Legislature(2007 - 2008)BUTROVICH 205
11/02/2007 05:00 PM Senate JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| SB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB2001 | TELECONFERENCED | |
SB 2001 - OIL & GAS TAX AMENDMENTS
5:28:45 PM
CHAIR FRENCH announced consideration of SB 2001 and asked for a
motion to adopt the committee substitute.
SENATOR WIELECHOWSKI moved to adopt committee substitute (CS) to
SB 2001, labeled 25-GS0014\K. Hearing no objections, version K
was before the committee.
CHAIR FRENCH asked Mr. Bullock to explain the change in the CS
that reinserted the progressivity tax rate but not the floor.
5:29:54 PM
DONALD BULLOCK, Attorney, Legislative Legal and Research
Services Division, said version K is a combination of the bill
that came out of the Resources Committee and the governor's
bill. The biggest difference between the Resources Committee CS
and this version is that two of the three tax provisions that
the governor offered are brought into this bill. The governor
proposed moving the nominal tax rate from 22.5 percent to 25
percent and lowering the floor from 40 to 30 for the
progressivity tax. Her bill also proposed a floor tax of 10
percent of the gross value at the point of production for the
fields that have been in production a long time and that
continue at high production. This bill does not include that
last part of the tax but it does include the 22.5 to 25 percent
increase and it includes lowering the floor to 30 as well as
changing the progressivity rate from 0.2 percent to 0.4 percent.
Sections 15, 16, and 17 of the bill address the tax changes.
MR. BULLOCK said the progressivity tax payment schedule has also
changed. Currently payments are scheduled on a monthly basis
which affects calculating the installment payment. The
governor's bill determined progressivity on a calendar year
basis. The installment payment was based on the nominal tax rate
and then a pay-up at the end of the year or by March 31 of the
year after the calendar year for which the tax is due. Version K
goes back to the monthly calculation so the installment should
keep current.
5:31:59 PM
MR. BULLOCK said there are no substantive changes in the credit
provisions of the bill. The nominal tax rate plus the
progressivity are combined into one section in this bill as they
were in the governor's bill. Changes that deal with eligibility
for transitional investment expenditure (TIE) credits made in
the Senate Resources Committee were incorporated. Also in the
section that establishes the tax rate there's a maximum of 50
percent, which is a combination of 25 percent nominal rate plus
the multiple of .4 percent that applies to the progressivity
rate. Other changes in this draft compared to the Resources
Committee CS are the inclusion of a class of disallowed
expenditures relating to poorly maintained equipment. That's the
corrosion issue from SB 80, which wasn't addressed in prior
versions. Version K adds the provision that if there is
maintenance that's the result of improper maintenance before,
then those costs are disallowed. That's in section 44, which
amends AS 43.55.165(e). This bill also includes the expansion of
the statute of limitations to six years as proposed in the
governor's bill. These changes are found in Sections 1, 14, and
37.
5:35:29 PM
MR. BULLOCK further explained that this bill changes the
classifications and reduces to four the number of exempt oil and
gas audit manager positions. Intent language regarding the
positions has been added to Section 51.
5:36:42 PM
MR. BULLOCK explained the changes regarding the replacement of
transportation costs made in the Petroleum Production Tax (PPT).
In PPT three conditions were required to be met to replace
"actual" with "reasonable" costs. Version K changes it back so
any one of the three conditions can trigger the substitution.
SENATOR THERRIAULT asked which section he's referencing.
MR. BULLOCK replied it's Sections 39 and 40.
MR. BULLOCK continued. A requirement was added to AS
43.55.165(b), stating lease expenditures that may be deductible
must be incurred in the state. Additionally, a new provision in
Section 33 gives the Department of Revenue (DOR) the authority
to require a producer to report and publish the gross value at
the point of production for a calendar year and the
corresponding lease expenditures. Section 46 allows the DOR to
publish that information. It does not include reporting the
credits.
5:40:11 PM
MR. BULLOCK said Section 36 has a new section - AS 43.55.055.
This is a new penalty for understatements of tax that must be
shown on the return. He added that there will be a technical
amendment in the near future to correct a misstated number.
MR. BULLOCK said in Section 38 an amendment to AS 43.55.110
gives DOR authority to reward a person who provides information
to the department about non-compliance with the requirements of
AS 43.55 that leads to collection of an increase in the tax,
penalty, or interest. The reward is subject to appropriation.
The information that is sought is information related to:
understated gross value at the point of production; overstated
lease expenditures; or overstated transportation costs.
5:41:36 PM
SENATOR THERRIAULT referring to Section 38, page 27, lines 15-
16, asked if the reward could amount to millions of dollars even
with a 10 percent cap.
MR. BULLOCK replied it could, but the department is given
discretion to determine the compensation.
5:42:43 PM
SENATOR THERRIAULT asked if the department would be given the
authority to cap the amount.
MR. BULLOCK replied it's within their discretion to have the
reward be less than 10 percent.
CHAIR FRENCH noted that the bill has many provisions that had to
be included because of the ripple effect of bringing in two out
of the three fiscal changes.
MR. BULLOCK agreed, and said that that the governor's bill
changed the way taxes were described in AS 43.55.011 so any
references to former sections had to be changed.
CHAIR FRENCH said it might be easier to review changes by topic
rather than section by section.
CHAIR FRENCH called an at-ease at 5:45PM.
5:54:19 PM
CHAIR FRENCH called the committee back to order.
PATRICK GALVIN, Commissioner, Department of Revenue, Juneau,
reviewed Sections 16 and 17. He explained that the Department of
Revenue (DOR) was working with a "twenty-five percent rate with
progressivity that starts at a net $30 trigger with a .4 degree
slope." Credits were approached as provided in the Senate
Resources CS. Based on those assumptions he provided information
for fiscal years 2008, 2009, and 2010. He stated it was also
important to note that the effective date of the fiscal terms is
January 1, 2008.
COMMISSIONER GALVIN said that three different dollar assumptions
were run. He continued:
One was at our current price forecast, which starts in
FY 2008 at $71.65. And for that price…this CS would
result in $2.699 billion. That compares to status quo
PPT of $1.915 [billion]. Continuing in the forecasted
price for 2009 is $64.55-going down. The draft CS in
$2.732 billion compared to a status quo PPT of $1.693.
Then in 2010 the projected price is $60.05. The CS
$2.356 billion compared to status quo PPT of $1.531.
We also ran them at $60 price and then $80 price. The
$60 we ran as a nominal, which had it increasing each
year. So I'll tell you the price at $60 basically in
today's dollars each year.
For 2008 it's $1.613 billion for the CS compared to
status quo PPT of $1.051 [billion]. For 2009 the CS is
$2.308 compared to status quo PPT of $1.435. In 2010
the CS $2.398 compared to PPT $1.562.
CHAIR FRENCH asked for the nominal price in 2009.
COMMISSIONER GALVIN answered $61.65 and in 2010 $63.35.
5:59:36 PM
COMMISSIONER GALVIN clarified that the price forecast is also in
today's dollars. The forecasted price for 2009 in 2009 dollars
is $66.30 and in 2010 it's $63.40 so the numbers should be
similar for the two runs in 2010. He continued:
Finally at $80. 2008 $3.619 for the CS compared to
$2.650 for status quo [PPT]. In 2009 - running all
your numbers you've got a nominal price of $82.20 -
the CS would be $4.709 [billion]. Status quo PPT
$3.031 [billion]. In 2010, nominal price $84.46. The
CS $4.900 [billion] and status quo PPT $3.266
[billion].
Those are the numbers that our revenue model shows
would be generated by the fiscal terms proposed in the
CS.
6:01:26 PM
CHAIR FRENCH asked Commissioner Galvin for the administration's
view of the tax increases with respect to giving Alaska a fair
share and impacting industry.
COMMISSIONER GALVIN replied the Alaska's Clear and Equitable
Share (ACES) proposal contains a gross tax floor as well as a
progressivity rate that is not nearly as steep as what is
proposed in the CS. The administration still supports that trade
off but recognizes that the legislature is taking a slightly
different approach. We don't see that the proposal necessarily
will crimp investment, but we do recognize that progressivity
based upon the margin as opposed to the gross value will provide
investment incentive for entities looking at pursuing more
economically stressed projects. It's a reasonable fiscal
tradeoff.
CHAIR FRENCH asked if the change would be reasonable.
COMMISSIONER GALVIN answered it would be reasonable and fair.
SENATOR WIELECHOWSKI asked if the governor supports the change.
COMMISSIONER GALVIN answered it's an entire package, but she
would support this trade-off as it stands.
6:03:48 PM
SENATOR HUGGINS said he wants to see qualifiers that show how
the deduction was reached.
COMMISSIONER GALVIN responded that an important component of
this trade-off is the operating principle of making gains when
prices are high so that becomes the protection for lower prices
in the future.
SENATOR HUGGINS said he hopes future budgets will reflect the
desire to save money and contain spending.
COMMISSIONER GALVIN said the governor supports saving and
recognizes that in her budget.
6:05:36 PM
SENATOR WIELECHOWSKI clarified that this proposal is a trade-
off. The state is taking a little bit of risk at the low end of
prices by giving up the gross, hoping to make it up when oil
prices are high.
COMMISSIONER GALVIN agreed.
CHAIR FRENCH asked Mr. Bullock to talk about the statute of
limitations in Sections 1, 14, and 37.
MR. BULLOCK said Section 1 is a statement of legislative intent,
but it would not be particularly helpful in determining how the
section applies that extends the statute for six years.
MR. BULLOCK said Section 14 is a conforming change in the
current statute of limitation.
CHAIR FRENCH asked if the statute of limitation will be six
years when the bill is finished.
MR. BULLOCK replied yes, for AS 43.55 taxes. There is a
different statute of limitation in Chapter 5 of Title 43 that
generally applies to other taxes in the title.
CHAIR FRENCH asked if that is why it says three years in Section
14.
MR. BULLOCK answered yes.
CHAIR FRENCH asked if AS 43.55.075 is the operative change.
MR. BULLOCK said yes; it's in Section 37. It was in the
governor's bill, but not in the Senate Resources CS.
6:08:26 PM
CHAIR FRENCH asked for an explanation of how the statute of
limitations works.
COMMISSIONER GALVIN explained that the standard statute of
limitations for tax issues is three years. The section in
question provides an exception. For oil production tax the
statute of limitations is six years as opposed to three.
SENATOR WIELECHOWSKI said the public has justified concerns
about going to a net profit tax, and to dispel some of those
concerns this is one tool that will be critical. The state will
conduct many audits and this provision will help protect the
state's interests.
SENATOR THERRIAULT asked for an explanation of the link with
Section 1.
COMMISSIONER GALVIN said Section 1 is a reference to a
particular regulation that references a regulatory decision that
is made after a taxpayer has filed a tax return. That decision
has a retroactive application and the taxpayer is obligated to
provide notice of the decision to the department along with an
amended tax return that's retroactive to the particular
decision. The statute of limitations would start with the
amended return. This is to ensure that if the statute of
limitations is changed within this chapter, then for the
purposes of that regulation the intent is that it applies the
full statute of limitations to that also.
SENATOR THERRIAULT said an interpretation of AS 43.05.260 would
embody that particular set of regulations.
COMMISSIONER GALVIN agreed; that's the cross reference.
6:12:21 PM
CHAIR FRENCH asked for an explanation of auditors referenced in
Sections 9 and 51.
MR. BULLOCK explained that Section 9 [Section 10] amends the
statute that lists all the exempt positions in the state. This
section differentiates oil and gas audit managers from auditors
that may already be employed with the department. This section
adds emphasis on their being employed in a professional policy
making capacity, which is a key determination of an exempt
position. Section 51 is intent. It refers to the creation of
four auditor positions in the DOR.
CHAIR FRENCH said there has been much discussion about auditors,
and he thought the current number of auditors in classified
service would be maintained at seventeen. He asked if this CS
would add four new positions to that number.
COMMISSIONER GALVIN answered no. His understanding is four out
of the seventeen existing positions would become exempt.
CHAIR FRENCH said the committee intent was to create four new
positions to increase the size of the staff. He believes it is
necessary to create four new positions.
6:16:14 PM
COMMISSIONER GALVIN said this is a compromise between the
various interests which addresses his primary request, but it
doesn't completely tackle the need to attract the personnel
necessary for the department's audit staff. Qualified auditors
are a broader issue that will need to be addressed statewide.
Department of Natural Resources (DNR) audit needs, which were
included in the original bill, are not addressed here. He said
this is the starting point for getting the personnel he needs.
CHAIR FRENCH said it is important to get this right.
SENATOR HUGGINS said auditing is the cornerstone to success and
he wants to err on the side of "robustness." He will recommend
follow-up in the Finance Committee.
6:18:17 PM
CHAIR FRENCH asked how many auditors are necessary.
COMMISSIONER GALVIN said he won't know until he has the people
in place. The system must be designed first, and that might take
a couple of years. Consultants say four highly skilled people
are needed along with existing staff.
SENATOR MCGUIRE said she doesn't want this provision to reduce
morale within the department. She believes the current auditing
staff at DNR and DOR works hard and is doing a good job. She
said she believes that training is an important component.
COMMISSIONER GALVIN replied that he shares Senator McGuire's
sentiments because morale is important. Training and other
experiences that provide a sense of fulfillment are vital to
employee well-being and retention.
6:23:27 PM
CHAIR FRENCH said this provision was intended as a compromise.
SENATOR THERRIAULT asked if the provision affects only DOR
auditors.
COMMISSIONER GALVIN answered yes.
SENATOR THERRIAULT asked if the original bill addressed DNR
concerns.
COMMISSIONER GALVIN replied yes; the original bill provided
exempt tax auditor positions for DOR and exempt royalty auditor
positions for DNR.
SENATOR THERRIAULT asked for the chair's intent regarding DNR.
CHAIR FRENCH said the intention was to keep DNR auditors in
classified service. He understood that what was really necessary
was to have high level analysts in DOR.
COMMISSIONER GALVIN said he has heard testimony that there are
other solutions to the classified service issues. He wants to
continue to work in that direction as well.
CHAIR FRENCH said right now he wants to craft a solution that
works for DOR.
CHAIR FRENCH asked again if the number of proposed auditors
should be increased.
COMMISSIONER GALVIN answered no; four is the number that meets
his current expectations.
6:27:48 PM
SENATOR MCGUIRE encouraged Commissioner Galvin to look at the
"like-pay for like-work" issue.
Commissioner Galvin replied current employees can be impacted
when new employees are brought into positions above them. It is
an issue that must be dealt with.
6:30:56 PM
CHAIR FRENCH asked for an explanation of Section 43, pages 30-
31, pertaining to in-state expenditures.
MR. BULLOCK said it amends AS 43.55.165(b) and addresses direct
costs and spending activity restrictions.
CHAIR FRENCH asked if it is constitutional to limit tax
deductions to expenditures that occur within the state.
MR. BULLOCK said these types of requirements are subject to a
low level of scrutiny and are a tax policy matter for the state.
In this case the state is identifying what expenses can be taken
to reduce the value of the oil and gas that's taxable. He thinks
federal or state constitutions would not be violated by this
provision.
6:34:00 PM
CHAIR FRENCH asked if this provision allows a deduction for
steel, for example, to be bought in Tulsa then shipped to the
North Slope.
MR. BULLOCK answered the steel would have to make it to Alaska
in order to be deducted.
CHAIR FRENCH summarized it's a deductible expense it the item is
shipped to Alaska and used in Alaska; if it never gets to Alaska
then it's not deductible.
MR. BULLOCK added that DOR would ultimately need to adopt by
regulation conditions for identifying costs that are incurred in
the state.
CHAIR FRENCH asked about people who work in Alaska and fly to a
home in Texas or Oklahoma.
MR. BULLOCK said if those people are working in the state the
expenses would be deductible. If they work out of state, even if
it is Alaska related, the deduction would not be allowed under
this provision.
CHAIR FRENCH clarified his question using an example of a
petroleum engineer located in Houston working on a lease for the
North Slope. Those wages would not be deductible because that
work does not take place in the state. Whereas a petroleum
engineer working in Anchorage on a North Slope expenditure would
be eligible for deduction.
MR. BULLOCK agreed with his characterization of the issue.
6:36:23 PM
SENATOR HUGGINS asked Commissioner Galvin if there are any
activities that he is concerned about in this provision.
COMMISSIONER GALVIN replied his department does not have any
particular concerns. This provision came from other interested
parties.
CHAIR FRENCH addressed the question and said that in a net
profit regime, deductions for labor costs should come from money
being spent in the state.
SENATOR THERRIAULT asked if there is information about what
percentage of deductions will not be allowed under this
provision.
CHAIR FRENCH said he didn't know. Part of the reason for
including this provision is to address to what extent board room
discussions in Houston will be assigned as a lease expenditure
against the state's gross revenue.
SENATOR THERRIAULT said that component is probably small in the
whole scheme. Perhaps at the project design level this provision
would have more of an impact.
CHAIR FRENCH said this is the area where he sees this provision
benefiting the state. He can imagine engineering, geologic work,
or financial analysis being outsourced. He sees this as a trade
off for a net profit system that benefits industry by not
collecting taxes until they show a profit. In exchange for that,
money will be spent in Alaska on jobs.
6:41:06 PM
MR. BULLOCK commented that the PPT allows a one-dollar deduction
for every dollar in allowable lease expenditure. That dollar
reduces the taxable value for PPT purposes by a dollar thereby
creating a 22.5 cent revenue deduction. This is a legitimate
policy matter when looking at which expenditures to allow.
SENATOR THERRIAULT relayed that in production sharing contracts
a local hire requirement is generally part of the agreement.
6:42:30 PM
CHAIR FRENCH asked for an explanation of publication of profits
in Section 46.
MR. BULLOCK explained that the section has two parts. He
referred to AS 43.55.040 on pages 23-24, which authorizes DOR to
require a producer that has an average total production in the
state of more than 100,000 barrels a day for a calendar year, to
report the gross value at the point of production of the
producer's taxable oil and gas and the total amount of the lease
expenditures. Those are two elements that are used to determine
petroleum production tax. Turning to Section 46 he said the
first part requires an aggregation of three or more producers
for certain types of information. Page 37, lines 6-7 refers to
the information that the department would be authorized to
request. It allows the department to publish the gross value at
the point of production and the total amount of the lease
expenditures that each producer that met the 100,000 barrel per
day requirement was required to report.
SENATOR THERRIAULT asked if this is a blanket requirement, or if
it would be implemented only if a company wished to take
advantage of credits and deductions.
MR. BULLOCK answered there is no contingency, the department can
simply ask for reporting.
CHAIR FRENCH noted that this is another trade-off provision in a
net-profit system. If the State of Alaska allows credits and
deductions against certain expenses, the public exchange of
information is reasonable.
6:45:58 PM
CHAIR FRENCH asked about the penalties provision in Section 36.
MR. BULLOCK said Section 36 inserts a new penalty in AS
43.55.055 to address substantial and gross understatement of
tax. Gross understatement brings a higher penalty than
substantial understatement. Definitions of "substantial
understatement" and "gross understatement" are included in
statute. He noted that an amendment will arrive shortly to
correct an error. It will change 10 percent to 20 percent.
CHAIR FRENCH said the amendment, labeled 25-GS0014\K.8, reads as
follows:
Page 25, line 22:
Delete "10"
Insert "20"
CHAIR FRENCH set the amendment aside temporarily. In response to
a question from Senator Therriault he labeled it Amendment 1.
6:48:06 PM
CHAIR FRENCH turned to the section dealing with Qui Tam
"whistle-blowers" and asked how it would work.
MR. BULLOCK said this amends AS 43.55.110, which is in Section
38. The provision is on page 27, line 11. This section of the
bill offers an incentive for someone aware of a reporting
problem, to inform the state and thereby set an audit in motion.
If an adjustment to a tax results in more money to the state,
DOR is allowed to pay a reward to the person who provides the
tip based on the percentage that the state gained as a result of
the tip.
CHAIR FRENCH asked for clarification that the provision does not
give anyone the right to go to court to proceed against a
company whose deduction may or may not be lawful.
MR. BULLOCK agreed; DOR would take the action in the form of an
audit. The provision allows DOR an "informant" tool.
SENATOR WIELECHOWSKI said the committee should consider making
the provision revenue neutral by assessing the reward amount in
addition to the penalty.
MR. BULLOCK explained that the appropriation for the reward
would come from the penalty assessment. The state would receive
the tax that's due plus interest on that amount.
SENATOR WIELECHOWSKI asked for clarification of the provision as
currently written.
MR. BULLOCK replied the legislature has the option of
appropriating award money out of the penalties that are
received. The reward may not exceed 10 percent of the tax,
penalty and interest that's collected.
CHAIR FRENCH understood Senator Wielechowski's point which is to
avoid reducing the state's overall collection. The difficulty is
that the legislature must appropriate the money, he added.
MR. BULLOCK acknowledged that and pointed out that part of the
issue is that the state might not have acquired the information
otherwise.
CHAIR FRENCH said the state has to give something up for the
receipt of new tax revenue.
6:54:08 PM
SENATOR WIELECHOWSKI asked if the company could be penalized and
also be required to pay the cost of the informant's reward.
MR. BULLOCK said he was not aware of any such precedence.
SENATOR THERRIAULT asked why language addressing the
appropriation for the "purpose from penalties collected" is
included. Aren't the penalties general funds dollars?
MR. BULLOCK said the language is identifying a source that may
be considered by the legislature if it chooses to appropriate
reward money.
SENATOR THERRIAULT pointed out that someone might provide
information where the state gets additional tax and interest but
there might not be a penalty. The benefit that's paid is just
general fund dollars.
MR. BULLOCK replied the reward would not be paid out of the
actual increase to the state. Money would be available at the
discretion of the department to make an award based on what the
state gained as a result of the tip. The provision only says
that the award cannot be more than 10 percent of whatever the
state recovered.
SENATOR THERRIAULT said if the reward is a percentage of the
tax, interest, and penalty, the reward would clearly not be more
than the worth of what the state gained; thus, why would the
source of reward money need to be indicated?
6:57:28 PM
MR. BULLOCK responded the money has to be appropriated and
identified. There is no link between the appropriation and the
payment.
SENATOR THERRIAULT asked if the provision would be the same if
on page 27, lines 11-12 the language said "subject to a
legislative appropriation the department may compensate a person
who provides information."
MR. BULLOCK replied yes.
CHAIR FRENCH said a possible Amendment 2 has been identified.
SENATOR MCGUIRE asked about the rationale for the ten percent
cap.
CHAIR FRENCH replied he did not have a specific cap in mind,
except to contain it so there would be a definite gain to the
state.
6:59:29 PM
SENATOR MCGUIRE asked if a penalty section was set up when the
legislature privatized attorney general and consumer liability,
and if there was a uniform standard.
MR. BULLOCK said he didn't know. His approach to this particular
reward is money is being spent to get information that results
in more taxes to the state.
SENATOR WIELECHOWSKI asked if the provision exposes the state to
liability if an award is not appropriated.
MR. BULLOCK replied it does not; any reward is subject to
legislative appropriation.
7:01:05 PM
CHAIR FRENCH turned to provisions of the bill that deal with
corrosion.
MR. BULLOCK explained that corrosion is a disallowed lease
expenditure in AS 43.55.165(e). In this draft Section 44
contains those exclusions. The "corrosion issue" is on page 34.
CHAIR FRENCH asked what was changed in the provision.
MR. BULLOCK replied language has been added beginning on page
34, line 10, that's based on SB 80. It disallows costs incurred
for repair, replacement or deferred maintenance of a facility
other than a well that was improperly maintained.
CHAIR FRENCH said the provision is meant to deal with unforeseen
problems not addressed specifically in the bill.
SENATOR THERRIAULT asked if Mr. Bullock has any concerns about
the interpretation and application of the provision.
MR. BULLOCK replied that the definition of "improperly
maintained" could be a factual issue for which the DOR will
develop standards over time.
7:04:08 PM
COMMISSIONER GALVIN said the difficulty of implementing this
type of standard is trying to identify which definition fits any
given situation. Auditors needed something to trigger a further
review and that is why the department chose interruption of
service as a guideline.
MR. BULLOCK agreed with Commissioner Galvin, and pointed out
that the provision provides for a standard of care evaluation as
to whether the costs are reasonable.
COMMISSIONER GALVIN explained that the reference to "could not
have been prevented or avoided in the exercise of due care
foresight" is a small exception to the provision.
SENATOR THERRIAULT asked if a previous situation would have been
addressed under the current language of the bill.
7:09:37 PM
COMMISSIONER GALVIN said it would not reasonably be interpreted
that way. Most likely, a company would admit to a more narrow
violation.
SENATOR WIELECHOWSKI recalled that the administration supported
SB 80 and wondered when the thinking changed.
COMMISSIONER GALVIN responded the administration feels strongly
that this issue has to be addressed and recognizes that during
the previous legislative process the SB 80 approach was
identified as the appropriate direction. In developing the ACES
plan the administration took a broader view of what it was
trying to accomplish and walked through the process with
auditors. After that the administration came up with what was
thought to be a better approach.
7:12:00 PM
CHAIR FRENCH asked if the word "unscheduled" on page 34, line 6,
modifies the word "reduction." Certainly it modifies
"interruption."
COMMISSIONER GALVIN asked Robert Mintz to respond.
ROBERT MINTZ, Consulting Attorney for the Administration,
Kirkpatrick & Lockhart Preston Gates Ellis LLP (K&L Gates), said
"unscheduled" modifies both "reduction" and "interruption."
CHAIR FRENCH said that's why he wanted to include the catchall
phrase from SB 80. He can imagine huge tax disputes revolving
around whether a shutdown was scheduled or not.
7:13:49 PM
COMMISSIONER GALVIN said he recognizes the need for clarifying
regulations to make this work in real world scenarios. One
particular aspect is what it means to be "unscheduled." These
standards would be developed through interaction with industry
and the regulatory process.
CHAIR FRENCH said that the provision is meant for major
cataclysmic events and maintenance issues.
COMMISSIONER GALVIN agreed. The purpose of this provision is to
identify those major cost components that should not be subject
to state credit.
7:16:00 PM
CHAIR FRENCH asked if there were any other changes that need to
be addressed.
MR. BULLOCK highlighted that tanker transportation costs had not
been fully discussed. There were three requirements for
substitution of "actual" costs with "reasonable" costs and under
PPT all three conditions had to be met. Now any one of the three
conditions can be met.
SENATOR THERRIAULT said he understands that Sections 39 and 40
need to be the same, but he wants to make certain the language
works as intended. He also suggested that on page 27, line 30,
the word "conditions" should be singular.
MR. BULLOCK agreed. He then said two things happened. First the
section is triggered by any one of the conditions in Section 39.
Once they're triggered the actual costs that were reported are
replaced by reasonable costs. Then the latter part of subsection
(b) in bill section 40 tells you to look at fair market value of
like transportation and the other options. He doesn't know the
policy behind putting in the Regulatory Commission of Alaska or
other regulatory commission.
SENATOR THERRIAULT gave an example of an ongoing dispute about
control between RCA and FERC. RCA controls intrastate
transportation down the TAPS line and FERC controls
transportation out of state under the TAPS settlement
methodology. If he were a non-TAPS owner shipper he may pay the
TAPS settlement rate. That'd be a true cost because nothing
comes back through a subsidiary. This language seems to say that
if a regulatory body has rendered a decision, it's prema facia
that the department should use that to determine just and
reasonable. That could bind the department.
COMMISSIONER GALVIN said he understands Senator Therriault's
reasoning. The administration believes that the substitution of
"or" for "and" in Section 39 is appropriate. Doing both
undermines the purpose of the first change. The idea is to say
that all three conditions must be met for the prima facia
standard to be used.
7:20:57 PM
MR. BULLOCK said the section rejects prices that a person taking
the deduction has control over, in favor of standards over which
that person has less control.
SENATOR THERRIAULT observed that the shippers that own the
pipeline are paying the tariff, but to themselves. He doesn't
agree that placing the "or" in subsection (b) undermines the
purpose because that would say conditions 1, 2, and 3 have to be
triggered. There was testimony that condition 3 never gets
triggered because a pipeline off the North Slope is the only
reasonable transportation.
COMMISSIONER GALVIN suggested asking Mr. Mintz about this issue.
MR. MINTZ offered the view that it's consistent to change "and"
to "or" in both places. Also he agrees the plural should be
changed to the singular. Finally, if the committee is concerned
about the last sentence in subsection (b) it could be deleted.
SENATOR THERRIAULT said he is unsure of the impact because
sometimes the RCA has made a determination on what is just and
reasonable.
MR. MINTZ said the purpose of the sentence might seem unclear,
but the provision only comes into play when the department
decides to substitute reasonable cost for actual cost. The first
sentence lists several types of evidence that the department can
use to determine what reasonable costs are. The second sentence
says the tariff rates on file with the agencies mentioned is
powerful evidence of what reasonable cost is. Generally
speaking, the tariff paid by a shipper is considered the actual
cost. It's only if one or more of the three criteria in (a) is
triggered that the department would use something else based on
reasonable costs. He also noted that on page 27, line 31, it
would be preferable to change the word "shall" to "may."
7:26:00 PM
SENATOR WIELECHOWSKI wondered if the section addressing
reasonable costs for transportation should be cut altogether.
7:26:49 PM
CHAIR FRENCH called a recess.
7:47:35 PM
CHAIR FRENCH called the meeting back to order, and mentioned
that Nan Thompson with the Department of Natural Resources is
available for questions.
COMMISSIONER GALVIN asked Ms. Thompson to explain how the
language in Sections 39 and 40 works together to ensure DOR
assesses the appropriate reasonable cost deductions for
transportation.
NANETTE THOMPSON, Petroleum Manager, Division of Oil & Gas,
Department of Natural Resources, said deleting the language on
lines 3-5 on page 28 is a good idea because of the way tariff
filings are done with the Regulatory Commission of Alaska and
FERC. Tariff rates are sometimes filed and paid by the shippers.
A process for protesting a tariff exists but sometimes the
process of adjudicating those protests takes a number of years.
If the standard is only "tariff rates properly on file" a
situation could exist where a deduction that is much larger than
is appropriate could go on for a number of years before the
right amount is paid. Also, transportation rates properly on
file are not always reviewed by a regulatory agency. More often
in FERC practice than the Regulatory Commission of Alaska,
tariff rates are negotiated. As a practical matter those rates
aren't reviewed unless there's a protest.
CHAIR FRENCH asked if negotiated rates go on file.
MS. THOMPSON replied they are put on file, but not all filed
rates have been reviewed and determined to be just and
reasonable. In fact a filed rate may be paid for a number of
years before it's found not to be just and reasonable. The TAPS
tariff is a good example. It was many years after the original
filing that the RCA made a finding that the rate was not
reasonable. Shippers paid the cost during that time and under
this provision those costs would be deductible.
7:52:13 PM
SENATOR MCGUIRE expressed concerned with the exceptions in
Section 39. The second "or" on line 25 gives me some
consternation, she said.
MS. THOMPSON replied she too is concerned with the first "or" in
the sentence. She wants to think about it but it may work to
change the "or" to "and" so that the exception requires both
conditions.
SENATOR THERRIAULT asked Ms. Thompson to also ponder changing
"shall" to "may" on page 27, line 31.
7:55:43 PM
SENATOR THERRIAULT asked Commissioner Galvin if the
administration supports the seismic data language that was in
the original bill.
COMMISSIONER GALVIN said yes. The administration continues to
support the entire proposed exploration incentive credit
amendments. He understands this committee isn't going to deal
with that issue, but they'd be happy to see any part get back in
the bill. He asked if Mr. Mintz had anything to add.
7:57:13 PM
MR. MINTZ highlighted that the relationship between monthly and
annual calculations in Sections 15 and 16 on pages 10 and 11
needs to be reconciled.
MR. BULLOCK, referring to Section 21 on page 13, said one of the
changes from the governor's bill was to look at progressivity on
a monthly basis rather than over a calendar year. The intention
is to look each month to see if the progressivity tax applied
and if it did, calculate it and make the installment payment
under AS 43.55.020(a). The administration's approach changed the
installment payments so the progressivity tax would be paid when
the final return was filed, or by April 1 of the following year.
CHAIR FRENCH said his intent is to change to monthly across the
board.
8:02:00 PM
MR. MINTZ said in that case the calculation of the installment
payment before credit would be the actual tax payment. There
wouldn't be a difference between the estimated and actual
payments. There's no problem, but it should be clarified in
Section 15.
COMMISSIONER GALVIN noted that the monthly rate is based on an
estimate of annual costs, and asked if there would be a
reconciliation of those costs at the end of the year.
MR. MINTZ said that is still covered in the bill. Conceptually
this can still be viewed as an annual tax composed of twelve
monthly parts.
MR. BULLOCK added that the installment payments are like
estimated tax payments. For example, the failure to pay a
penalty wouldn't necessarily apply for underpayment of
installment. In this case there would be interest penalty from
the time of the underpayment until it's paid. When the final
return is due, it is an annual true-up.
CHAIR FRENCH asked Mr. Mintz if he could conform the sections
overnight.
MR. MINTZ replied he could try.
MR. BULLOCK commented the old tax is paid on a monthly basis, so
each year there were twelve different starting dates for the
statute of limitation period. With the annual tax it's just the
one date so it's clearer.
8:04:43 PM
MR. MINTZ referred to page 24, paragraph 6 and said he assumed
it meant the oil and gas produced during the year. He asked if
that's correct.
CHAIR FRENCH replied it's meant to be what their gross tax value
is.
MR. MINTZ questioned why that's required in the annual return.
MR. BULLOCK explained the difference is that this is a required
report that will be made public under AS 43.55.890. It's added
by bill section 46. Paragraph 2 says the department may publish
the gross value at the point of production and the total amount
of the lease expenditures for each producer required to report
under AS 43.55.040.
8:06:45 PM
MR. MINTZ, referring to Section 36, page 25, suggested that if
this penalty is meant to be in addition to or instead of other
penalties provided under existing law, it would be beneficial to
clarify that. It might be preferable to say that the penalty is
in addition to other penalties that are provided by law.
MR. BULLOCK agreed that's been done elsewhere in tax laws.
CHAIR FRENCH said that'd be addressed in the amendment phase of
the proceedings.
SENATOR WIELECHOWSKI referred to Qui Tam and suggested adding
the cost of the informant reward to the penalty incurred by a
company.
COMMISSIONER GALVIN pointed out that the administration hasn't
taken a position on Qui Tam, but it makes sense to make it
revenue neutral.
MR. BULLOCK warned against dedicated fund issues; the money
would go into the general fund and then it'd be reappropriated.
COMMISSIONER GALVIN interpreted it as an additional 10 percent
penalty; it doesn't necessarily designate that the penalty goes
to the informant.
SENATOR THERRIAULT noted that the penalty is not to exceed ten
percent of the money gained by the state and demonstrated that
it could become mathematically complicated.
8:10:06 PM
MR. MINTZ said he concurs that the provision in Sections 42 and
43 on page 30 to limit lease expenditures to costs incurred
within the state, does raise questions about the commerce clause
and constitutionality.
CHAIR FRENCH agreed it's an issue, but he believes it's a
challenge that's worth taking.
SENATOR WIELECHOWSKI added that the stipulation only kicks in if
the company wants to take deductions. It's beyond rational basis
to say as a state that we want to promote Alaska business and
Alaska hire.
MR. MINTZ said he wonders whether Section 38 that provides
incentives to whistle blowers is a substantial enough issue to
be mentioned in the bill title. Also, on lines 6-7 where it
refers to civil penalties related to oil and gas production tax
payments, he suggests it would be more complete to also mention
reports.
MR. BULLOCK explained that bill titles are a compromise. This
generally relates to everything about oil and gas production
taxes.
There being no further business to come before the committee,
Chair French adjourned the meeting at 8:13:22 PM.
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