Legislature(2015 - 2016)BARNES 124
04/16/2015 08:00 AM House COMMUNITY & REGIONAL AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| HB183 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 183 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE COMMUNITY AND REGIONAL AFFAIRS STANDING COMMITTEE
April 16, 2015
8:02 a.m.
MEMBERS PRESENT
Representative Cathy Tilton, Chair
Representative Paul Seaton, Vice Chair
Representative Shelley Hughes
Representative Benjamin Nageak
Representative Harriet Drummond
Representative Dan Ortiz
MEMBERS ABSENT
Representative Lora Reinbold
COMMITTEE CALENDAR
HOUSE BILL NO. 183
"An Act relating to the assessment of property for oil and gas
exploration, production, and pipeline transportation property
tax on a North Slope natural gas project; amending the
definition of "taxable property"; adding a definition for "North
Slope natural gas project"; and making conforming amendments."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 183
SHORT TITLE: NORTH SLOPE GAS PROJ PROP TAX;ASSESSMENT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
04/07/15 (H) READ THE FIRST TIME - REFERRALS
04/07/15 (H) CRA, FIN
04/16/15 (H) CRA AT 8:00 AM BARNES 124
WITNESS REGISTER
RANDALL HOFFBECK, Commissioner Designee
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Presented a PowerPoint on HB 183.
NIKOS TSAFOS, Partner, Energy Consultant
enalytica
Washington, DC
POSITION STATEMENT: As consultant to the Alaska State
Legislature, provided a presentation entitled "HB 183
Commentary."
JANAK MAYER, Partner, Energy Consultant
enalytica
Washington, DC
POSITION STATEMENT: As consultant to the Alaska State
Legislature, provided a presentation entitled "HB 183
Commentary."
ACTION NARRATIVE
8:02:26 AM
CHAIR CATHY TILTON called the House Community and Regional
Affairs Standing Committee meeting to order at 8:02 a.m.
Representatives Seaton, Nageak, Ortiz, and Tilton were present
at the call to order. Representatives Hughes and Drummond
arrived as the meeting was in progress.
HB 183-NORTH SLOPE GAS PROJ PROP TAX;ASSESSMENT
8:03:23 AM
CHAIR TILTON announced that the only order of business would be
HOUSE BILL NO. 183, "An Act relating to the assessment of
property for oil and gas exploration, production, and pipeline
transportation property tax on a North Slope natural gas
project; amending the definition of "taxable property"; adding a
definition for "North Slope natural gas project"; and making
conforming amendments."
8:04:14 AM
RANDALL HOFFBECK, Commissioner Designee, Department of Revenue
(DOR), referring to his PowerPoint on HB 183, directed attention
to slide 2 entitled "Components of Property Tax that need to be
Considered for the AKLNG Project." He delineated the three
parts to the process of developing a property tax for the Alaska
liquefied natural gas (AKLNG) project, as follows [original
punctuation provided]:
· Impact Payments during the construction period in lieu
of property tax payments
· Durable and predictable property tax payments during
operational period
· Distribution of revenues among State and Local
Government entities
COMMISSIONER HOFFBECK said there is a general understanding that
there won't be a standard tax regime but rather will be limited
payments to assist communities impacted during the construction
period. With regard to the durable and predictable property tax
payments, he expressed hope that they could be maintained beyond
the operational period in order to avoid any conflicts at the
end of the contracts, such as those currently being experienced
with the Trans-Alaska Pipeline System (TAPS). He clarified that
the distribution of the revenues refers to the revenue during
construction and operation.
COMMISSIONER HOFFBECK reminded the committee that prior to the
Walker Administration the Municipal Advisory Gas Project Review
Board (MAGP Board) was established to provide the state, when
negotiating with the producers, a full understanding of the
local issues related to this project. The MAGP Board provided a
report outlining its position to the governor. The
aforementioned report, as outlined on slide 3, specifies that
[the project] needs to be fair and equitable to all
stakeholders, clear and easily understood, robust and durable
such that it's able to cope with future changes in the operation
of the pipeline, unambiguous such that matters aren't subject to
judgment and interpretation, and commercially sound. As related
on slide 4, the initial feedback from the AKLNG producers was
for the project to be simple with few variables. In fact, the
ultimate goal of the producers that is attempting to be
accommodated is the use of a simple cents per thousand cubic
feet (Mcf) or thousand thousand British thermal units (MMBtu)
calculation for the property tax. The producers, he explained,
prefer a general property tax formula that meets the AKLNG
project economic expectations and is acceptable to the
municipalities. As mentioned earlier, the producers prefer a
flow related property tax payment that is a fixed unit rate per
actual throughput basis and adjusts annually by known non-
variable factors. The department utilized the aforementioned
input and developed the original formula that was brought before
the MAGP Board. The formula, provided on slide 5 entitled
"Formulaic Interpretation of Initial Feedback," multiplies the
actual cost of construction, as audited upon the completion of
construction, by a throughput adjustment. The throughput
adjustment is the actual throughput divided by the design
throughput and includes an exponential factor to allow for the
nonlinear relationship between cost and the volume the pipeline
can carry. The throughput is then multiplied by an inflation
index and then multiplied by 20 mills. The result of the
aforementioned is then multiplied by the adjustment factor. As
related on slide 6, the additional feedback from the AKLNG
producers included comments pointing out that the current mill
rates for the LNG plants in Nikiski and Point MacKenzie are
locally assessed rather than at the 20 mills of the oil and gas
tax. The producers expressed the desire to have the project
cost estimated at the final investment decision (FID) rather
than the actual audited project costs at the completion of
construction. The producers also pointed out the need for the
aforementioned formula to include a depreciation component, not
just an inflation component. He noted that the producers made
several comments with regard to throughput. With regard to
inflation, the producers [prefer] a fixed escalation rate rather
than an index rate. The producers also felt that the adjustment
factor was arbitrary and would introduce a lot of noise and
uncertainty into the process, and therefore [would prefer] a
formula that is sufficiently robust and avoid use of a separate
adjustment factor.
8:11:53 AM
COMMISSIONER HOFFBECK moved on to slide 7 entitled "MAGP Board
Recommendation (March 13, 2015)." He explained that with the
aforementioned recommendations MAGP Board adjusted the formula
with the capital cost being an FID estimate, inflation being a
fixed rate that is then multiplied by a depreciation factor. A
similar throughput in which actual throughput is divided by
design throughput with an exponent is used and multiplied by the
statutory mill rate for the particular asset. He pointed out
the inputs recommended by the MAGP Board located on slide 7,
which include a 10 percent uplift on the estimated construction
cost at the point of financial decision, a 4 percent per annum
inflation, a depreciation factor that's based on a 50-year
floating life, an exponent on throughput of 1, and the mill rate
based on current statutes. He explained the depreciation factor
is such that it's ever flattening and never reaches zero.
Setting the exponent on throughput to one essentially eliminates
the exponent, which was recommended by the producers. Changing
the mill rate to be based on current statutes results in all
projects being valued according to whatever statutory piece of
language that piece of the project falls. The AKLNG producers'
feedback can be found on slide 8. The producers offered that
commercial soundness can be accommodated through adjustments in
the formula. Further, the producers wanted the capital cost at
FID not to include the uplift. The producers recommended a
fixed rate for inflation, an averaged asset value over time, and
[applying a single averaged factor]. The producers further
recommended a lower initial property tax with an [agreed upon]
escalation to provide some benefits over time. He noted that
the early years are the most critical components for the
project, particularly those years prior to revenue. Therefore,
the producers are looking at opportunities to achieve at the
front end while escalating the tax through the life of the
project. Commissioner Hoffbeck then directed attention to slide
9, which provides a graphical representation of how providing
opportunities at the front end might work; these are not hard
numbers. He detailed the graph presented on slide 9. The final
formula, the language for which is embodied in HB 183, can be
found on slide 10 entitled "HB 183 Recommendation." He
characterized the formula in HB 183 as a simplified formula that
allows flexibility during fiscal negotiations. The formula
multiplies the original cost by an inflation factor that is
multiplied by a depreciation factor that is multiplied by a
throughput adjustment that is ultimately multiplied by 20 mills.
He explained that the original cost would be fixed by pre-FID
project specific data/fiscal agreement, the inflation and
depreciation factors would be fixed by a fiscal agreement, the
actual throughput is an operational measurable, the design
throughput would be fixed at pre-FID with project specific data,
and the mill rate would be fixed by statute with the total take
adjusted by fiscal agreement.
8:17:59 AM
REPRESENTATIVE SEATON related his understanding that the FID
estimate is not fixed until flow starts or five years after flow
and will be present for the life of the project, no matter any
cost overruns.
COMMISSIONER HOFFBECK said Representative Seaton's understanding
is the position taken by the producers. The MAGP Board
initially recommended a 10 percent uplift, and therefore it will
have to be negotiated. However, whatever is negotiated will be
in place through the life of the project. The adjustments, he
explained, will be in the throughput. For instance, if there is
an expansion, it won't be picked up as additional original cost
rather it will be picked up in the value of the extra gas
flowing through the pipeline.
8:19:17 AM
REPRESENTATIVE SEATON asked if the inflation factor is being set
in the formula. He then inquired as to what the proposed value
would be.
COMMISSIONER HOFFBECK clarified that the intent is to set the
inflation factor at the beginning of the process rather than
have it float with the consumer price index (CPI) or producer
price index (PPI). Although information during the MAGP Board
meeting reported the 10-20 year average of annual inflation to
be 4 percent, Commissioner Hoffbeck recalled that long-term
historically it has be 3 percent annually. He acknowledged
inflation could be left as an index that floats, but also
acknowledged that it's easier to run the economics with a fixed
number as it's likely to stay at the historic average over the
course of 20 years while some years it will be a little higher
and others a little lower.
8:20:37 AM
REPRESENTATIVE SEATON recalled that in the past taxes or
projects have been made robust [by using an inflation factor]
that self-adjusts. However, this legislation specifies a
formula with a fixed inflation factor that isn't related to real
world economics. Representative Seaton expressed concern that
the proposed formula isn't robust as it doesn't adjust to real
world conditions. He expressed the need for the system to be
such that it automatically adjusts to real world conditions
rather than a fixed inflation factor.
8:22:02 AM
REPRESENTATIVE HUGHES inquired as to whether the 20 mills in the
formula will be set for the life of the project or change over
time.
COMMISSIONER HOFFBECK informed the committee that 20 mills has
been statutorily in place for oil and gas properties since the
1970s. Commissioner Hoffbeck characterized 20 mills as a magic
number in property taxes as it's difficult to go over a 20 mill
levy. He then explained that there is a fixed 20 mill levy for
all oil and gas properties under AS 43.56. Local property taxes
are assessed under AS 29.45. He explained that although the
state assesses the oil and gas property, the local jurisdictions
can tax against it at the local mill rate. For instance, a
local jurisdiction with a 14 mill tax rate would tax the oil and
gas property at 14 mills. The owners of the oil and gas
property would use the rate paid to the local jurisdiction as a
credit against the 20 mills it pays to the state. Therefore,
the owners of the oil and gas property would pay 14 mills to the
local jurisdiction and 6 mills to the state. The local property
tax would fall under the 20 mills, which is the overall levy on
oil and gas properties. Although the aforementioned means that
how much tax the state receives is dependent upon how much the
local jurisdiction collected, he opined that the mill rate
shouldn't be reduced to a level that is less than the local levy
as it would result in other issues regarding constraining local
taxing authority.
8:25:03 AM
COMMISSIONER HOFFBECK then explained that Section 1 adds a
conforming reference to include the property exclusively used
for a North Slope natural gas project. Section 2, similarly
relates it to the full and true value of pipeline transportation
property, and therefore places the AKLNG project within the
pipeline transportation project section of AS 43.56 of the oil
and gas property tax laws. Section 3 is the narrative of the
formula presented earlier. He characterized the language in
Section 3 on page 2, lines 25-27, which read: "(h) Starting on
the construction commencement date, the full and true value of
taxable property exclusively used for a North Slope natural gas
project is determined on each January 1." as placeholder
language. Commissioner Hoffbeck explained there was concern that
without language referring to payments during construction,
there might be the assumption that there were no payments to be
made during construction. Therefore, it was envisioned that
when the impact payment discussions are completed, the
placeholder language would be replaced with language that
defines the impact payments.
8:28:05 AM
REPRESENTATIVE SEATON inquired as to whether the impact payments
would be payments rather than advances that are subtracted from
later tax payments.
COMMISSIONER HOFFBECK said the idea is that the impact payments
won't be advances on later taxation but rather will be tied to
construction that is actually occurring. The impact payments
will be less than the property tax, and therefore there will be
no reason for repayment in the future.
8:29:04 AM
COMMISSIONER HOFFBECK, in response to Representative Hughes,
explained that the MAGP Board was established in Senate Bill 138
[28th Alaska State Legislature]. The MAGP Board has had several
meetings working through the issue of the payment in lieu of
taxes (PILT) for the project. Ultimately, the MAGP Board
produced a report for the governor at the end of the last
administration. Commissioner Hoffbeck remarked that the report
was more of a wish list within the context of the [board's]
disagreements. Under the Walker Administration, the MAGP Board
reaffirmed that the PILT was the direction it wanted to take.
He informed the committee that the MAGP Board has meet four
times since the Walker Administration has been in office. In
further response to Representative Hughes, Commissioner Hoffbeck
specified that the MAGP Board consists of the commissioners or
their designees of the Department of Revenue (DOR), the
Department of Natural Resources (DNR), and the Department of
Commerce, Community & Economic Development (DCCED) as well as
the mayors or their designees of Anchorage, Kenai, Fairbanks,
Mat-Su, Denali, North Slope Borough, and Northwest Arctic
Borough. He noted that the producers have attended the MAGP
Board meetings, and therefore he characterized it as an
iterative and cooperative process.
8:32:46 AM
CHAIR TILTON MAGP inquired as to the MAGP Board's role in
developing HB 183.
COMMISSIONER HOFFBECK answered that the most input from the MAGP
Board was drilling down on the formula. He opined that the MAGP
Board and the producers recognize that this is an interim step
and the final step will be a more refined PILT or calculation of
the tax burden during the project. He related his belief that
the impact payments during construction will be some form of
PILT. What's proposed in HB 183 can be morphed into a PILT
structure, which he opined is the goal. The MAGP Board has been
the forum for the discussion as well as a place for the
producers to have input into the discussion. The legislation
itself was totally drafted by DOR and the attorney general's
office. He noted that the producers are working on a red-lined
version to present, which the municipalities are awaiting prior
to weighing in on the language. In further response to Chair
Tilton, Commissioner Hoffbeck explained that as this model
becomes calibrated during the fiscal negotiations the MAGP Board
will be kept informed, although the MAGP Board does not have a
seat at the table during negotiations. He mentioned, however,
that the MAGP Board will have a tremendous amount of input
regarding the determination of the impact payments and where the
impacts occur. Furthermore, the MAGP Board will be the forum
for the local jurisdictions when the state decides how the
revenues will be distributed. The reality of the tax is that a
$50 billion project with a 20 mill levy will result in $1
billion annually in property taxes. He opined that the local
jurisdictions realize that the aforementioned property tax will
not flow to the jurisdictions that sit along the pipeline
corridor. A portion of the property tax, he pointed out, will
be reserved for its own operations or distribution elsewhere.
The aforementioned discussion will be between the state and the
MAGP Board. He then related that there has been a briefing on
the Federal Energy Regulatory Commission (FERC) process and
documents regarding the stranded gas were distributed. He noted
that additional document research is being performed now.
8:37:07 AM
REPRESENTATIVE HUGHES asked if the MAGP Board is generally in
support of HB 183 as currently written.
COMMISSIONER HOFFBECK indicated that to be the case since the
formula embodied in HB 183 is a generic version of what the MAGP
Board developed during its discussions. The inputs developed by
the MAGP Board are not included in the formula in HB 183.
Commissioner Hoffbeck highlighted that the Denali Borough
doesn't have a property tax, and thus collects the PILT on the
Usibelli Coal Mine, Inc. Therefore, the Denali Borough wants a
PILT to ensure it receives revenue from the pipeline running
through it without having to implement a general property tax.
Commissioner Hoffbeck opined that the aforementioned issues
remain, but the MAGP Board seems comfortable that HB 183
represents its input generically at this point.
8:38:57 AM
REPRESENTATIVE NAGEAK, drawing from his knowledge of
Commissioner Hoffbeck since a young man, related his pleasure
that Commissioner Hoffbeck is in the position of commissioner of
DOR.
8:41:12 AM
COMMISSIONER HOFFBECK, returning to the sectional analysis,
directed attention to the second part of Section 3, which is the
narrative description of the formula and specifies that the
throughput factor will be based on the annual averages of the
throughput measured in Mcf. Section 4 references the project
under the definition of "taxable property." He then explained
that existing LNG plants are locally assessed and the language
in Section 4 includes a carve out for them while placing the LNG
project for this plan under the oil and gas tax laws.
Therefore, the entire project is under the 20 mill levy, under
AS 43.56. Although the aforementioned is primarily done for
administrative purposes, it does increase the tax burden and
thus needs to be addressed with the producers. If the state
decides that a specific amount of the $1 billion will flow to
the state prior to any being distributed to the municipalities,
it's critical for all [participants] to be under the same tax
regime. He then moved on to Section 5, which is a definition of
the project that adds subsection (7) defining the North Slope
natural gas project and its components. He pointed out that the
"gas pipeline" definition includes language on page 4, lines 20-
21, that excludes "any pipelines downstream of an offtake point
between a gas treatment plant and a liquefaction plant".
Therefore, anything after an offtake point is not part of the
project. With regard to the gas treatment plant (GTP), he
recalled that prior testimony to the legislature has discussed
the project starting at the point of production, which would
mean that the pipeline feeding the gas treatment plant would be
part of the project. However, for property tax purposes it
works best if the start of the project is the inlet flange as it
would allow future expansions in which other pipelines flow into
the GTP will not cause confusion if those pipelines are taxable
entities and not part of the existing PILT. The producers, he
related, are concerned about the aforementioned issue. Section
6, the last section, is conforming language. Commissioner
Hoffbeck informed the committee that the producers are concerned
that there isn't enough enabling language to create a PILT in
statute without a constitutional challenge.
8:46:57 AM
REPRESENTATIVE SEATON posed a scenario in which there is an
offtake point for Fairbanks. He then asked if the flange that
is the start would be the flange at the pipe or the flange at
the outlet of the straddle plant that removes gas for Fairbanks.
There would be quite a difference in the cost structure share
depending upon which flange is the start.
COMMISSIONER HOFFBECK answered that currently [the start point]
would be the flange at the pipe. However, if a straddle plant
was part of the original design and construction costs of the
pipeline, [the start point] could be on the outlet flange of the
straddle plant. He expressed the need to avoid having a major
offtake facility as part of the PILT on the pipeline when it was
never part of the construction cost of the pipeline. The goal,
he offered, is to balance the PILT with what would be generated
by a standard property tax and avoid attaching assets that were
never part of the original construction [to the PILT].
Therefore, if it's part of the original construction costs, [the
start] could be the outlet flange of the straddle plant.
REPRESENTATIVE SEATON requested clarification of the
aforementioned in the language of HB 183.
8:48:46 AM
REPRESENTATIVE SEATON asked if the design throughput will be the
pipe size multiplied by an initial compression or will it be at
the capacity of the liquefaction plant. He further asked if the
[design throughput] would change if another train is added later
in compression. Or, is that automatically getting controlled,
he asked.
COMMISSIONER HOFFBECK explained that design throughput and cost
will be locked in at the FID so they both stay in sync. Any
additional capacity due to additions/changes would be picked up
in the additional throughput. Therefore, additional gas creates
a higher value, which could theoretically pick up the additional
value of the train. With regard to where the design throughput
is attached, Commissioner Hoffbeck said there will likely be
three separate components such that there is a PILT for the GTP,
a PILT for the pipeline, and a PILT for the LNG plant. Since
each of the aforementioned will have a different throughput,
it's simpler to have three different PILTs.
REPRESENTATIVE SEATON requested more clarity with the formula,
particularly in terms of having examples of using the formula
with potential changes over time.
8:52:38 AM
CHAIR TILTON inquired as to whether the state will have to pay a
property tax on the portion the state owns.
COMMISSIONER HOFFBECK answered that hasn't yet been determined
as it will likely be based on the structure of the final
ownership. In further response to Chair Tilton, Commissioner
Hoffbeck related that fiscal negotiations are ongoing.
8:53:18 AM
CHAIR TILTON inquired as to how the throughput factor is
calculated for the instate gas coming off the line prior to the
LNG facility.
COMMISSIONER HOFFBECK said that's why multiple PILTs is being
considered. However, he said it's likely that it will be based
on the input into the pipeline, but obviously the LNG plant
wouldn't be tagged with gas that never made it there.
8:55:31 AM
NIKOS TSAFOS, Partner, Energy Consultant, enalytica, referring
to the slide entitled "PROPERTY TAX IN CONTEXT," directed
attention to the chart on the left that shows how much property
tax oil and gas properties pay per barrel of oil produced in the
state. He noted that since it's normalized for inflation, it's
in real terms. The chart on the left illustrates that there's a
period of about 25 years of relative stability. The [property
tax] per barrel, in real 2009 dollars, starts at about $1.00 and
then [levels] at about $.75 per barrel until 2006. In 2006
there is a methodology change and the [property tax] per barrel
increases. Therefore, the [property tax] is about $2.50 of a
$50-$100 barrel of oil. He related that for an AKLNG project,
the order of magnitude becomes much greater in terms of the
impact of the property tax. Mr. Tsafos then directed attention
to the chart on the right, which is an indicative value change
for the AKLNG project. The AKLNG project has an estimated cost
of $45-65 billion, which means the discussion is about
indicative economics until the cost can be narrowed down.
Therefore, he cautioned the committee that the numbers are
merely estimates. He then explained that the AKLNG plant may
need a price in Asia of about $12-13 per Mmbtu to be viable.
The property tax could be as high as $1 [per barrel]. He
further explained that property tax is more than the shipping
cost to Asia; it's $1 out $12-$13 and thus the possibility of an
increase to $1.50-$2 would have a huge impact on the economics.
The chart illustrates that $13 is the price in Japan when oil is
$90. If oil is $70, the price in Japan is more like $10. Mr.
Tsafos emphasized that property tax is a large portion of the
burden of this project. The aforementioned is the commercial
context in terms of the costs and the importance of stability.
For example, at some point [the property tax revenues] may
increase from $1 to $2.50 per barrel of oil and in the context
of the AKLNG project, it's the difference between a project
being viable at $90 or $105-$110 per barrel of oil.
9:00:55 AM
JANAK MAYER, Partner, Energy Consultant, enalytica, focusing on
the specifics of HB 183, directed the committee's attention to
the slide entitled "PILT VS. PROPERTY TAX." He then emphasized
the importance of distinguishing between a PILT and things done
directly through a property tax. The reason there is discussion
about a PILT is that the Heads of Agreement explicitly laid out
that the intention of all the parties was that AKLNG, as part of
the fiscal arrangement, wouldn't pay property tax but rather
have a negotiated PILT. The notion of a PILT then is a
negotiated payment that is in place contractually and through
whatever necessary legislative avenues. While the basis of
negotiation may be what the liability of the project would
otherwise be in terms of property tax based on assessed value
and other things, eventually some negotiated payment is reached.
The Heads of Agreement established a payment that would be
specifically about cents per Mcf that would be paid in lieu of
property tax. He pointed out that although many of the concepts
in HB 183 are familiar in terms of creating a payment that is a
fixed per Mcf amount. The legislation, HB 183, seems to embody
an effort not to create or authorize the negotiation of a PILT,
but rather to create some of the economics of a PILT through the
property tax system. He explained that it would be a situation
in which the assessed value is fixed and subjected to throughput
and other things to create a fixed Mcf payment that is made
directly as a property tax rather than in lieu of property tax.
He reiterated the importance of understanding that a PILT versus
PILT-like economics through the property tax system are two
different concepts and the ultimate aim. By going with the
basic negotiated PILT, there are a number of benefits/options in
terms of the ultimate payment structure. For example, the
payment structure under the basic PILT could be one in which
there aren't property tax payments during construction but only
impact payments while shaping the eventual profile. There is
flexibility under a negotiated PILT. Because [a PILT] is a
contractual mechanism there is a degree of implicit
stabilization, particularly when done with other things. Part
of that implicit stabilization comes from the fact that once the
PILT is negotiated and agreed upon, it is quite separate from
the property assessment process. Property assessment was
utilized in negotiating the PILT in terms of what the property
tax might have been, and therefore what reasonable numbers might
be. However, once the number is negotiated it's a cents per Mcf
charge that is paid in lieu of the property tax and at that
point the link to the property tax is severed. If the goal is
to implement some of those economics through property tax
directly, there is a wide scope for doing so and some of the
ways in which to achieve the aforementioned seem to be reflected
in HB 183. [To implement the economics through a property tax],
one must begin by creating a firm assessment of the actual cost
basis that will always be the case and will be adjusted by
depreciation, throughput, and other factors to create a stable
and predictable dollar per Mcf amount. The aforementioned, he
specified, is a way to achieve PILT-like economics through the
property tax, not itself a PILT.
9:06:45 AM
MR. MAYER said in comparison, the payment profiles are slightly
more limited with the [property tax]. He opined that if it's
done solely through property tax, the other AKLNG partners would
have deep concern with regard to the stability of the
arrangement. In fact, he surmised that the other AKLNG partners
would want other forms of stabilization in place beyond statute
that can be changed in order to guarantee it's durable for the
time of the agreed upon duration of the project. The need for
stabilization will be particularly acute because doing it
through the property tax places it in statute, which is subject
to change, and remains linked to property assessment. The
aforementioned can be found in the language of HB 183. Mr.
Mayer then turned to the fact that the project is placed under
AS 43.56, the state level property tax. He acknowledged that it
could make sense to levy a charge that has PILT-like economics
through a property tax because it's a clean and uniform
structure for the entire project rather than a patchwork of
municipal level tax rates. However, from the perspective of the
companies that would be a significant tax hike because currently
the Kenai LNG facility is taxed through AS 29 solely at the
municipal rate not at the full 20 mills. It makes sense that
any negotiation of an ultimate tax rate may start at 20 mills
and be negotiated down to what the project economics can support
while having a uniform system that applies to everything.
Although this is a large piece of making the project
economically viable, it's important to understand that a company
would become anxious regarding whether a PILT or property tax is
being used while raising the tax rate. Therefore, he emphasized
the need for clarity on such matters as the discussion
continues.
9:10:08 AM
MR. MAYER, moving on to the slide entitled "OUTSTANDING
QUESTIONS," addressed the treatment of transmission lines, which
may be the difference between taking a pure negotiated PILT
approach versus property tax legislation that has broader
application. If the agreement is for a PILT with the parties of
an AKLNG project, then it may be more manageable in terms of not
having subsequent effects on subsequent projects. Whereas if
something is enshrined through general property tax legislation,
the question of to whom else that might apply in the future
becomes much more pertinent. Therefore, exclusion of the
transmission lines from the definition of the natural gas
project for the purposes of property tax is an effort to address
that precisely because it's in general property tax legislation
rather than a specific negotiated agreement with the parties.
The administration, he offered, seems to be concerned with the
need to be clear that if a very large and expensive pipeline
were constructed to connect to the gas processing plant, it
wouldn't be part of this arrangement. Mr. Mayer opined that the
aforementioned is less of a concern with a PILT than it would be
of concern when solely utilizing a property tax. Mr. Mayer
continued:
That said, ... it will be an obvious issue of concern
for the companies, particularly given that [Senate
Bill] 138 specifically pushed the point of production
from a legislative definition perspective back up to
the unit level and excluded the transmission lines
from -- deliberately included the transmission lines
within the scope of the project and excluded them from
the upstream. Part of the concern there was excluding
the cost of those transmission lines from what would
be deducted from an upstream oil tax perspective, but
it seems to ... us that there needs to be some degree
of consistency in whatever one chooses. It's a little
difficult to say, "Well, transmission lines are part
of this project from the perspective of making sure
they can't be deducted against oil taxes, but they're
not part of this project from the perspective of
special treatment for property tax." That's an
important issue to think about and to be aware of.
MR. MAYER then recalled the commissioner's comments with regard
to payments during construction and that the Heads of Agreement
specifies the project wouldn't pay property tax during that
time, but rather impact payments directly related to
construction impacts of the project would be made. Part of the
reason for the aforementioned, he offered, is that property tax
is a large amount, potentially as much as $1 billion a year, and
that has a particularly detrimental impact on the project
economics if the project pays the highest amount at the start of
the project and pays prior to earning revenues from producing
natural gas but during the construction phase. Mr. Mayer said
although he was glad there remains agreement in commentary on
the aforementioned principle, it isn't reflected in HB 183 as
currently written. He then related the importance of meeting
milestones in terms of what was established in the Heads of
Agreement last year. A key milestone has been reaching a
negotiation of a PILT for the project. A key milestone for this
legislative session, he surmised, was to ensure authorization,
if necessary, for the administration to undertake negotiations
for an agreement that would be put before the legislature. He
opined that meeting the milestones is particularly important in
the broader context of ensuring that the very high level of
spending on AKLNG is going to continue.
9:15:19 AM
REPRESENTATIVE SEATON said although he is supportive of
stability, disruption can be caused by stability that creates
future instability when future economics aren't taken into
account, such as with the use of a fixed inflation rate no
matter the inflation rate in the general economy. Therefore, he
opined that the [proposed] design isn't very robust with the
fixed inflation rate. He further opined that such a design
doesn't create a stable relationship between those receiving the
PILT or the property tax and those with the product in the
project. He then inquired as to how more future alignment in
this process can be created.
MR. MAYER highlighted the importance of distinguishing between
HB 183 versus the conceptual discussions when the specifics are
discussed. As written, he characterized HB 183 as a series of
sign posts that lack any specifics. In fact, he opined, there
is no indication as to the exact nature of any of these factors
and how the math would work because there is a negotiation
process yet to come. Therefore, it's difficult to comment on
how inflation would be treated as it's a largely hypothetical
discussion based on concrete terms. Still, predictability, he
offered, is going to be the most important thing as part of the
question of stability. In talking to the companies involved;
Mr. Mayer related that discussions of future expansions, one
would expect future green field expansions because they benefit
from having an existing project in place and tend to be less
capital intensive per unit of gas put through them than the
initial project. Therefore, in many ways having a pure fixed
$/Mcf amount actually subjects future expansions to a higher tax
burden per Mcf than they might pay were they subject to either
adjustments such as an exponent in the formula or renegotiations
of the property value at the time. He opined that it says a lot
that the involved companies want a fixed $/Mcf that will apply,
including to future expansions. The aforementioned likely means
they pay more per Mcf in property taxes than they might pay if
there was more flexibility. Mr. Mayer said that relates a lot
about how much [the involved companies] value stability and the
ability to know now for the future the entire tax burden,
including for expansions. Potentially, [the companies] would
rather pay more and have stability than have [inflation] that is
subject to change. Mr. Mayer agreed with Representative Seaton
that utilizing a fixed inflation rate somewhat divorces things
from the reality of what inflation may be subsequently.
However, in many cases inflation and depreciation offset each
other and perhaps much greater stability and predictability
could be achieved by stripping them out or developing something
else that creates the greatest simplicity and stability
possible. Without a detailed proposal, he pointed out that it's
difficult to offer specific commentary, he said.
MR. TSAFOS noted his agreement with Mr. Mayer's comments.
Addressing [the formula] from a common sense perspective, Mr.
Tsafos opined that the inflation is the least disputable number
as there is ample data on it. While the desire is for
simplicity and predictability to trump everything, inflation is
likely a variable of the formula that everyone could more or
less agree upon. Although the number is subject to negotiation,
he speculated that inflation is fairly transparent and clear.
9:22:32 AM
REPRESENTATIVE SEATON expressed concern with looking into the
future with perhaps a 50-year project life and a fixed 4 percent
inflation without any future flexibility. He requested the
consultants provide mechanisms to achieve stability at the
decision point as well as in the future to ensure a robust
system.
9:24:02 AM
REPRESENTATIVE NAGEAK predicted that as the project ages there
will be discussions of different evaluations according to those
who pay and receive taxes. Therefore, there will be a lot of
give and take over the course of the project because throughput
will diminish over time. He characterized it as a fluid process
over the life of the project.
9:25:31 AM
REPRESENTATIVE HUGHES recalled the January 1st deadlines for the
full and true value of the gas or unrefined oil in HB 183. She
then requested explanation of the 20 mill property tax rate and
why that might be of concern.
MR. MAYER, addressing the January 1st deadline, explained the
new section proposed in AS 43.56.060 to specifically deal with
the natural gas project envisions an annual assessment until
construction. From the start of construction onwards, full
value is deemed to be the original value; presumably that means
it's fixed and doesn't change. However, by doing it in the
property tax it's explicitly linked to a property tax assessment
process as illustrated in Section 1 of HB 183 with the addition
of the language "exclusively used for a North Slope natural gas
project". Furthermore, the language retains the reference to
the fact that property tax is levied on the property used for
the transportation of gas at its full and true value as of
January 1st of the assessment year. He acknowledged that on one
hand, there is reference to the full and true value instead of a
fixed amount, but it's also the full and true value as of
January 1st of the assessment year. The ambiguity of the
aforementioned makes companies concerned about stability
anxious. With regard to the 20 mill rate, Mr. Mayer explained
that property tax can be levied under AS 43.56 in which case
it's a state level levy and municipalities can also levy a
property tax at a rate below or up to the 20 mills. Whatever
[property tax] is paid at the municipal level is creditable from
the property tax such that the total amount paid by the taxpayer
is no more than 20 mills combined. The difference between the
municipal rate and the 20 mill rate is what ultimately goes to
the state. The aforementioned, he noted, applies to oil and gas
facilities including the pipeline going into the Kenai LNG
facility. The Kenai LNG facility itself is taxed under AS 29,
which is the municipal property tax. Therefore, the only
property tax that Kenai pays is the Kenai municipal property
tax, which is substantially below the 20 mill rate. If that
status quo were to apply to the AKLNG, the property tax on the
liquefaction would be substantially lower than the 20 mill rate
because the state wouldn't be taking any property tax. The
general idea of having a uniform framework that applies across
the entire project is clean and makes sense, he opined. He also
opined that it makes sense to start negotiations at the 20 mill
rate to see what the project can support. The effect, he
opined, of enshrining it directly in property tax statute is
relative to the status quo to impose an increase in the rate.
9:30:31 AM
REPRESENTATIVE HUGHES surmised then that under HB 183, the state
would collect [tax] that in the past only the municipality
collected. She asked if the aforementioned would only occur at
the North Slope and Nikiski ends or only at the Nikiski end.
MR. MAYER answered that [the collection] would occur at the
liquefaction facility at the Nikiski end.
9:31:16 AM
REPRESENTATIVE SEATON pointed out the committee packet includes
a letter dated April 14, 2015, from the Kenai Peninsula Borough.
9:31:50 AM
REPRESENTATIVE HUGHES asked if the MAGP Board will continue
meeting in the interim.
COMMISSIONER HOFFBECK nodded yes.
9:32:39 AM
CHAIR TILTON inquired as to why HB 183 was brought forward now
while more fiscal negotiations are necessary. She also inquired
as to the processes that are being considered as the legislation
moves forward and when more specifics will arise.
COMMISSIONER HOFFBECK answered that HB 183 was introduced now in
order to bring the discussion forward to begin to fine tune the
issues. The advantage of introducing the legislation now is
that eliminates many of the issues that surrounded Trans-Alaska
Pipeline System (TAPS) in terms of how the asset is valued. The
legislation brings it down to five measureable terms from which
work can begin to establish the base value of calculating a
PILT. He surmised that ultimately everyone wants to reach that
one $/Mcf amount that provides stability moving forward.
However, there had to be some foundation to measure that, he
offered. [The legislation] is merely an interim step, not the
final step. As the consultants mentioned, there was an
expectation this session that a PILT agreement would be reached,
but the reality is that the process isn't far enough along in
the fiscal negotiations to pin down a PILT. The question is
whether a project can bear that high of a PILT, which is why it
needs to be left open as the process moves forward during the
interim.
9:35:25 AM
COMMISISONER HOFFBECK, in response to Representative Seaton,
related his belief that ultimately the producers would like a
property tax tied directly to the flow of the gas through the
project. Essentially, if the formula is divided by the
throughput, a tax per Mcf would result. The aforementioned, he
opined, is ultimately what everyone is trying to achieve.
REPRESENTATIVE SEATON indicated the need to determine where the
mill rate and Mcf calculations end up in "the mix" as the two
seem a bit disparate.
9:37:07 AM
CHAIR TILTON inquired as how the PILT would be allocated as
linear miles don't work because of the GTP and LNG facilities.
She further inquired as to whether there are other alternatives.
COMMISISONER HOFFBECK said that is a discussion that needs to
occur. Currently, under TAPS the allocation is by the value of
the asset within the particular jurisdiction. [The PILT]
actually breaks out the pipeline, the pump station, and the
Valdez marine terminal and calculates those values separately
and then looks at the totality of the value of the pipeline.
Then a certain percentage is given based on the total value of
the pipeline versus the total value of construction within each
of the jurisdictions. Commissioner Hoffbeck envisioned that the
[PILT for the natural gas project] would be something similar to
the aforementioned as most likely the PILT will be parsed at
multiple pieces such that there would be a piece for the GTP and
the pipeline. Therefore, the GTP wouldn't have to be calculated
as to how it factors through while the pipeline could be
calculated on a per mile basis "and then, of course, the LNG at
the end." He noted that potentially, there could be a [PILT]
for the upstream pipelines, the feeder pipelines, as well.
9:38:57 AM
REPRESENTATIVE HUGHES, referring to the MAGP Board and the
participation by mayors who don't necessarily have expertise in
oil and gas issues, asked if the municipalities have [oil and
gas] consultants to help them with the AKLNG project.
COMMISSIONER HOFFBECK answered that most mayors have someone on
their staff who attend the MAGP Board meetings with them.
However, because property tax is the primary source of revenue
for most municipalities most mayors understand property tax
well. The overriding oil and gas 20 mill levy is an important
piece that they need to understand. Certainly, Kenai,
Fairbanks, and the North Slope Borough understand the oil and
gas 20 mill levy as they have been dealing with it for years.
For instance, Kenai just hired Larry Persily, former federal
coordinator of the Alaska Gasline Project and deputy
commissioner of the Department of Revenue.
9:41:10 AM
CHAIR TILTON announced that HB 183 would be held over.
9:41:43 AM
ADJOURNMENT
There being no further business before the committee, the House
Community and Regional Affairs Standing Committee meeting was
adjourned at 9:41 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB183 Fiscal Note-0832-DOR-TAX-4-1-15.pdf |
HCRA 4/16/2015 8:00:00 AM |
HB 183 |
| HB183 Sponsor Statement.pdf |
HCRA 4/16/2015 8:00:00 AM |
HB 183 |
| HB183 Supporting Documents - DOR Hearing Request Letter.pdf |
HCRA 4/16/2015 8:00:00 AM |
HB 183 |
| HB183 Supporting Documents - DOR Hearing Request Letter.pdf |
HCRA 4/16/2015 8:00:00 AM |
HB 183 |
| enalytica HB 183 April 2015.pdf |
HCRA 4/16/2015 8:00:00 AM |
HB 183 |
| Property Tax Bil Overview AKLNG (HB 183)(final).pdf |
HCRA 4/16/2015 8:00:00 AM |
HB 183 |