital                                                                    
credit had been previously eliminated  as part of SB 21. The                                                                    
exploration credit  was sunsetting and continued  to sunset.                                                                    
The operating loss credit of  35 percent remained. There was                                                                    
a  temporary bump  to  45  percent for  2014  and 2015  that                                                                    
ramped down.  The Frontier  Basin, with  a large  80 percent                                                                    
credit,  was  specifically  extended to  2017.  Ahtna,  Inc.                                                                    
addressed  the committee  with their  concern about  missing                                                                    
their  window  because  of  a  lost  rig.  That  credit  was                                                                    
extended for a single year  and was the only short extension                                                                    
in HB 247.                                                                                                                      
2:04:25 PM                                                                                                                    
RANDALL HOFFBECK,  COMMISSIONER, DEPARTMENT OF  REVENUE (via                                                                    
teleconference), wanted  to explain  that the  net operating                                                                    
loss credit  came in two  flavors. First, credits  were used                                                                    
by developers  and explorers and,  they were  truly credits.                                                                    
They were  cash flow  credits paid  by the  state. Secondly,                                                                    
credits were  used by the  producers as deductions  or write                                                                    
offs against  revenues. A  net operating  loss credit  was a                                                                    
credit in one circumstance and a deduction in another.                                                                          
Co-Chair   MacKinnon  thanked   the  commissioner   for  the                                                                    
Mr.  Alper indicated  he  was halfway  through  slide 4.  He                                                                    
reported  there   were  very  little  credits   against  tax                                                                    
liability  outside of  the North  Slope because  of the  tax                                                                    
caps, the very low maximum taxes  in place going back to the                                                                    
PPT bill from 2006. He relayed  there was a robust amount of                                                                    
refunded credits  in the amount  of $1.2  billion, primarily                                                                    
in Cook Inlet and within the previous 3 or 4 years.                                                                             
Mr. Alper turned to slide 5: "Work Done Since January":                                                                         
   · Spring 2016 Revenue Forecast includes large expected                                                                       
     operating losses from major producers, which would                                                                         
     offset minimum tax payments for several years                                                                              
   · Forecast also updates FY17 demand for refunded credits                                                                     
     to $775 million (includes $200 million that had been                                                                       
     vetoed from the FY16 budget, carried forward)                                                                              
   · HB247 passes after over 60 hearings with substantial                                                                       
     reforms in Cook Inlet credits and how North Slope                                                                          
     "Gross Value Reduction" is treated                                                                                         
     · FY17 budget passes with $30 million GF funding for                                                                       
        credits via statutory formula, plus $430 million                                                                        
        from other funding sources in the HB247 fiscal note                                                                     
     · Governor Walker vetoes the additional $430 million,                                                                      
       leaving only the $30 million from the formula                                                                            
Mr. Alper reported  that the bill was introduced  with a set                                                                    
of  expectations  at  the  beginning  of  the  last  regular                                                                    
session.   Those  expectations   changed  with   the  spring                                                                    
forecast  released  in late  March  or  early April  [2016].                                                                    
Suddenly, with the extended period  of low oil prices, large                                                                    
anticipated  operating losses  could be  seen for  the major                                                                    
producers.  It  changed  how the  administration  calculated                                                                    
things.  He furthered  that because  of the  ability to  use                                                                    
operating loss  credits carried forward against  the minimum                                                                    
tax it started seeing zero  minimum taxes for production for                                                                    
2,3,  and 4  years  into the  future  rather than  receiving                                                                    
roughly  $150 million  to $200  million the  state had  been                                                                    
counting  on as  the  minimum  tax payment  in  a low  price                                                                    
environment.  In  a  low price  environment  the  department                                                                    
still saw $775  million in expected demand  for refunded tax                                                                    
credits  in FY  17. He  explained that  of the  $775 million                                                                    
there was  $575 million of  new applicants and  $200 million                                                                    
carried forward  from the previous  year's veto.  The demand                                                                    
equaled $775 million. He explained  that with the passage of                                                                    
HB  247 there  were  tremendous reforms  to  the Cook  Inlet                                                                    
credits which  would be  completely phased  out by  2018. On                                                                    
the North Slope  the calculation and the  application of the                                                                    
new  oil  provisions  of  the  gross  value  reduction  were                                                                    
aggressively   reformed.   The   underlying   credits,   the                                                                    
operating losses,  and how  they were  treated on  the North                                                                    
Slope, were not reformed.  Meanwhile, the legislature passed                                                                    
an operating  budget with $30  million in general  fund (GF)                                                                    
funding  determined by  a statutory  formula  and $430  from                                                                    
other funding sources making up  $460 million in tax credits                                                                    
for  FY  17.  He  reported  that  the  governor  vetoed  the                                                                    
additional  $430 million  which left  only $30  million from                                                                    
the formula.  It meant that  the state only had  $30 million                                                                    
to  be spent  on $775  million worth  of demand.  He thought                                                                    
there  would  be  a  large amount  of  tax  credits  carried                                                                    
forward into FY 18 if additional action was not taken.                                                                          
2:08:47 PM                                                                                                                    
Mr. Alper  moved to the  spreadsheet on slide  6: "Potential                                                                    
NOL  Carry-Forward Liability."  He  explained  that the  top                                                                    
half of the slide reflected  the beginning of the credit era                                                                    
through the  last fiscal year.  The third column  showed how                                                                    
many credits  were claimed and  how much the state  spent on                                                                    
tax  credits. He  relayed that  the columns  further to  the                                                                    
right showed  the calculation had the  legislature funded at                                                                    
the statutory  formula which  was tied to  10 percent  to 15                                                                    
percent of production tax revenue.  He pointed to the column                                                                    
titled "Credit  Cap per  AS 43.55.028  (c) showing  what the                                                                    
appropriation  would have  been. He  noted that  the numbers                                                                    
between FY  09 and FY 13  were larger than the  amount spent                                                                    
on credits.  In other  words, had the  formula appropriation                                                                    
taken place,  rather than funding  what had  been requested,                                                                    
the  state would  have been  out of  funds. The  state would                                                                    
have  built up  an amount  of  set-aside money  to fund  tax                                                                    
credits. The  end year fund  balance was the balance  of the                                                                    
fund which would  have peaked at $655 million at  the end of                                                                    
FY  13. He  continued that  beginning in  FY 14  the revenue                                                                    
would have been  dropping off but there would  have been the                                                                    
money in the  fund and with the demand the  state would have                                                                    
spent  the fund  down. The  fund  would have  been close  to                                                                    
wiped out  by the end of  FY 15. Going into  the last budget                                                                    
cycle a  year previously the  state would have  been roughly                                                                    
in the  same place - the  state would need to  find money to                                                                    
pay for  tax credits  only there would  not be  the cultural                                                                    
expectation  that  the  legislature  would  fully  fund  the                                                                    
demanded tax credits  over a year. The  expectation would be                                                                    
that the  state would fund  at the statutory  formula. There                                                                    
would not  have been  the same level  of anxiety  from short                                                                    
Mr.  Alper pointed  to the  bottom of  the page.  He queried                                                                    
what would  happen if the  state continued the  process into                                                                    
the  future.  He  highlighted the  blue  numbers.  The  blue                                                                    
numbers  were updated  based on  the passage  of HB  247. He                                                                    
noted there  had been different  and larger numbers  when he                                                                    
had  presented the  same slide  a  month prior.  Due to  the                                                                    
changes,  the Cook  Inlet tax  cuts, and  additional revenue                                                                    
from  a couple  of  other calculations  the  state would  be                                                                    
spending  less money  on  tax credits.  It  would also  have                                                                    
slightly   smaller  carry   forward  NOLs   for  the   major                                                                    
producers. The  demand in the  following year [FY  17] would                                                                    
decrease to  about $760 million  down from $775  million. In                                                                    
FY  18 the  demand  would  be $445  million  down from  $500                                                                    
million. He suggested  that in looking at  the $760 million,                                                                    
when the  legislature was only  paying the  statutory amount                                                                    
of $30 million,  left a carry-over of $730  million. If $730                                                                    
million  of carry  forward was  added to  $445 million  (the                                                                    
claimed  credits for  FY 18)  it  would result  in a  credit                                                                    
demand worth almost  $1.2 billion in FY  18. Meanwhile, only                                                                    
$33 million would be appropriated  in FY 18 by the statutory                                                                    
formula leaving a  $1.1 billion carry-forward. By  FY 25 the                                                                    
state would be  behind in tax credits by  about $2.0 billion                                                                    
if it continued to fund at the statutory cap.                                                                                   
2:12:30 PM                                                                                                                    
Co-Chair  MacKinnon stated  that what  the slide  showed her                                                                    
was that  by FY 18  the governor  would have created  a $600                                                                    
million  hole in  the state's  budget by  not paying  a bill                                                                    
that was owed via his veto power.                                                                                               
Mr. Alper  stated that it  was moving an obligation  from FY                                                                    
17  to  FY 18.  The  producers  would have  certificates  of                                                                    
credits, an  obligation of the state.  With the certificates                                                                    
in-hand  the companies  would request  payment and  would be                                                                    
waiting  until the  state had  money available  to make  the                                                                    
Co-Chair  MacKinnon  stated   that  the  administration  was                                                                    
creating the  problem while advocating  for a  solution. She                                                                    
conveyed  that  with the  current  veto,  over half  of  the                                                                    
problem stemmed  from the administration  not paying  a bill                                                                    
when it  was supposed to.  It was something  the legislature                                                                    
could  override,   but  more   importantly  she   wanted  to                                                                    
understand the administration's reason  for not advocating a                                                                    
fix and  for creating more  of a  problem by not  paying its                                                                    
Mr.    Alper   stated    that   through    legislation   the                                                                    
administration  was  attempting  to  change  the  underlying                                                                    
programs  so  that there  were  less  tax credits  owed  and                                                                    
earned in  the future.  The veto  had to  do with  when past                                                                    
obligations had  to be  paid. He argued  that the  state was                                                                    
not required  to pay the obligations  immediately. There was                                                                    
no requirement that the state  buy the credits and there was                                                                    
not cost of delay. The  governor struggled with his decision                                                                    
to execute his veto power.  Mr. Alper reported being part of                                                                    
the discussions around the governor's  veto. He reported the                                                                    
decision  was heart-felt,  difficult, and  would potentially                                                                    
put  a strain  and burden  on the  industry. The  governor's                                                                    
original   proposal   in    January   [2016]   included   an                                                                    
appropriation  to  fund all  the  credits  wiping the  slate                                                                    
clean.  However,  the  original   proposal  was  part  of  a                                                                    
comprehensive fiscal  package. There were several  pieces of                                                                    
legislation  that  would  solve   the  state's  problem  and                                                                    
balance  its budget  into the  future. In  the absence  of a                                                                    
comprehensive plan  in place, the governor's  larger concern                                                                    
became  how to  keep the  light  on for  the coming  2 or  3                                                                    
years.   The  state   was   on  a   path   to  deplete   the                                                                    
Constitutional  Budget   Reserve  (CBR)  a  year   from  the                                                                    
present.  The  state   had  school  obligations,  healthcare                                                                    
obligations,     transportation     obligations,     pension                                                                    
obligations,  and  other  costs related  to  the  day-to-day                                                                    
functioning of  government. If the state  was uncertain that                                                                    
it  would  be  able  to  meet  the  obligations  listed,  he                                                                    
wondered if  it could  afford to fully  fund the  tax credit                                                                    
program. He  suggested that the  state could legally  make a                                                                    
smaller  installment  payment,  save   some  money  for  the                                                                    
future,   and  hopefully   resolve  its   underlying  fiscal                                                                    
problems in the following year.                                                                                                 
Co-Chair Kelly suggested that  Mr. Alper's slide essentially                                                                    
cried out,  "Help stop me  before I make  another irrational                                                                    
veto!" He agreed  with what Senator McKinnon  had said about                                                                    
the  governor  creating a  problem  with  his veto  and  the                                                                    
administration  asking the  legislature to  make a  complete                                                                    
change to Alaska's  oil tax regime rather  than the governor                                                                    
acting more  sanely. He also  pointed out that prior  to the                                                                    
governor's plan of paying off  the tax credits with a larger                                                                    
fiscal  plan, he  recalled that  it assumed  the use  of the                                                                    
CBR. He asked Mr. Alper if he was correct.                                                                                      
Mr. Alper responded affirmatively.                                                                                              
Co-Chair Kelly  stated that  there was  an assumed  CBR draw                                                                    
that was  never, ever, ever  going to happen. He  thought it                                                                    
was impossible. He reported telling  the governor that a CBR                                                                    
draw was impossible  early on in the  current year's regular                                                                    
session. He  relayed that the  governor seemed  surprised at                                                                    
his comments.  He continued  that the  administration saying                                                                    
it  had a  plan  that  was not  working  and  wanting to  do                                                                    
something  else was  a  poor response.  He  opined that  the                                                                    
larger fiscal  plan the administration  was hoping  would be                                                                    
enacted was  irrational. He thought  2 things were  going on                                                                    
in slide 6.  First, the governor created a  problem, and now                                                                    
the  legislature had  to do  something else  instead of  the                                                                    
governor  changing his  behavior. Second,  the Tax  Division                                                                    
came up  with a  $2 billion  number, an  extremely political                                                                    
number - the number that  had been thrown around for several                                                                    
years as  the $2 billion  give away.  It was never  true and                                                                    
the people of Alaska voted for  SB 21 because of what a sham                                                                    
it was.  Currently, the state  was back with  another slide.                                                                    
He reiterated that  he thought slide 6 was  a very political                                                                    
2:17:46 PM                                                                                                                    
Senator Olson  realized that  the State of  Alaska was  in a                                                                    
bind. He  wondered about any  considerations being  made for                                                                    
the smaller  companies trying to  survive. Late  payments to                                                                    
businesses  made survival  difficult  and effected  people's                                                                    
livelihoods.  He was  not only  talking about  producers but                                                                    
also  the contractors.  He was  concerned that  some of  the                                                                    
private sector businesses would go bankrupt.                                                                                    
Mr.   Alper  replied   that   the   state  had   significant                                                                    
obligations not  just to the  oil industry. It had  the rest                                                                    
of the  government to  run. The anxiety  over how  to handle                                                                    
the   state's  fiscal   condition   with  reserves   rapidly                                                                    
depleting became  the overarching factor. He  suggested that                                                                    
if the  state paid its  obligation in  full it might  not be                                                                    
allowed  to  do something  else  in  the following  day.  He                                                                    
believed  a comprehensive  fix was  necessary either  in the                                                                    
current year or the following  year. He conveyed the message                                                                    
of  the governor.  He mentioned  that the  governor's office                                                                    
had released  paperwork regarding  what would happen  if the                                                                    
state went  off of the cliff.  He supposed he would  have to                                                                    
generate  a couple  of bullet  points about  how his  agency                                                                    
would function with 75 percent  less funding. He was certain                                                                    
it would not be pretty. The  state did not want to do damage                                                                    
to its  private sector  investors. He  thought it  was about                                                                    
priorities and making sure the lights stayed on longer.                                                                         
Senator    Olson   asked    about   assurances    that   the                                                                    
administration  could   give  to  the  private   sector.  HE                                                                    
compared  the governor's  veto to  either  paying a  partial                                                                    
credit  card  payment  or  making  a  full  payment  of  the                                                                    
Mr. Alper stated that it  was about making a minimum payment                                                                    
on a  credit card rather  than paying  off a balance  as the                                                                    
state had  been with  the tax  credits for the  past 3  or 4                                                                    
years. He could not speak  for the governor or guarantee any                                                                    
future  action.  He  believed that  once  the  governor  was                                                                    
satisfied the  state had  solved its  fiscal woes,  he would                                                                    
want to  set aside  the funds  to pay  down the  state debt.                                                                    
There  was nothing  positive about  having  $1 billion  debt                                                                    
over the  state. The  state needed  to get  to the  point of                                                                    
knowing it had the money.                                                                                                       
2:22:15 PM                                                                                                                    
Co-Chair  MacKinnon commented  that  the state  did not  pay                                                                    
interest  in reference  to Mr.  Alper's credit  card example                                                                    
and  could make  the  monthly payment,  the  issue that  the                                                                    
Senate Finance  Committee was concerned  with was  job loss,                                                                    
bankruptcy,  and  people  having   similar  loses,  and  the                                                                    
state's  credit  down  rating.   The  governor  had  been  a                                                                    
proponent of maintaining the  state's credit worthiness. She                                                                    
was  not sure,  as bankruptcy  occurred as  a result  of the                                                                    
non-payment of tax credits, she  could consider it a minimum                                                                    
payment. The interest  would be very different.  It would be                                                                    
job  loss, downgraded  credit, and  other things.  She asked                                                                    
Mr. Alper to respond.                                                                                                           
Mr. Alper wished he had an  answer for her. It was obviously                                                                    
a burden on  the industry. It was not a  place the state was                                                                    
comfortable being  in or wanted  to be in. She  was accurate                                                                    
that the  state did not  have to pay any  interest. However,                                                                    
the companies  did have to  pay interest to  their finances.                                                                    
Many of  them had  cash calls. He  continued that  the great                                                                    
bulk of  the credits were  owed against borrowed  money. The                                                                    
companies did not have their  own cash reserves to invest in                                                                    
their  field  but  rather  they   borrowed  money  with  the                                                                    
expectation   of   paying   it  back.   The   administration                                                                    
understood. It was an  uncomfortable and unfortunate reality                                                                    
of the  state's fiscal situation. He  noted Co-Chair Kelly's                                                                    
prior  comments about  how a  CBR  draw to  pay the  credits                                                                    
would not  work. The reality  was that the budget  that just                                                                    
passed  was funded  2/3 out  of the  CBR. Whether  the funds                                                                    
were GF  or set  a side special  CBR appropriations,  if the                                                                    
state placed $600  billion into tax credits  the money would                                                                    
be coming out of the CBR.                                                                                                       
Senator  Bishop   returned  to  the  forecast   on  slide  6                                                                    
regarding the  NOL liabilities.  He wanted  to see  the same                                                                    
numbers ran with  the debt paid as it was  encumbered to see                                                                    
what   the  bottom   looked  like.   He  thought   that  the                                                                    
administration  was chasing  a red  herring. Alaska  was not                                                                    
Texas, North Dakota, or Wyoming.  It took 10 years, at best,                                                                    
from an initial discovery to  point of production to bring a                                                                    
field online.  It was a long-term  commitment. He reiterated                                                                    
his desire to see the numbers  ran with the debt paid in the                                                                    
year the credits were encumbered  ultimately looking for the                                                                    
bottom line.                                                                                                                    
Co-Chair MacKinnon asked if the numbers could be run.                                                                           
Mr.  Alper  responded  in   the  affirmative.  He  addressed                                                                    
Senator  Bishop. He  emphasized  that the  state would  stay                                                                    
abreast of  its obligations  every year  in the  scenario on                                                                    
the slide  and pay it. It  meant that the state  would spend                                                                    
about  $2 billion  more  which would  come  out of  reserves                                                                    
assuming the  money was available.  The state would  butt up                                                                    
against the  bottom of  the CBR and  would possibly  have to                                                                    
get  into the  earnings  reserve account  (ERA) and  address                                                                    
fundamental questions of restructuring.  The Senate passed a                                                                    
bill that  had gone a  long way towards fixing  the problem.                                                                    
Part of the  administration's struggle was that  the rest of                                                                    
the legislature  had not  followed suit.  The number  on the                                                                    
slide of  $2 billion  was the real  obligation of  the state                                                                    
for  the  next  6  or  7  years.  He  added  that  what  was                                                                    
interesting in updating the slide was  that it used to be $3                                                                    
billion. The  reason for the  change was due to  the passage                                                                    
of HB 247.  There was an authentic savings of  $1 billion on                                                                    
tax credits reducing the burden to the state.                                                                                   
2:27:40 PM                                                                                                                    
Co-Chair   MacKinnon   appreciated   the   information   and                                                                    
suggested that  it be referenced  in some of  the governor's                                                                    
press  releases.  She  commented  that  the  general  public                                                                    
believed that  the legislature  did not  act on  anything in                                                                    
the  governor's  package.   However,  the  legislature  took                                                                    
action. She  loved the  idea of saving  $1 billion  over the                                                                    
following  10 years  based on  what  the legislature  passed                                                                    
which was part of the  fiscal plan. However, the information                                                                    
had not been conveyed in a press release.                                                                                       
Mr. Alper turned to slide 7: "Regional Impacts of HB 257":                                                                      
   Cook Inlet                                                                                                                   
     · Complete phase-out of NOL, QCE, and WLE by 2018                                                                          
     · Extends "tax caps" on gas indefinitely and adds a                                                                        
     · $1 / bbl "tax cap" on oil                                                                                                
     · Municipal utility pro-ration of costs                                                                                    
   Middle Earth                                                                                                                 
     · Reduces the NOL, QCE, and WLE credit rates                                                                               
     · Extends "Frontier Basin" exploration credit for one                                                                      
        year to July 2017                                                                                                       
   North Slope                                                                                                                  
     · GVR "Graduation" provision after three to seven                                                                          
     · GVR can't be used to increase an NOL                                                                                     
     · $70 million per company per year cap ($61 with                                                                           
     · Interest rates increased for 3 years, then drops to                                                                      
     · Transparency, local hire, state obligation offsets,                                                                      
        surety bond                                                                                                             
Mr. Alper listed the bulk of the changes.                                                                                       
2:32:36 PM                                                                                                                    
Co-Chair MacKinnon asked how many  of the provisions were in                                                                    
the new bill  SB 5005. She noticed interest  changes on page                                                                    
1 of the bill.                                                                                                                  
Mr.  Alper responded  that there  were interest  changes and                                                                    
the municipal  pro-ration had  a technical  cleanup section.                                                                    
The administration  was looking  at extending things  on the                                                                    
North Slope when the state  was done in Cook Inlet. However,                                                                    
the administration  was not looking  to changing any  of the                                                                    
pieces already addressed in HB 247.                                                                                             
Mr. Alper moved to slide 8: "Fiscal Impact of HB247":                                                                           
     · $0 to $25 million increase through FY21 due to loss                                                                      
        of Cook Inlet credits used against tax liability,                                                                       
        plus new $1 / bbl oil tax                                                                                               
     · $40 to $115 million tax cut beginning FY22 due to                                                                        
        above combined with up to $20 million from sunset of                                                                    
        GVR tax break, but offset by extension of Cook Inlet                                                                    
        gas tax caps                                                                                                            
     · Full impact of credit cuts won't be seen until FY19                                                                      
     · Annual savings $65 to $115 million. Largest portion                                                                      
        is Cook Inlet cuts, less from the per-company cap                                                                       
      and the fix to the GVR / NOL interaction issue                                                                            
Mr. Alper  indicated that  the slide was  a snapshot  of the                                                                    
fiscal note for  HB 247. He explained that all  of the bills                                                                    
had  2  halves  to  the fiscal  note;  raising  or  changing                                                                    
revenue in  some way  and changing  spending such  as buying                                                                    
tax credits.  He reported that  the $1 per barrel  tax would                                                                    
generate about $5  million to $10 million. There  was also a                                                                    
tax  cut in  the bill  which might  lead to  seeing negative                                                                    
revenue. He had  stated there was $1 billion  in savings and                                                                    
spending on  the previous slide  that was offset by  the tax                                                                    
cut  in some  of the  out years.  As a  result the  public's                                                                    
perception of the  impact of HB 247 might  have been diluted                                                                    
because of  the extension  of the Cook  Inlet tax  caps past                                                                    
2022.  They were  scheduled to  come off  the books  and the                                                                    
underlying  35  percent  tax  would  kick  in  in  2022.  By                                                                    
extending them  into the future  it showed up as  a negative                                                                    
in  the  revenue  estimates.  He  thought  that  it  was  an                                                                    
overblown number. No one really  expected the 35 percent tax                                                                    
to kick  in in  2022. However,  it was  the administration's                                                                    
statutory base line.                                                                                                            
2:35:36 PM                                                                                                                    
Co-Chair MacKinnon asked Mr. Alper  to pause and discuss why                                                                    
the  35 percent  would not  likely come  to fruition  in the                                                                    
Cook Inlet.                                                                                                                     
Mr.  Alper explained  that when  the  Petroleum Profits  Tax                                                                    
(PPT)  system legislation  came  before  the legislature  in                                                                    
2006  the Economic  Limit Factor  (ELF) system  had been  in                                                                    
place for  20 years or  more. The ELF formulas  were thought                                                                    
to be distorted.  It generated tax from fields  tied to per-                                                                    
well  productivity  including  the Prudhoe  Bay  and  Alpine                                                                    
fields.  However, most  of  the other  fields  on the  North                                                                    
Slope were paying a low  production tax (less than 1 percent                                                                    
of the  gross). In  Cook Inlet  the tax  was zero.  The Cook                                                                    
Inlet gas taxes  under ELF were also low. While  there was a                                                                    
desire to  raise revenue  from the  North Slope  through the                                                                    
PPT bill  (it was  an important  reform package and  part of                                                                    
Governor Murkowski's Stranded  Gas Development Act process),                                                                    
no one wanted to raise the tax  on gas in Cook Inlet. At the                                                                    
time  there  was  a  larger concern  about  gas  supply  and                                                                    
utility security.  He suggested that  in the ELF  bill there                                                                    
was a hold  harmless provision which outlined  that taxes on                                                                    
oil and  gas in Cook Inlet  would not exceed what  they were                                                                    
prior to  the passage of the  bill (from 2005). It  was a 15                                                                    
or 16  year hold harmless  provision until 2022.  He relayed                                                                    
that in 2022 the underlying  statutes kicked in. However the                                                                    
underlying  statutes  had  not  been built  for  Cook  Inlet                                                                    
leaving  the  state with  a  hodge-podge  of multiple  other                                                                    
bills. There  was the 35  percent SB  21 tax rate  without a                                                                    
per-barrel credit or comparable  benefit on the North Slope.                                                                    
There were  no new oil  benefits and the 20  percent capital                                                                    
credit was  going away.  There would be  a large  35 percent                                                                    
net  tax.  He opined  that  sometime  between now  and  2022                                                                    
someone would have to fix  the system. He suggested that the                                                                    
attempt  made  with  HB  247 extending  the  tax  caps,  was                                                                    
probably too  low. The 17  cent per MCF  tax on gas  in Cook                                                                    
Inlet was probably  not the state's highest and  best use of                                                                    
the resource. Another part of  the equation was $150 million                                                                    
more from at 35 percent net  tax. He though the right answer                                                                    
was somewhere in the middle.                                                                                                    
2:38:20 PM                                                                                                                    
Co-Chair MacKinnon asked  where the oil from  the Cook Inlet                                                                    
region was sold.                                                                                                                
Mr.  Alper responded  that it  went  to a  refinery in  Cook                                                                    
Inlet and used in Alaska.                                                                                                       
Co-Chair  MacKinnon  stated that  the  oil  was sold  to  an                                                                    
instate refinery, and accounted for  about 30 percent of the                                                                    
feed stock  at the Tesoro  refinery. She asked Mr.  Alper to                                                                    
Mr. Alper  reported hearing similar numbers.  He stated that                                                                    
the refineries  in Alaska  were ready to  absorb all  of the                                                                    
oil  production from  Cook Inlet  and  were still  importing                                                                    
crude oil.                                                                                                                      
Co-Chair MacKinnon  asked how the refinery  would collect an                                                                    
increase of 35 percent.                                                                                                         
Mr. Alper responded  that if there was a higher  tax on Cook                                                                    
Inlet oil  it would be  taxed similarly to North  Slope oil.                                                                    
It  would likely  be worked  through. He  thought that  Cook                                                                    
Inlet  gas  was  what  was  really  being  referred  to.  He                                                                    
suggested that  if there  was a higher  tax it  would affect                                                                    
the utility rates in South Central.                                                                                             
Co-Chair MacKinnon emphasized that  rate payers in Anchorage                                                                    
and the  Central region would  have to  pay the tax.  From a                                                                    
political perspective  folks that would  be opposed to  a 35                                                                    
percent increase in  taxes within the region  were trying to                                                                    
protect the consumers on the other side.                                                                                        
Mr. Alper  clarified that it  was not a 35  percent increase                                                                    
but a 35 percent net profits  tax which would be a very high                                                                    
tax in Cook Inlet, 5 or 6 times the current tax.                                                                                
Commissioner Hoffbeck concurred that  a large portion of the                                                                    
Cook Inlet gas tax would get  passed to consumers. As far as                                                                    
the oil  and its  use in  refined products,  prices depended                                                                    
largely  on the  competition  of other  refiners. It  really                                                                    
depended  upon the  refining  margins  and whether  refiners                                                                    
could  absorb  the tax.  There  was  a  good chance  the  35                                                                    
percent  tax  rate would  not  be  passed to  the  consumers                                                                    
because  the  price  was  set  based  on  other  competitive                                                                    
products delivered by other West Coast refiners.                                                                                
Co-Chair MacKinnon  concurred that  about 30 percent  of the                                                                    
feed  stock going  into the  local refinery  came from  Cook                                                                    
Inlet.  She  continued that  70  percent  came from  another                                                                    
source.  She was  depending on  others in  the market.  Cook                                                                    
Inlet gas  was being sold at  some of the highest  prices in                                                                    
the world.  Alaska's consumers would  be picking up  some of                                                                    
the proposed price changes.                                                                                                     
Commissioner Hoffbeck concurred.                                                                                                
2:42:43 PM                                                                                                                    
Vice-Chair Micciche  also concurred. He added  that the less                                                                    
competitive Alaska oil  was, produced by Alaskan  jobs at an                                                                    
Alaskan facility, the more likely  imports would compete. In                                                                    
the current market,  he thought throwing another  tax in the                                                                    
way could have  a negative effect. He believed  a 35 percent                                                                    
tax  on  Cook  Inlet  oil   and  gas  was  unreasonable.  He                                                                    
suggested  that  the  reason  for  holding  off  on  another                                                                    
increase  would be  to take  the time  to evaluate  what the                                                                    
proper  tax  should be  rather  than  simply applying  a  35                                                                    
percent rate in 3 years.                                                                                                        
Mr. Alper stated  that there was no change  proposed for the                                                                    
Cook Inlet  oil and gas  tax in the current  legislation. He                                                                    
mentioned  that the  administration  had an  issue with  the                                                                    
extension  of  the caps  in  the  previous legislation.  The                                                                    
administration was not looking to  make a change until 2022.                                                                    
He  indicated  that if  the  sunset  remained in  place  the                                                                    
administration  would  be  passing  a  tax  cut  because  of                                                                    
something that  would occur in  2022. However,  when looking                                                                    
to put  in the right Cook  Inlet tax in the  future it would                                                                    
be sold with  a tax increase and would be  more difficult to                                                                    
get accomplished.                                                                                                               
Co-Chair  MacKinnon  asked  the question  because  when  the                                                                    
committee looked at  the $775 million that  was distorted by                                                                    
the $200  million veto  that would  be distorted  further in                                                                    
the following year  by the $430 million  veto he interjected                                                                    
the comparison. She agreed that  it would have never reached                                                                    
the  35 percent.  There  was a  reason  why the  legislature                                                                    
would walk cautiously into the  conversation. She wanted the                                                                    
people  in  the  Central  Region   to  understand  that  the                                                                    
committee was  trying to look  at who  in the end  would pay                                                                    
some of  the increases. The  state would  not be the  one to                                                                    
pay the  increases, it would  be the consumer that  would be                                                                    
covering the  costs as  the state  withdrew tax  credits and                                                                    
increased taxes.                                                                                                                
Mr. Alper  noted that his  point was a distraction  from the                                                                    
current  legislation.   He  raised  the  issue   because  it                                                                    
explained  why  the  legislature  had  not  received  enough                                                                    
credit  for the  good HB  247 did.  He furthered  that if  a                                                                    
person was  to read the  fiscal note  for HB 247  the bottom                                                                    
line did  not add up  to $1 billion. It  added up to  a much                                                                    
smaller number  because the number  was eroded by  the paper                                                                    
tax cut  on the  Cook Inlet  side. On  the spending  side it                                                                    
added up  to $1 billion.  Negative numbers could be  seen on                                                                    
the revenue side.  He pointed to the  spending reductions of                                                                    
about $1 million  on the bottom of slide 8.  The state would                                                                    
not see the full impact  of the spending reductions until FY                                                                    
19 as  a result of the  slow ramping down of  the Cook Inlet                                                                    
tax credits. The annual saving  would be between $65 million                                                                    
to  $115 million.  There would  be an  overall reduction  in                                                                    
what the  state would  be spending on  tax credits  and cash                                                                    
credits, or  obligated to spend. He  estimated the reduction                                                                    
to  be  between  30  percent and  40  percent.  The  largest                                                                    
portion  of  the spending  reductions  were  the Cook  Inlet                                                                    
2:47:19 PM                                                                                                                    
Mr. Alper  turned to  slide 9:  "Original HB  247 Components                                                                    
Not Passed":                                                                                                                    
   · Minimum tax increase to 5%                                                                                                 
   · Floor "hardening" against various credits                                                                                  
   · Per-barrel credit migration ("true up") issue                                                                              
   · GVPP cannot go below zero for a field                                                                                      
   · Restrict repurchase to companies with < $10 billion                                                                        
     revenue and sunset NOLs after 10 years                                                                                     
   · Interest rate increase limited to three years, and                                                                         
     then reduced to below current rate after that                                                                              
Mr.  Alper  continued  to slide  10:  "House-Passed  HB  247                                                                    
Components Not Passed":                                                                                                         
  (In addition to components of Governor's original bill)                                                                       
   · Cash payments limited to companies with less than                                                                          
     15,000 bbl / day                                                                                                           
   · NOL credit rate ramps down to 25%                                                                                          
   · No NOLs earned by companies with production over                                                                           
     15,000 bbl / day                                                                                                           
   · Cook Inlet tax cap sunset moved up to 2019                                                                                 
   · ARM Board alternative purchase option                                                                                      
Mr.  Alper moved  on  to  slide 11:  "Major  Features of  SB
   1. North Slope Operating Loss (NOL) credit phased out:                                                                       
      35% today to 15% in 2017 and zero in 2018                                                                                 
     · Effectively sets a tax rate that can't go below zero                                                                     
     · non-profitable companies                                                                                                 
     · Impacts major producers by preventing credits from                                                                       
        carrying forward, indirectly "hardening" the minimum                                                                    
        tax floor                                                                                                               
     · Impacts independents by eliminating credits earned                                                                       
        during the development stage prior to a company's                                                                       
     New language not in any version of HB247                                                                                   
Mr. Alper added that the  new language was a more aggressive                                                                    
stance  towards operating  loses  than seen  in  any of  the                                                                    
prior versions of legislation during the current session.                                                                       
2:51:35 PM                                                                                                                    
Senator  Dunleavy  asked  if price  impacted  the  NOLs.  He                                                                    
wondered  if there  was a  certain price  at which  the NOLs                                                                    
Mr. Alper responded, "Half yes,  half no." He explained that                                                                    
for independents  developing a field  that did not  have any                                                                    
revenue  price it  did not  matter.  Their NOL  would be  35                                                                    
percent of whatever their costs  might be. He continued that                                                                    
for the major  producers it was only relevant if  they had a                                                                    
loss.  It varied  dramatically from  company-to-company. The                                                                    
weighted  average  breakeven price  on  the  North Slope  at                                                                    
present was  about $45 per barrel.  If the price of  oil was                                                                    
demonstratively higher  than $45 the state  would not expect                                                                    
to  see  a  significant  amount   of  NOLs  from  the  major                                                                    
producers. The provision would be mute.                                                                                         
Senator  Dunleavy thought  the  price of  oil was  currently                                                                    
close to $45 per barrel.                                                                                                        
Mr. Alper reported  that the previous day's  price was about                                                                    
$44 per barrel. Two weeks prior the price reached $50.                                                                          
Senator  Dunleavy   asked  Mr.   Alper  about   his  comment                                                                    
regarding investing or dealing with  the oil patch as Alaska                                                                    
had done 35 years prior.                                                                                                        
Mr. Alper  responded that when  Prudhoe Bay and  Kuparuk and                                                                    
other large fields  were built there were no  tax credits or                                                                    
carry forward  operating losses.  Instead there was  a gross                                                                    
tax and no  incentives for development. There  were just oil                                                                    
Senator Dunleavy  asked if new  technologies, such  as those                                                                    
used   in  North   Dakota,  had   altered  the   concept  of                                                                    
traditional oil exploration, development, and production.                                                                       
Mr.  Alper  responded  that   the  increase  in  technology,                                                                    
precise directional drilling,  hydraulic fracturing, and the                                                                    
like had made pools available  that might not have otherwise                                                                    
been developed.  He thought there  was a  significant amount                                                                    
of oil available that might  not have been available without                                                                    
new technology.  He believed the biggest  difference between                                                                    
the current  day and the  past was scale. There  were larger                                                                    
economies  of  scales  and  the  North  Slope  was  smaller.                                                                    
Smaller fields  had a  higher per  barrel cost.  He surmised                                                                    
that  the higher  per barrel  cost  was behind  the push  to                                                                    
provide incentives for operators.                                                                                               
Senator  Dunleavy   remarked  that  the  world   was  vastly                                                                    
different  than  it was  35  years  previously in  terms  of                                                                    
science advances and technology.                                                                                                
Co-Chair  Kelly  asked  if the  regulatory  environment  had                                                                    
resulted  in  companies spending  more  money  to develop  a                                                                    
field.  He  mentioned  Senator  Dunleavy's  reference  to  a                                                                    
number  of technological  changes in  developing fields.  He                                                                    
wondered if regulatory practices from  35 years ago had been                                                                    
taken into consideration.                                                                                                       
2:56:01 PM                                                                                                                    
Mr.  Alper answered  "probably." He  commented that  Senator                                                                    
Bishop had  discussed that it  took 7  years to 10  years to                                                                    
get an oil filed in place.  He clarified that not all of the                                                                    
time had  to do with  logistics, much  of it was  devoted to                                                                    
permitting. He  believed the state  was tighter  in handling                                                                    
the  unique  environmental issues  on  the  North Slope.  He                                                                    
added  that the  frozen season  being shorter  made it  more                                                                    
difficult to  operate. The  ability to  build ice  roads and                                                                    
other factors made it more  challenging. He admitted that it                                                                    
was not easy  to develop an oil field on  the North Slope of                                                                    
Co-Chair Kelly  asked how long it  used to take to  bring an                                                                    
oilfield  online.  He noted  that  10  years was  frequently                                                                    
mentioned. There had  been an earlier reference  made to the                                                                    
Lower 48 fields  being brought online within 30  to 60 days.                                                                    
He  acknowledged  that  both  the  physical  and  regulatory                                                                    
environments in the Lower 48  were completely different from                                                                    
those in Alaska.  He reiterated his question  about how long                                                                    
it used to take in 1979 or 1980.                                                                                                
Mr. Alper  answered that  in 1930 it  was nothing.  Once the                                                                    
Clean Air Act and Clean Water  Act passed there was a fairly                                                                    
robust process  in place. He  recalled companies  shipping a                                                                    
lot of pipe to Alaska which  ended up sitting in piles along                                                                    
the haul  road for 4 or  5 years waiting on  federal permits                                                                    
to build the Trans-Alaska Pipeline System (TAPS).                                                                               
Commissioner Hoffbeck relayed that  the last field developed                                                                    
on the North  Slope was Alpine which took close  to 10 years                                                                    
to develop.                                                                                                                     
Co-Chair MacKinnon asked about ConocoPhillips' CD-5 field.                                                                      
Commissioner  Hoffbeck answered  that CD-5  did not  take as                                                                    
long. He  explained that the  Alpine field was brand  new in                                                                    
the  Colville Delta  with no  infrastructure  around it.  He                                                                    
indicated that CD-5  had a bridge issue that held  it up for                                                                    
a long time. He was unclear  of the total number of years it                                                                    
took to develop it.                                                                                                             
2:59:11 PM                                                                                                                    
Mr. Alper addressed slide 12: "Major Features of SB5005":                                                                       
   2. Reduces eligibility for cash credits from 50,000 bbl /                                                                    
      day to 15,000                                                                                                             
     Was in House-passed HB247                                                                                                  
   3. Minimum tax increased to 5% when the price of oil is                                                                      
      greater than $55 / bbl                                                                                                    
     · Current 4% rate is at all prices above $25; would                                                                        
        remain in effect between $25 and $55                                                                                    
     · Current "crossover" between minimum tax and SB21                                                                         
        profits tax is about $75-$80 / bbl                                                                                      
    Gov orig. bill had a 5% minimum tax at all prices.                                                                          
     House-passed HB247 had a 5% minimum above $65                                                                              
Mr.  Alper explained  that the  change  in number  1 was  of                                                                    
relatively  limited impact.  It would  make a  difference in                                                                    
2017 where there  was the 15 percent NOL.  He furthered that                                                                    
by eliminating the operating loss  credit on the North Slope                                                                    
it  became   a  Middle   Earth  credit.  Feature   number  2                                                                    
restricted the eligibility to producers  of less than 15,000                                                                    
bbl/day.  Currently   there  was  no  production   from  the                                                                    
Mr.  Alper  discussed  item  3 which  was  the  minimum  tax                                                                    
increase.   It   was   a  milder   version   of   what   the                                                                    
administration had proposed 6 months  prior. It did not kick                                                                    
in to  the 5 percent  level until  the price of  oil reached                                                                    
$55 /bbl (per barrel). He  explained that the 4 percent rate                                                                    
in statute  was actually a  stair step. He claimed  that the                                                                    
steps  were  written years  ago  and  were unrealistic.  The                                                                    
price  had to  be below  $25 /bbl  for a  full year  for the                                                                    
percentage rate  to go to 3  percent, $20 /bbl to  drop to 2                                                                    
percent, etc.  As long as the  price was about $25  /bbl the                                                                    
rate would be 4 percent.                                                                                                        
Co-Chair  Kelly  asked  about a  mandatory  4  percent  rate                                                                    
between  $25 and  $55 regardless  of losses.  He also  asked                                                                    
about  the percentage  between  $75 /bbl  and  $80 /bbl  and                                                                    
whether it essentially returned to the current regime.                                                                          
Mr. Alper  answered that  currently the  rate was  4 percent                                                                    
between $25  /bbl and $75  /bbl or $80  /bbl. In SB  5005 it                                                                    
would be  4 percent  from $25  /bbl to $55  /bbl and  then 5                                                                    
percent from $55 /bbl to the crossover point.                                                                                   
Co-Chair Kelly  asked if it  returned to the  current regime                                                                    
at $75 /bbl to $80 /bbl.                                                                                                        
Mr. Alper  replied that there  was a breakeven point  in the                                                                    
calculation where 35  percent of the net minus  $8 /bbl (the                                                                    
per barrel  credit) was  exactly equal to  4 percent  of the                                                                    
gross, the crossover point. It  was roughly between $75 /bbl                                                                    
to $80  /bbl. As the  minimum tax  was raised it  pushed the                                                                    
crossover point to  the right a couple of  dollars. It would                                                                    
go from  $76 /bbl to  $78 /bbl if  there was an  increase to                                                                    
the 5 percent.                                                                                                                  
Ms.   Rogers  believed   that  the   annual   tax  was   one                                                                    
calculation, but the monthly  installment payments went back                                                                    
and forth.                                                                                                                      
Co-Chair MacKinnon  asked for clarification of  the specific                                                                    
language  in  the  bill.  She   suggested  that  the  people                                                                    
required to  pay the tax  would want  specificity concerning                                                                    
how the  tax calculations  worked. She understood  that once                                                                    
the price of  oil went over $55 /bbl for  a year the minimum                                                                    
tax would be triggered. She  wondered whether it stayed at 5                                                                    
percent or  whether it  went back  and forth.  She requested                                                                    
additional information.                                                                                                         
Mr. Alper  replied that the division  would supply something                                                                    
in writing.  He confirmed that  it was one minimum  tax rate                                                                    
based on the  average price for a calendar  year. The number                                                                    
could be a  different number from one year to  the next. The                                                                    
state received estimated tax payments  and there was a true-                                                                    
up  at the  end  of  the year.  Every  year  was a  separate                                                                    
3:04:55 PM                                                                                                                    
Mr. Alper spoke to slide 13: "Major Features of SB5005":                                                                        
   4. "Migrating Credits" fix preventing per-barrel credits                                                                     
      from being used in another month than the month they                                                                      
      were earned                                                                                                               
     · Important volatility protection for the state                                                                            
    In both the Gov. Orig. and House versions of HB247                                                                          
   5. Gross Value at the Points of Production can't go below                                                                    
      zero for a lease or property                                                                                              
     · Protects the state from effective negative taxation                                                                      
        at high-transportation cost fields                                                                                      
    In both the Gov. Orig. and House versions of HB247                                                                          
Mr.  Alper  continued that  item  4  created some  confusion                                                                    
about  the  issue  of  the interaction  of  the  per  barrel                                                                    
credit, a  monthly credit that changed  value from month-to-                                                                    
month.  In a  year with  significant volatility  such as  in                                                                    
2014  when there  were certain  months  the tax  calculation                                                                    
fell below  the minimum tax  only a  portion of the  $8 /bbl                                                                    
figure  could be  subtracted  because of  the  4 percent  of                                                                    
gross   calculation.   A   per  barrel   credit   was   non-                                                                    
transferrable and  could not  be carried  forward. It  was a                                                                    
use-it or lose-it  credit. Credits would be lost  in the low                                                                    
priced  months. In  other months  the full  credit would  be                                                                    
used and  the companies would pay  a net profit tax.  At the                                                                    
time of annual true-up companies  were able to recapture the                                                                    
unused  per-barrel   credits  from  the  low   price  months                                                                    
effectively  offsetting  tax  obligations  from  the  higher                                                                    
priced months. The  state paid about $110  million in refund                                                                    
checks after  the 2014  tax true-ups.  A fixed  number floor                                                                    
would  prevent it  from  happening. It  would  turn the  per                                                                    
barrel credit  into a true  monthly tax calculation.  It was                                                                    
not an  overall monthly  tax such as  in the  Alaska's Clear                                                                    
and  Equitable  Share  (ACES)  system.   It  was  a  limited                                                                    
application  of a  monthly tax  for one  specific issue.  It                                                                    
would only kick  in in a year with a  lot of volatility. The                                                                    
item was in the governor's original  bill and also in one of                                                                    
the versions of  HB 247. He highlighted item  5 which stated                                                                    
that the  gross value at  the point of production  could not                                                                    
go  below  zero.  The  provision had  to  do  with  avoiding                                                                    
negative  taxation. He  provided an  example where  if there                                                                    
was  a high  transportation cost  and  a very  low price  it                                                                    
might  result in  a negative  wellhead value.  Point Thomson                                                                    
was used  as an  example in  testimony. Point  Thomson filed                                                                    
tariff to return to the  preexisting infrastructure at about                                                                    
$19 /bbl.  By the time oil  went from Point Thomson  all the                                                                    
way  to market  the tariff  was at  about $31  /bbl. If  the                                                                    
price  of  oil  was  $30  /bbl there  would  be  a  negative                                                                    
wellhead value of $1 /bbl  which could be offset against the                                                                    
wellhead value  from other fields  and impacted some  of the                                                                    
other  taxes. If  corrected,  for a  given  field the  gross                                                                    
value  could  not  go  below  zero.  It  was  rare  for  the                                                                    
provision to apply.  He brought up the example  of the Smith                                                                    
Bay prospect.                                                                                                                   
3:08:28 PM                                                                                                                    
Mr. Alper discussed  item 6 on slide 14:  "Major Features of                                                                    
SB SB5005":                                                                                                                     
   6. Interest Rate on delinquent taxes changed from HB247                                                                      
   · Change from 7% + Fed compounding, for three years and                                                                      
     then zero after that; to 5% + Fed compounding, for                                                                         
     four years and 5% + Fed, with simple interest after                                                                        
   · Substantial concern that zero interest rate will make                                                                      
     it difficult to settle tax cases. Also it may kick in                                                                      
     immediately even if a delinquency has paid only the                                                                        
     3%-4% "SB21" rate for three years                                                                                          
   · Changes applied to all taxes rather than carving out                                                                       
     the O&G Production Tax                                                                                                     
   Language was in House-passed HB247                                                                                           
Mr. Alper  addressed item 6  dealing with the  interest rate                                                                    
on delinquent taxes. He relayed  that the law that passed as                                                                    
part of SB 21, included a  simple interest rate of 3 percent                                                                    
above the federal discount rate.  The simple interest was an                                                                    
amendment error  in the late stages  of SB 21 when  the bill                                                                    
was  in  the House  Finance  Committee.  Prior versions  had                                                                    
compound interest.  The administration  wanted to  raise the                                                                    
interest rate  from 3 percent  to 7 percent. The  rate under                                                                    
ACES  was  11  percent.  He mentioned  reverting  to  simple                                                                    
interest  after   4  years   of  entities   paying  compound                                                                    
interest.  He   added  that  the  administration   had  real                                                                    
concerns about  the impact of  a zero interest rate.  It was                                                                    
not about years  4, 5, and 6,  but about years 7,  8, and 9.                                                                    
If a company  were to get assessed and decided  to fight the                                                                    
audit  findings  there  would  be no  reason  to  hurry  the                                                                    
process  along  because no  interest  would  be accrued.  He                                                                    
remarked  that  zero  interest  was  unsustainable  for  the                                                                    
state. The administration also  wanted some clarification on                                                                    
transitional  language  from  the previous  version  of  the                                                                    
bill.  Another change  was to  the  interest rate  language.                                                                    
House Bill 247 carved out a  new regime for just the oil and                                                                    
gas production tax and left  the old interest rates in place                                                                    
for all other taxes.  It created some programming complexity                                                                    
and  the  administration would  like  to  have a  consistent                                                                    
interest regime across all of its taxes.                                                                                        
Co-Chair MacKinnon  encouraged Mr. Alper to  continue to try                                                                    
to  make his  case. However,  there  were 3  members in  the                                                                    
House that stepped  forward to send the ball  down the field                                                                    
to the Senate, but she  was uncertain that everything in the                                                                    
House version would  be acceptable to the  group. The Senate                                                                    
had a difficult  time removing over 10 years  of tax credits                                                                    
worth  billions   of  dollars.   The  Senate   would  listen                                                                    
carefully,  as  they did  not  want  auditors to  have  more                                                                    
complex  procedures. The  Senate had  done battle  regarding                                                                    
some of  the issues in  the bill already. She  remarked that                                                                    
although the House  passed a certain version of  a bill, the                                                                    
Senate would pass a bill  that reflected what it thought was                                                                    
the  right  thing  to  do  in  a  compromise  position.  She                                                                    
encouraged Mr.  Alper to provide  a more  detailed proposal.                                                                    
She thought the issue had already been vetted.                                                                                  
Mr.  Alper appreciated  her words.  He  emphasized that  the                                                                    
administration  wanted  a   more  enforceable  and  rational                                                                    
structure  for  the  interests. There  were  some  technical                                                                    
concerns   with  the   Senate   language   which  gave   the                                                                    
administration some anxiety,  but it would adapt  to the law                                                                    
if it remained in its current form.                                                                                             
Co-Chair  MacKinnon highlighted  that Mr.  Alper had  stated                                                                    
that he would try to  solve the problem through a regulatory                                                                    
process if the legislature did not take it up statutorily.                                                                      
3:13:53 PM                                                                                                                    
Senator Dunleavy asked  if Mr. Alper had stated  that if the                                                                    
bill did  not pass  he would  accept the law  as it  was and                                                                    
implement it.                                                                                                                   
Mr.  Alper  responded  affirmatively.   He  added  that  the                                                                    
regulations  would  provide  some  clarity  as  to  how  the                                                                    
administration  enforced  different  pieces. The  part  that                                                                    
could  be addressed  from a  regulatory  standpoint was  how                                                                    
exactly the  effective date applied  to existing debts  of a                                                                    
certain  age  and  how  things kicked  in.  He  thought  the                                                                    
language needed  to be cleaned  up for a  transition period.                                                                    
He commented, "The  law is the law and, we  will, of course,                                                                    
enforce it".                                                                                                                    
Senator  Dunleavy wondered  if  there would  be any  further                                                                    
attempts to change SB 21 if the bill was not passed.                                                                            
Mr.  Alper was  not  in a  position to  promise  one way  or                                                                    
Senator Dunleavy was trying to clarify.                                                                                         
Mr. Alper advanced to slide 15: "Major Features of SB5005":                                                                     
     7. Technical correction to Sec. 30 of HB247. Fixes                                                                         
     error in the municipal entity / only a portion of                                                                          
     production is sold / proration of costs issue.                                                                             
     New language                                                                                                               
     8. Allows for seismic and geophysical data to be                                                                           
     released in less than 10 years if the lease for which                                                                      
     the data was acquired is terminated.                                                                                       
     New language                                                                                                               
Mr.  Alper   explained  that  in  a   circumstance  where  a                                                                    
municipally  owned utility  owned a  gas field  and consumed                                                                    
all of  their own gas in  their own turbines they  would not                                                                    
be  taxable  and  they  would  not  get  credits  for  their                                                                    
expenses. If they sold some of  their gas and gained a small                                                                    
amount  of revenue  and became  a tax  payer, they  would be                                                                    
able to get credits on  all of their spending. The technical                                                                    
correction would  allow the utility  to get credits  only on                                                                    
the share of the costs related to the amount of gas sold.                                                                       
Ms. Rogers detailed  that all of what  the municipally owned                                                                    
utility produced  was taxable. However, because  they were a                                                                    
municipal entity  they could not  be taxed. In  other words,                                                                    
the portion that they sold was  subject to tax and the other                                                                    
portion  that  they produced  and  did  not sell  was  still                                                                    
taxable. However, because they  were a municipal entity they                                                                    
were  not  taxed.  The   technical  correction  aligned  the                                                                    
expenditures with the portion that was produced and sold.                                                                       
Mr. Alper clarified that the  issue was technical in nature.                                                                    
It was not that  the gas was taxed low, it  was that the tax                                                                    
payer  was exempt.  The  language needed  to  be changed  to                                                                    
restrict  the  ability  of  a  municipal  owned  utility  to                                                                    
receive certain refundable credits.                                                                                             
Co-Chair  MacKinnon stated  that it  was her  understanding.                                                                    
She wondered  if the legislature  had changed  the language.                                                                    
She  thought   the  original  administrative   language  was                                                                    
inserted in an  attempt to help the  administration with the                                                                    
Mr.  Alper  responded  that every  committee  had  kept  the                                                                    
administration's  language. The  Tax Division  realized late                                                                    
in the  game that the  language was written  incorrectly. He                                                                    
reported  that item  8 addressed  the issue  of seismic  and                                                                    
geophysical data  becoming public.  Currently, if  a company                                                                    
owned a  credit and obtained  certain data it  became public                                                                    
in 10 years. The proposed change  was that if a company gave                                                                    
up  a lease  in less  than 10  years the  data would  become                                                                    
public immediately upon  giving up a lease.  The state could                                                                    
then use  the data publically to  release the land to  get a                                                                    
new developer in place.                                                                                                         
3:18:45 PM                                                                                                                    
Co-Chair MacKinnon asked  if item 8 applied to  a lease that                                                                    
was  willingly  forfeited  or   a  lease  forfeited  through                                                                    
Mr. Alper would have to get back to her.                                                                                        
Co-Chair MacKinnon  made reference to the  Prudhoe Bay unit.                                                                    
She wanted clarification on data  associated with a lease in                                                                    
Mr. Alper responded that litigation  would likely take about                                                                    
10 years.                                                                                                                       
Co-Chair   MacKinnon  suspected   Mr.  Alper   was  probably                                                                    
correct. She  wanted to better understand  what the language                                                                    
Mr.  Alper  replied that  he  would  get clarification.  The                                                                    
issue  impacted DNR  more than  the tax  division. He  would                                                                    
consult with  them and  provide a  coherent response  to the                                                                    
Mr. Alper scrolled to slide 16: "Implementation Cost":                                                                          
   · The changes anticipated in this bill will require                                                                          
     additional reprogramming of  the Tax Revenue Management                                                                    
     System (TRMS)  and Revenue Online (ROL)  which allows a                                                                    
     taxpayer  to  file  a  return  online  and  update  the                                                                    
     current tax return forms                                                                                                   
   · The fiscal note from HB247 included $1.2 million in                                                                        
     capital funds for this purpose                                                                                             
   · We are not requesting any additional funds with this                                                                       
   · We do not anticipate any additional costs to                                                                               
     administer the tax program                                                                                                 
   · We are beginning the scoping process for the major                                                                         
     regulatory changes to implement HB247                                                                                      
Co-Chair  MacKinnon was  waiting for  the regulatory  review                                                                    
Mr.  Alper   offered  to   review  the   sectional  analysis                                                                    
beginning  on  slide  17   "Sectional  Analysis".  He  began                                                                    
reading the sectional analysis.                                                                                                 
Co-Chair MacKinnon called an "at ease."                                                                                         
3:21:51 PM                                                                                                                    
AT EASE                                                                                                                         
3:22:34 PM                                                                                                                    
Co-Chair  MacKinnon asked  Mr. Alper  to send  the sectional                                                                    
analysis in a word document for members.                                                                                        
Mr. Alper would provide a copy for the committee.                                                                               
Co-Chair  MacKinnon  stated  that a  separate  document  was                                                                    
easier for the general public to access online.                                                                                 
Mr. Alper  responded that the documents  that were presented                                                                    
to the  committee included the  fiscal note,  the PowerPoint                                                                    
Presentation,  and  a  one page  analysis  of  the  expected                                                                    
future spend for credits as modified to HB 247.                                                                                 
Co-Chair  MacKinnon notified  the public  that the  document                                                                    
titled, "Estimated  Tax Credit  Payments with Impacts  of FY                                                                    
17 Budget and  HB 247", was prepared by Dan  Stickle and was                                                                    
available online. The document was  dated, July 12, 2016 and                                                                    
was 2 pages. The second page contained a graph.                                                                                 
Mr.  Alper  explained that  the  graph  on the  second  page                                                                    
reflected what  he had mentioned  earlier: 30 percent  to 40                                                                    
percent of the credits were reduced in HB 247.                                                                                  
Senator  Hoffman  had a  question  on  the fiscal  note.  He                                                                    
wondered  if the  numbers would  continue to  decline beyond                                                                    
2022. He  asked Mr.  Alper what he  envisioned for  5 years,                                                                    
through 2027.                                                                                                                   
Co-Chair  MacKinnon  noted  that  there was  a  fiscal  note                                                                    
number attached to SB 5005,  Fiscal Note 1, dated 7-11-2016.                                                                    
It had fiscals from FY 17 through FY 22.                                                                                        
Mr.  Alper  relayed  that  the  fiscal note  was  a  4  page                                                                    
document. Most of the narrative  had been covered throughout                                                                    
the  meeting.  He  noted  on  the  back  page  there  was  a                                                                    
horizontal formatted  table showing  the years and  the line                                                                    
item description  of the different  provisions of  the bill.                                                                    
Going past 2025  there were two halves to it:  The half that                                                                    
reduced the state's spending on  credits and the increase of                                                                    
a minimum tax  in the years of 2022, 2023,  2024, 2025. Once                                                                    
the price of oil increased  the additional revenue would not                                                                    
be seen.                                                                                                                        
3:26:43 PM                                                                                                                    
Co-Chair MacKinnon  thought it was important  for the people                                                                    
of  Alaska to  know that  for the  first time  in the  prior                                                                    
decade the state had an  increase in oil production of about                                                                    
3.3  percent.  She  wondered  if  she  recalled  the  number                                                                    
Mr. Alper confirmed that she  was correct. There had been 15                                                                    
thousand barrels per  day of production more  than last year                                                                    
or the year before.                                                                                                             
Co-Chair MacKinnon  asked if  the state  was above  or below                                                                    
the  price point  provided in  the spring  revenue forecast.                                                                    
The spring  forecast lowered  when the  legislature modified                                                                    
the price per  barrel amount. She wondered if  the price was                                                                    
lower or higher than the state was currently experiencing.                                                                      
Mr. Alper  responded that the  spring forecast had an  FY 17                                                                    
price  of  $39. Currently,  the  price  was in  the  $43-$44                                                                    
range. If the price held, the  state would be about $4 above                                                                    
the estimate - round numbers at  these prices was $1 and the                                                                    
price of oil made the state about $30 million per year.                                                                         
Co-Chair MacKinnon  supposed the  state was  over estimating                                                                    
expenses  and under  estimating revenue  on what  was before                                                                    
the committee.                                                                                                                  
Mr.  Alper stated  that  the  administration was  estimating                                                                    
revenue based on  the price of oil. The volume  of oil would                                                                    
not make a  material bit of difference. Much of  the new and                                                                    
incremental  production that  lead  to the  increase was  in                                                                    
NPRA  and areas  that  did not  pay a  high  royalty to  the                                                                    
state. At low prices the so  called new oil, the gross value                                                                    
reduction  eligible oil,  did not  really  pay a  production                                                                    
Senator Dunleavy  commented that  the transportation  of oil                                                                    
would help by lowering the pipeline costs overall.                                                                              
Mr.  Alper  agreed.  The administration  was  more  or  less                                                                    
diluting  the  annual operating  costs  of  TAPS with  every                                                                    
extra barrel of oil.                                                                                                            
Senator  Dunleavy asked  if the  bill contained  all of  the                                                                    
changes  to   SB  21  that   the  administration   would  be                                                                    
Mr. Alper  responded that  he could only  speak to  the bill                                                                    
before  the  committee.  He  did  not  know  what  might  be                                                                    
proposed at a future time.                                                                                                      
Senator Dunleavy  asked, "So there  could be  more proposals                                                                    
to 21?"                                                                                                                         
Mr.  Alper replied  that  it  was not  for  him  to say.  He                                                                    
suggested that perhaps the commissioner could respond.                                                                          
Commissioner Hoffbeck  was uncertain whether there  would be                                                                    
additional changes.  The governor  stated when he  came into                                                                    
office  that rewriting  SB 21  was  not on  his agenda.  The                                                                    
administration had  found areas that needed  fine tuning. He                                                                    
believed  that  until  the entire  fiscal  package  was  put                                                                    
together it  would be  difficult to  make a  commitment that                                                                    
there would  be no other  changes. He  was not aware  of any                                                                    
changes in the works.                                                                                                           
Co-Chair  MacKinnon asked  if there  were other  tax credits                                                                    
that would be suspended.                                                                                                        
Commissioner  Hoffbeck responded  that the  film tax  credit                                                                    
had been eliminated  in the prior year. In  terms of smaller                                                                    
credit programs he deferred to Mr. Alper.                                                                                       
Mr.  Alper stated  that the  programs, themselves,  were not                                                                    
being    suspended.   However    through   the    veto   the                                                                    
administration was  suspending the purchase of  tax credits.                                                                    
Many different  credits fall under  the same  umbrella. Only                                                                    
the refundable  tax credits were  suspended. The  state only                                                                    
refunded credits in the world of oil and gas.                                                                                   
Co-Chair MacKinnon  asked about  an indirect  expense report                                                                    
showing  millions  of  additional  dollars  going  to  other                                                                    
industries. /she  wondered if there  would be a bill  in the                                                                    
session   to  suspend   the  tax   credits   or  delay   the                                                                    
implementation of paying those tax credits.                                                                                     
Mr. Alper stated  that they were all credits  used to reduce                                                                    
tax payments.                                                                                                                   
Co-Chair MacKinnon was aware.                                                                                                   
Mr. Alper explained that no  one was preventing or trying to                                                                    
prevent anyone  from using  them to  reduce their  taxes. If                                                                    
someone  earned them  and had  a tax  obligation they  could                                                                    
reduce  it. There  had been  legislation regarding  indirect                                                                    
expenditures eliminating some of  the credits. He personally                                                                    
wanted  to see  a  more  aggressive look  into  some of  the                                                                    
3:32:29 PM                                                                                                                    
Senator Dunleavy noted  that Mr. Alper had  just provided an                                                                    
opinion on where he would like things to go.                                                                                    
Mr. Alper had opinions.                                                                                                         
Co-Chair  MacKinnon  responded  that there  were  industries                                                                    
that contributed  across the state. All  of those industries                                                                    
were being  hit at the  same time  the oil and  gas industry                                                                    
was  being affected  based  on either  the  jobs created  or                                                                    
money  that  was  coming  into  the  state  of  Alaska  from                                                                    
revenues.  The money  was paying  for, not  receiving, taxes                                                                    
from the  other industries.  It was not  a tongue  and check                                                                    
matter.  She  was  asking  if   there  was  any  reason  the                                                                    
administration  was  holding off  paying  all  of the  other                                                                    
industries that  were contributing  to Alaska's  economy but                                                                    
were paying  less taxes to  the government in doing  so. She                                                                    
would  appreciate   an  evaluation.  She  opined   that  one                                                                    
industry was  being held  as a reason  to argue  about their                                                                    
business practices,  while other industries  were benefiting                                                                    
from  the   revenue  of  a  particular   industry  that  had                                                                    
contributed to Alaska  for more than 35  years. Everyone was                                                                    
trying to  ride the fiscal  situation the state was  in. She                                                                    
wondered if  the state  could suspend  the other  credits or                                                                    
delay   paying  the   other   credits   against  their   tax                                                                    
liabilities so that  the state saw more  revenue rather than                                                                    
a deferral of the revenue by allowing other deductions.                                                                         
Mr. Alper agreed  that it was worth  investigating and would                                                                    
talk to  the assistant attorney  general. He was aware  of a                                                                    
credit reduction built into the mining tax component.                                                                           
Co-Chair MacKinnon responded  that it was the  only bill the                                                                    
committee had at present.                                                                                                       
Mr.  Alper  expressed his  gratitude  to  the committee  for                                                                    
hearing the administration's bill.  He mentioned other bills                                                                    
that were  looking for other industries  to contribute more.                                                                    
There  was a  mining bill,  a fisheries  bill, a  motor fuel                                                                    
bill, and  an alcohol and  tobacco tax bill. The  intent was                                                                    
to  pass   all  of   them  along   with  a   Permanent  fund                                                                    
restructuring  bill. He  encourage  moving towards  building                                                                    
Alaska instead  of fighting over  how to fix Alaska.  He was                                                                    
paraphrasing the governor.                                                                                                      
Co-Chair MacKinnon  apologized to the committee.  Her office                                                                    
did  not   receive  the  governor's  tax   bill  until  late                                                                    
afternoon   on  Monday.   She  reported   reaching  out   to                                                                    
contractors to look at the  bill before the beginning of the                                                                    
special  session.  The   legislature's  contractor  was  not                                                                    
available. The legislature had to  change contractors in May                                                                    
and actively  pursued another contractor to  do the fiscals.                                                                    
That person was  not available at least  until the following                                                                    
Monday. The  committee also reached  out to the  industry to                                                                    
give them a chance to  review the legislation. They were not                                                                    
available  until after  Monday. At  present she  had nothing                                                                    
else to go before the  committee between now and Monday. She                                                                    
wondered  if  any committee  members  wanted  more from  the                                                                    
administration.  The   analysts  also  wanted  to   be  well                                                                    
prepared   to   provide   the   legislature   with   correct                                                                    
3:37:45 PM                                                                                                                    
Vice-Chair  Micciche  was   processing  the  points  brought                                                                    
before the committee.                                                                                                           
Co-Chair MacKinnon  added that the committee  would continue                                                                    
to pursue the  analysis as well as prepare  for the industry                                                                    
that  was affected  by  the  bill and  then  move to  public                                                                    
testimony.  She encouraged  committee members  to email  her                                                                    
office with any requests for additional information on the                                                                      
3:38:35 PM                                                                                                                    
AT EASE                                                                                                                         
3:38:52 PM                                                                                                                    
Co-Chair MacKinnon added that the committee had reached out                                                                     
to the industry and would hear from the legislature's                                                                           
analysts prior to hearing from the industry.                                                                                    

Document Name Date/Time Subjects
SB5005 Sponsor Statement - Governor's Transmittal Letter.pdf SFIN 7/13/2016 1:30:00 PM
SB 5005 DOR 1st Presentation- SB5005 OG Credits 7-12-16 final.pdf SFIN 7/13/2016 1:30:00 PM
SB 5005 Tax Credit Payments w HB247_v2_ds_20160712.pdf SFIN 7/13/2016 1:30:00 PM
HB 247