Legislature(1997 - 1998)

04/06/1998 01:30 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
           HOUSE FINANCE COMMITTEE                                             
              APRIL 6, 1998                                                    
                 1:30 P.M.                                                     
                                                                               
TAPE HFC 98 - 92, Side 1                                                       
TAPE HFC 98 - 92, Side 2                                                       
TAPE HFC 98 - 93, Side 1                                                       
TAPE HFC 98 - 93, Side 2                                                       
                                                                               
CALL TO ORDER                                                                  
                                                                               
Co-Chair Gene Therriault called the House Finance Committee                    
meeting to order at 1:45 p.m.                                                  
                                                                               
PRESENT                                                                        
                                                                               
Co-Chair Hanley    Representative Kelly                                        
Co-Chair Therriault   Representative Kohring                                   
Representative Davies  Representative Martin                                   
Representative Davis   Representative Moses                                    
Representative Foster  Representative Mulder                                   
Representative Grussendorf                                                     
                                                                               
ALSO PRESENT                                                                   
                                                                               
Representative Mark Hodgins; Wilson Condon, Commissioner,                      
Department of Revenue; Robert B. Stiles, Drven Corporation;                    
Greg Champion, General Manager, Sheraton Anchorage Hotel,                      
Anchorage; Susan Burke, Attorney, Northwest Cruise Ship                        
Association; Deborah Vogt, Deputy Director, Department of                      
Revenue; Remond Henderson, Director, Division of                               
Administrative Services, Department of Community and                           
Regional Affairs; Jeff Bush, Deputy Commissioner, Department                   
of Community and Regional Affairs; Mike Krieber, Staff,                        
Representative Kohring; John T. Shively, Commissioner,                         
Department of Natural Resources; Michael Hurley, Arco                          
Alaska, Anchorage; Beverly Mentzer, Exxon, Houston, Texas.                     
                                                                               
The following testified via the teleconference network: Jim                    
Johnson, Development Manager, Phillips Petroleum, Houston,                     
Texas; Jim Sykes, Oilwatch Alaska, Anchorage; David Brooks,                    
Anchorage.                                                                     
                                                                               
SUMMARY                                                                        
                                                                               
HB 393 An Act relating to contracts with the state                             
establishing payments in lieu of other taxes by a                              
qualified sponsor or qualified sponsor group for                               
projects to develop stranded gas resources in the                              
state; providing for the inclusion in such                                     
contracts of terms making certain adjustments                                  
regarding royalty value and the timing and notice                              
of the state's right to take royalty in kind or in                             
value from such projects; relating to the effect                               
of such contracts on municipal taxation; and                                   
providing for an effective date.                                               
                                                                               
 CSHB 393 (RES) was REPORTED out of Committee with                             
"no recommendation" and with two fiscal impact                                 
notes, one by the Department of Revenue and one by                             
the Department of Natural Resources, both dated                                
2/11/98.                                                                       
                                                                               
HB 400 "An Act combining parts of the Department of                            
Commerce and Economic Development and parts of the                             
Department of Community and Regional Affairs by                                
transferring some of their duties to a new                                     
Department of Commerce and Rural Development;                                  
transferring some of the duties of the Department                              
of Commerce and Economic Development and the                                   
Department of Community and Regional Affairs to                                
other existing agencies; eliminating the                                       
Department of Commerce and Economic Development                                
and the Department of Community and Regional                                   
Affairs; relating to the Department of Commerce                                
and Rural Development; adjusting the membership of                             
certain multi-member bodies to reflect the                                     
transfer of duties among departments and the                                   
elimination of departments; and providing for an                               
effective date."                                                               
                                                                               
HB 400 was HELD in Committee for further                                       
consideration.                                                                 
                                                                               
HB 472 "An Act relating to apportionment of business                           
income."                                                                       
                                                                               
 HB 472 was REPORTED out of Committee with a "do                               
pass" recommendation and with fiscal impact note                               
by the Department of Revenue.                                                  
HOUSE BILL NO. 400                                                             
                                                                               
"An Act combining parts of the Department of Commerce                          
and Economic Development and parts of the Department of                        
Community and Regional Affairs by transferring some of                         
their duties to a new Department of Commerce and Rural                         
Development; transferring some of the duties of the                            
Department of Commerce and Economic Development and the                        
Department of Community and Regional Affairs to other                          
existing agencies; eliminating the Department of                               
Commerce and Economic Development and the Department of                        
Community and Regional Affairs; relating to the                                
Department of Commerce and Rural Development; adjusting                        
the membership of certain multi-member bodies to                               
reflect the transfer of duties among departments and                           
the elimination of departments; and providing for an                           
effective date."                                                               
                                                                               
Representative Kohring spoke in support of HB 400.  He                         
maintained that HB 400 would save the state money by merging                   
the Department of Community and Regional Affairs and the                       
Department of Commerce and Economic Development.  He                           
emphasized that both departments are economically related.                     
The merger would eliminate one of the commissioner's                           
offices. He stated that the legislation would save                             
approximately $1,054 million dollars and cost $192 thousand                    
dollars to implement.  He asserted that there would be                         
minimal costs for moving personnel.  Personnel would remain                    
in place for the most part.  He maintained that functions                      
would remain in tact.  He provided members with information                    
showing overlapping functions of the two departments and a                     
chart demonstrating how the new Department of Commerce and                     
Rural Development would be setup (copy on file).   There                       
would be four Divisions: Rural Affairs Division, Statewide                     
Economic Development Division, Division of Administration,                     
and Independent Agencies.  Independent Agencies would be                       
divided into Corporations and Regulatory.  The Regulatory                      
component would be divided into Occupational Licensing,                        
Insurance, Alaska Public Utilities Commission, and                             
Investment Division.                                                           
                                                                               
Representative Kohring explained that childcare programs                       
would be transferred to the Department of Health and Social                    
Services.  Job related programs would be transferred to the                    
Department of Labor.                                                           
                                                                               
Representative Kohring noted support for the legislation.                      
He referred to a letter by Don Tanner, former Deputy                           
Commissioner, Department of Community and Regional Affairs                     
(copy on file).  Mr. Tanner wrote in support of the                            
legislation.   He read from a letter by Don Eller in support                   
of the legislation (copy on file).  Mr. Eller stated that HB
400 promotes a unified and comprehensive system for rural                      
development.                                                                   
                                                                               
Representative Kohring reiterated that the legislation would                   
allow reductions without eliminating programs.  He                             
maintained that government would be restructured to deliver                    
services more efficiently.  He added that the legislation                      
would result in more than $1 million dollars in annual                         
savings for a one-time cost.                                                   
                                                                               
MIKE KRIEBER, STAFF, REPRESENTATIVE KOHRING added that the                     
legislation would move the Office of International Trade to                    
the Governor's Office.                                                         
                                                                               
JEFF BUSH, DEPUTY COMMISSIONER, DEPARTMENT OF COMMUNITY AND                    
REGIONAL AFFAIRS stated that the Administration is opposed                     
to the legislation.  He emphasized that the agencies'                          
functions are very different and should not be merged.  He                     
maintained that the legislation would dilute the Department                    
of Commerce and Economic Development's mission to promote                      
commerce and economic development.                                             
                                                                               
Mr. Bush observed that there is a wide difference in the                       
estimated fiscal impact between the Department and the                         
Sponsor.  The legislation estimates reductions from                            
elimination of several Administrative Services Division                        
employees.  He stated that these cuts are unrealistic.  The                    
sponsor fiscal note assumes a minimum amount of movement of                    
personnel.  He stated that this is not consistent with the                     
goal and purpose of the legislation.  If the goal is to                        
allow persons with similar functions to work together they                     
need to be located in the same building.  One time moving                      
estimates by the Department are based on Department of                         
Administration's analysis.  The Administration's estimate is                   
approximately ten times the estimate by the Sponsor.  The                      
Administration maintains that the cost of the legislation is                   
greater than short-term savings.                                               
                                                                               
REMOND HENDERSON, DIRECTOR, DIVISION OF ADMINISTRATIVE                         
SERVICES, DEPARTMENT OF COMMUNITY AND REGIONAL AFFAIRS                         
agreed with the comments of Mr. Bush.  He added that there                     
would be an adverse impact on rural Alaska.  He emphasized                     
that the Department of Community and Regional Affairs is                       
small and efficient.  He asserted that there would be an                       
impact on delivery of programs transferred to larger                           
agencies.  He expressed concern with the elimination of some                   
of the administrative positions.  A bottleneck would be                        
created by the reduction.  The legislation does not contain                    
a transition period.  He observed that other mergers and                       
consolidations have taken a period of time to accomplish.                      
                                                                               
Representative Kelly questioned if the fiscal note has                         
changed from the one attached to a similar bill that he                        
introduced two years ago.  Mr. Bush replied that moving                        
costs in the fiscal note have increased.                                       
                                                                               
HB 400 was HELD in Committee for further consideration.                        
HOUSE BILL NO. 472                                                             
                                                                               
"An Act relating to apportionment of business income."                         
                                                                               
REPRESENTATIVE NORMAN ROKEBERG observed that the House Labor                   
and Commerce Committee introduced HB 472 on behalf of                          
businesses in the state of Alaska.  He noted that the Alaska                   
Supreme court ruling, State of Alaska vs. OSG BULK Ships,                      
Inc., held that the exemption from taxation granted in 26                      
U.S.C. Section 883 was modified by the Alaska Corporation                      
Net Income Tax (ANITA).  Since state law modified federal                      
law, the Court ruled that the exemption under Section 883                      
does not apply.  He maintained that the Legislature intended                   
that the Section 883 federal exemption apply when it enacted                   
the Internal Revenue Code by reference.  The Court's ruling                    
has by implication created a new assessment on the net                         
income of foreign flagged/owned carriers.  He added that                       
aircraft, railroad rolling stock and communication                             
satellites would also be affected.  He asserted that a new                     
tax burden would be created on international trade in the                      
State.  Almost every natural resource that is produced,                        
manufactured or exported is shipped on foreign carriers.  He                   
pointed out that the federal government, by treaty, has                        
entered into agreements with various foreign governments.                      
The United States government and the reciprocating                             
governments agree not to tax net corporate income of                           
businesses engaged in international trade.  He maintained                      
that it could create a situation of double taxation.  It                       
would also be difficult to account for the tax.  The state                     
of Alaska has never collected the tax.  The State has                          
collected waivers by not imposing the tax.  The tax has been                   
in litigation for a decade.  He asserted that failure to act                   
on the legislation would send a very bad signal.  He                           
observed that the legislation has received support from a                      
number of national and international businesses.   He read                     
testimony by Representative Fran Ulmer during a 1991 House                     
Finance Committee meeting on similar legislation.                              
Representative Ulmer stated that she would not support                         
legislation that was inconsistent with the intent to send a                    
message that Alaska is a friendly business climate for                         
foreign investors.                                                             
                                                                               
ROBERT B. STILES, DRVEN CORPORATION testified in support of                    
the legislation.  He observed that in most cases the                           
producer is not the one that arranges the shipping.  Buyers                    
often arrange for shipping.  Part of the problem is                            
identifying foreign owners.  The exemption granted by                          
Section 883 recognized that it would be difficult to collect                   
the tax.  He maintained that the state of Alaska would                         
expose itself to retribution.                                                  
                                                                               
GENERAL MANAGER, SHERATON ANCHORAGE HOTEL, ANCHORAGE                           
testified in support of HB 472.  He noted that they are                        
affiliated with Korean Air.  Korean Air has been in business                   
in Alaska for 20 years.  They own shares in Anchorage                          
hotels, and employ approximately 30 people at the Anchorage                    
airport.  They have a variety of other business interests in                   
Alaska.  They employee approximately 350 people in Alaska.                     
There are approximately 12 foreign carriers that fly into                      
Alaska.  There were approximately 20 - 25 carriers in 1987.                    
He explained that some carriers no longer fly into Anchorage                   
because aircraft can now over-fly Anchorage due to                             
technological advancements.  He emphasized that Anchorage is                   
not a final destination.  He stressed the fiscal impact of                     
the 12 foreign carriers that come to Alaska.   He pointed                      
out that, currently, the cost of doing business in Anchorage                   
is good.  The state of Alaska would be the only state in the                   
nation to levy such a tax.  He asserted that collection of                     
the tax would have a drastic impact.                                           
                                                                               
(Tape Change, HFC 98 - 92, Side 2)                                             
                                                                               
SUSAN BURKE, ATTORNEY, NORTHWEST CRUISE SHIP ASSOCIATION                       
testified in support of the legislation.  She observed that                    
she wrote an Attorney General's opinion in 1980, regarding                     
the retroactive clause.  She noted that the situation in HB
472 is different to the situation on which the 1980 opinion                    
was based.  She added that new case law indicates that a                       
retroactive clause can stand if it serves the public                           
purpose.  House Bill 472 has a narrow focus.  She observed                     
that state businesses rely on foreign shippers.  If shippers                   
are made to pay back taxes with interests, they may respond                    
with rate increases.  She concluded that HB 472 serves a                       
public purpose by maintaining current rates.  She did not                      
think there would be a constitutional problem.                                 
                                                                               
In response to a question by Representative Martin, Ms.                        
Burke reviewed arguments that a 1991 transmittal letter by                     
Governor Hickel indicated that the state of Alaska intended                    
to collect the tax.  She stated that she did not interpret                     
the letter to specify that the exemption under the federal                     
IRS code, Section 883, did not apply.  She observed that the                   
State's position was not clear because even if the                             
transmittal letter was meant to imply that the exemption did                   
not apply, the Department of Revenue's position was that the                   
exemption did apply.  Section 883 was incorporated into the                    
state tax code by reference.  The Legislature also indicated                   
that the exemption would apply.                                                
                                                                               
Representative Davies questioned the effect of a retroactive                   
clause.  Ms. Burke clarified that there are tax cases                          
pending in the administrative process.  Some taxes have been                   
assessed but not collected.                                                    
                                                                               
In response to a question by Representative Martin, Ms.                        
Burke observed that the water's edge method was adopted in                     
1992.                                                                          
                                                                               
DEBORAH VOGT, DEPUTY DIRECTOR, DEPARTMENT OF REVENUE                           
reviewed the legislation.  She observed that on February 20,                   
1998, the Alaska Supreme Court issued a unanimous decision                     
that a federal tax exemption does not apply in Alaska.  The                    
case was OSG Bulk Ships v.  State (OSG).  The federal                          
provision exempts income from foreign-owned ships and                          
aircraft.  Result of the decision is that ships and aircraft                   
that do business in Alaska will be taxed regardless of                         
ownership.  She did not think that either railroads or                         
satellites would be affected.  The result of the decision is                   
that ships and aircraft that do business in Alaska would be                    
taxed regardless of their ownership.                                           
                                                                               
Ms. Vogt explained that the case arose from a decision                         
signed by Commissioner Rexwinkle, in June 1990.  The                           
taxpayer was a shipper of ANS crude on American ships.  The                    
issue arose because corporations affiliated with the                           
taxpayer were included in the apportionable base.  They did                    
not carry goods in Alaska.  The Superior Court held against                    
the state.  The state appealed to the Supreme Court.  The                      
state of Alaska then appealed to the Supreme Court and                         
prevailed.                                                                     
                                                                               
Ms. Vogt maintained that the OSG decision was a good                           
decision for the State.  It deals with the interrelationship                   
of Alaska and federal tax law.  The OSG decision holds that                    
Alaska's tax policy, as articulated in tax laws passed by                      
the Legislature, should be given as fact when reviewing the                    
interplay between the Internal Revenue Code and the State's                    
Corporate Income Tax.  The decision brings cruise ships,                       
foreign air operations, and foreign shippers into Alaska's                     
tax scheme on an even footing with other shippers, American                    
cruise ship operators and air carriers.                                        
                                                                               
Ms. Vogt noted that the basis for the State's holding is                       
that the State can incorporates Internal Revenue Code into                     
state tax, unless excepted to or modified by Alaska law.                       
The federal exemption essentially codifies federal tax                         
treaties, which provide that "if your country doesn't tax                      
our ships and planes, we won't tax yours".  These treaties                     
are at a national level. They do not bind subnationals like                    
states.  She acknowledged that there could be retaliation                      
under the treaties if one subnational begins taxing.  The                      
federal system permits federal taxes for any foreign tax                       
paid.  American businesses would receive a dollar for dollar                   
credit on their federal taxes for any taxes paid to other                      
nations.                                                                       
                                                                               
Ms. Vogt observed that the issue for the Court was: Does                       
Alaska's Corporate Income Tax system except or modify the                      
federal exemption in Section 883.  The court found that the                    
State's use of the apportionment method of taxation was so                     
different from the federal separate accounting approach to                     
defining income that Section 883 was not incorporated into                     
Alaska law.  This bill would reverse the Court's decision.                     
                                                                               
Ms. Vogt pointed out that Alaska's corporate income tax                        
system has always used formula apportionment to determine                      
the in-state income of businesses that earn income in the                      
State.  Business income from all sources is assessed and                       
apportioned by a formula related to business presence.  In                     
1970, the State joined the Multistate Tax Commission and                       
adopted the Uniform Division of Income for Tax Purposes Act                    
(UDIPTA).  The state of Alaska originally applied UDIPTA                       
worldwide.  There was a great deal of international                            
objection to this form of taxation.  Foreign affiliates that                   
did not operate in the United States objected to providing                     
books and records to the United States.                                        
                                                                               
In 1991, Alaska joined the majority of other states, in                        
moving to the waters edge method.  The waters edge approach                    
excludes from the corporate family those corporations that                     
do not do any business, or do a very small amount of                           
business, in the United States.  Ironically, the ships whose                   
income was taxed in OSG would not be included in our tax                       
base today because of the adoption of the waters edge                          
method.  Pursuant to the Court's decision, the State will                      
tax foreign ships and aircraft by formula apportionment,                       
using a "days in port" or "ground time" approach to their                      
factors.  This applies to all U.S. ships that do business in                   
Alaska.  Ships are apportioned based on the number of days a                   
ship is in Alaskan ports versus the total number ports.                        
Airlines are apportioned based on departures.                                  
                                                                               
Ms. Vogt discussed retroactivity.   She referred to a                          
memorandum from the Department of Law, which raised serious                    
legal questions about the constitutionality of the                             
retroactive collection of the tax.  The reason the                             
constitutional issue arises is that Alaska's Constitution                      
provides that appropriations have to be made for a public                      
purpose.  Tax repeal is considered an appropriation.  If                       
there is no provision, the Department of Revenue is unlikely                   
to assign any of its scarce resources to compliance efforts                    
under a repealed tax.                                                          
                                                                               
Ms. Vogt referred to the Department's fiscal note.  She                        
observed that, since most of these transportation companies                    
do not file tax, the Department does not have direct                           
information from taxpayers.  The Department of Revenue                         
estimates a potential loss of $3 to $8.5 million dollars.                      
                                                                               
Representative Martin questioned how much the state of                         
Alaska would lose in revenues, if businesses moved out of                      
state.  He emphasized that the tax could have a detrimental                    
affect on the State.   Ms. Vogt stressed that the Department                   
would need more information to assess the impact.                              
                                                                               
In response to a question by Representative Martin, Ms. Vogt                   
clarified that the legislation does not affect the waters                      
edge method.  Foreign corporations are taxed to the extent                     
that they do business in Alaska.  The legislation only makes                   
an exemption for certain components of foreign commerce.                       
                                                                               
In response to a question by Representative Grussendorf, Ms.                   
Vogt stated that the legislation would not preclude future                     
action.                                                                        
                                                                               
Co-Chair Therriault asked if the Administration had taken a                    
stand on the potential loss of business.  He questioned if                     
the cost of implementation and the loss of business would be                   
sufficient state interest to support the legislation.                          
                                                                               
In response to a question by Representative Davis, Ms. Vogt                    
stated that the prospective audits would not be problematic.                   
                                                                               
JEFF BUSH, DEPUTY COMMISSIONER, DEPARTMENT OF COMMUNITY AND                    
REGIONAL AFFAIRS testified in support of the legislation.                      
He acknowledged the importance of the litigation to assert                     
the right of the state of Alaska to enact appropriate tax                      
laws and to implement them without federal restrictions.                       
The Department supports the legislation because there are                      
other policy considerations.  The benefits to state business                   
out weighs increased revenues.  No other states impose a                       
similar tax.  A tax would detrimentally impact the                             
perception that Alaska is friendly to foreign owned                            
shippers.                                                                      
                                                                               
Representative Martin MOVED to report HB 472 out of                            
Committee with the accompanying fiscal note.  There being NO                   
OBJECTION, it was so ordered.                                                  
                                                                               
HB 472 was REPORTED out of Committee with a "do pass"                          
recommendation and with fiscal impact note by the Department                   
of Revenue.                                                                    
HOUSE BILL NO. 393                                                             
                                                                               
"An Act relating to contracts with the state                                   
establishing payments in lieu of other taxes by a                              
qualified sponsor or qualified sponsor group for                               
projects to develop stranded gas resources in the                              
state; providing for the inclusion in such contracts of                        
terms making certain adjustments regarding royalty                             
value and the timing and notice of the state's right to                        
take royalty in kind or in value from such projects;                           
relating to the effect of such contracts on municipal                          
taxation; and providing for an effective date."                                
                                                                               
REPRESENTATIVE MARK HODGINS emphasized that HB 393 is                          
enabling legislation.  He noted that there were two areas of                   
concern.  The first was gas to liquids.  This provision was                    
taken out, put back in, taken out, and is currently out of                     
the legislation.  He acknowledged the importance of gas to                     
liquids technology, but maintained that the technology would                   
not be hurt by its absence in the bill.  Some members felt                     
that gas to liquid should be reviewed separately and have                      
its own tax policy.  A provision to ratify contracts by the                    
legislature was added.  The affect on communities was                          
reviewed.  There would be a community advisory group.  He                      
maintained that mayors and municipalities will have the                        
ability to express concerns.  He stressed that most of the                     
pipeline communities are very excited about the legislation.                   
                                                                               
In response to a question by Co-Chair Therriault,                              
Representative Hodgins clarified that the advisory group                       
would be on municipal taxation.  The group would be put                        
together if there is a contract or proposal.                                   
                                                                               
Representative Martin questioned if there would be a                           
guarantee to invest in pipeline equity.  Representative                        
Hodgins stressed that contracts would be in place.                             
Purchasing countries generally want to be involved in                          
equity.  Contracts for natural gas would be for several                        
years.  The project would not go forward without contracts.                    
Representative Martin emphasized that purchases should also                    
be partners in the investment of the pipeline.  He also                        
noted the value of recycled gas.                                               
                                                                               
(Tape Change, HFC 98 -93, Side 1)                                              
                                                                               
Representative Hodgins emphasized that a taxation figures                      
would be developed to determine the actual and true cost of                    
the pipeline.  He stressed that the pipeline would not be                      
built for the current projected cost.  The intent is to                        
lower the cost to approximately $12 billion dollars.  The                      
current general analysis is $15 billion dollars.                               
                                                                               
In response to a question by Representative Davies,                            
Representative Hodgins reviewed incentives in the                              
legislation.  A municipal taxation exemption would be one                      
incentive.  Tax revenue is anticipated at $12.6 billion                        
dollars.  He suggested that it would be appropriate to give                    
up as much as two percent of that amount.  This would be                       
approximately $160 million dollars.  There would be a                          
negative impact to communities in the form of                                  
infrastructure.  More schools could be required due to                         
employment expansions.  Communities have indicated that they                   
can manage operational costs but not capital expenditures.                     
Communities might receive natural gas as a result of their                     
proximity to the pipeline. The federal government would                        
receive approximately $26 billion dollars over the course of                   
the project.  Federal relief would help the cash flow                          
portion of the project.  He did not anticipate any allowance                   
for decreased taxes once the revenue is flowing.  The                          
legislation is an incentive program to indicate that the                       
State wants to do business.                                                    
                                                                               
Representative Martin expressed concern that oil companies                     
are not threatened by the implementation of taxes.                             
                                                                               
JOHN T. SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL                           
RESOURCES provided members with a flow chart of HB 393 (copy                   
on file).  Stranded gas is gas that is uneconomic or not                       
competitive to develop.  A qualified project would be                          
identified and a qualified sponsor would come forward. The                     
project would have to establish that:                                          
                                                                               
1. Own some or all of the stranded gas; or                                     
2. Have a right to purchase some of the stranded gas; or                       
3. Have the financial strength to construct the project.                       
                                                                               
Once a qualified project by a qualified sponsor brings a                       
project to the commissioner of the Department of Natural                       
Resources, the commissioner would have to determine if:                        
                                                                               
1. The gas is stranded;                                                        
2. Qualified sponsors requirements are met;                                    
3. The proposed project is a Qualified Project; and                            
4. There is a Project Plan that reflects a proposal for                        
diligent development of the gas, and includes reasonable                       
provisions for providing gas to local communities.                             
                                                                               
If all the conditions are affirmed than the commissioner of                    
the Department of Natural Resources may begin to negotiate                     
an agreement.  The commissioner would look at the following                    
principles:                                                                    
                                                                               
1. Improve the competitiveness of the Alaska project;                          
2. Function effectively under a wide range of economic and                     
market conditions;                                                             
3. Link the State's share to project profitability (make tax                   
"progressive");                                                                
4. Make State's share "backend loaded"-lower tax rates in                      
earlier years, higher rates in later years;                                    
5. Allow Sponsor a share of the project's return                               
commensurate with the Sponsor's assumed risk;                                  
6. Have the State's share increase under favorable price and                   
cost conditions;                                                               
7. Be clear and unambiguous; and                                               
8. Base payment terms on actual costs if possible.                             
                                                                               
 In addition to fiscal terms, the contract would also:                         
                                                                               
1. Provide for Alaska Hire within the limits of                                
Constitutional restrictions;                                                   
2. Provide gas for Alaska communities;                                         
3. Provide for a fair and reasonable sharing of revenue with                   
affected communities;                                                          
                                                                               
Development of municipal revenue sharing terms would be                        
based on the following:                                                        
                                                                               
i. The size of the tax base that would be exempted;                            
ii. The anticipated economic and social burdens imposed                        
on a municipality from a project;                                              
iii. The need for stable and predictable payments; and                         
iv. The eight fiscal principles outlined above.                                
                                                                               
Commissioner Shively emphasized that how the State deals                       
with affected communities is one of the challenges it faces.                   
Property tax is the most regressive.  Assuming that there is                   
an agreement, the commissioner of Department of Natural                        
Resources  has the ability to negotiate a couple of issues.                    
The commissioner can provide for a method for valuing the                      
gas for royalty purposes.  He observed that there have been                    
disagreements about the system of valuing gas.  The amount                     
of the royalty would not be changed.  The method of figuring                   
the royalty could change.   The commissioner may also modify                   
the rights of the State to take royalty in-kind rather than                    
in-value.  Currently, the amount of oil the State takes can                    
be changed on a monthly basis.  Project sponsors will not                      
want the State to be able to take up to 12 and a half                          
percent of the gas at anytime during the project.  They will                   
need to know, up front, how much royalty gas will be taken.                    
                                                                               
Commissioner Shively observed that once the commissioners or                   
the Department of Revenue and the Department of Natural                        
Resources are in agreement it goes out to contract.  The                       
commissioner of Department of Revenue listens to the public                    
and a final agreement is reached.  Then the contract would                     
go to the governor.  The governor would submit the contract                    
to the legislature.  If the legislature authorizes the                         
contract the commissioner of Department of Revenue signs the                   
contract within 60 days.                                                       
                                                                               
In response to a question by Representative Martin,                            
Commissioner Shively noted that companies have to make a                       
case for confidentiality.  Trade secrets, things that affect                   
the applicants competitive position, information that has                      
commercial value that could be significantly diminished by                     
public disclosure, or public exposure that is not in the                       
long term interest of the state of Alaska would be standards                   
for confidentiality.  The legislature could still review                       
information under executive session.  The major portion of                     
the contract would be under public debate.                                     
                                                                               
Representative Martin questioned qualifications for Alaska                     
hire.  He noted that Alaskans would have to be trained for                     
some skilled positions.  Commissioner Shively stated that a                    
year or more residency would be required.  He stressed that                    
Alaska's work force is more qualified than it was during the                   
mid 1970's.  If the workforce is a large as it was for the                     
pipeline there will probably be some outside hire.  The                        
companies would be pressured to prove that they exhausted                      
efforts to hire Alaskans.                                                      
                                                                               
JIM SYKES, OILWATCH ALASKA, ANCHORAGE stated that the                          
legislation is moving in a good direction, but cautioned                       
that there are some areas that need to be improved.  He                        
emphasized that the project cannot be made profitable if it                    
is not profitable.  He asserted that the state of Alaska                       
cannot afford to give away valuable resources.  He noted                       
four areas of concern:                                                         
                                                                               
- Payment schemes for payment in lieu of taxes;                                
- No legal assurance that a negotiated contract by the                         
Administration will fully compensate the people of                             
Alaska for the public owned resource or other public                           
cost;                                                                          
- There has been no discussion about the downside risks                        
and the effect of the project on the State; and                                
- How can a competitive environment be assured?                                
                                                                               
Mr. Sykes observed that cash starved nations maybe willing                     
to grant greater concessions to get gas extraction activity                    
started at almost any price.  This could hurt Alaska's                         
competitive position.  It is possible that gas from other                      
nations could flood the nation after the project is on line.                   
He observed that the system of identifying impacted                            
communities is based on the question of whether periodic                       
payments to communities will adequately compensate for the                     
real cost of providing schools, public safety and other                        
services during construction.  There is no insurance that                      
there will be money available when the municipalities need                     
the money the most.  He maintained that something more                         
concrete is needed to assure that municipal needs are met.                     
He stressed that the only way to assure that those that are                    
working in Alaska are supporting the benefits they require                     
is to have them pay an income tax.  He observed that the                       
upside benefits have been addressed but that until the                         
downside is fully examined the Department of Natural                           
Resources should not negotiate a contract.  He emphasized                      
that the state of Alaska needs to make sure that there is a                    
competitive environment to prevent antitrust cases.                            
                                                                               
DAVID BROOKS, MANAGER ALASKA GAS, BP EXPLORATION ALASKA                        
INCORPORATED stated that they have prove in Prudhoe Bay                        
approximately 25 trillion cubic feet of gas.  There is                         
approximately 5 trillion cubic feet of gas in Point Thompson                   
and the US geological survey suggests that there could be in                   
excess of another 100 trillion cubic feet yet to be found on                   
the North Slope.  He emphasized the value for the resource                     
owners and the State if economic ways of transporting the                      
gas to market could be found.  He assured the Committee that                   
BP is taking the issue of the commercialization of these gas                   
resources very seriously and continues to dedicate resources                   
to exploring routes to commercialize it.                                       
                                                                               
Mr. Brooks observed that over the past year BP has worked                      
with the legislature, the state administration, other gas                      
owners and interested parties on the commercialization of                      
the North Slope gas.  The Gas Commercialization Report                         
published in January of this year was an outcome of that                       
work. He highlighted two issues that BP believes ought to be                   
considered.  He emphasized that a key option today is gas to                   
liquids technology.  Although the technology is currently                      
uneconomic many companies including BP have extensive work                     
programs in progress to drive down the costs of the process                    
and make it competitive.                                                       
                                                                               
The gas to liquids technology would convert the gas on the                     
North Slope to a liquid hydrocarbon such as diesel. That                       
diesel could be transported in the TAPS oil pipeline and                       
sold out of Valdez in the normal way. Although this would                      
not require the development of a gas line it would have                        
other significant benefits.                                                    
                                                                               
First, a gas to liquids plant on the North Slope would                         
increase the flow of oil through the TAPS line, which would                    
help to keep down transportation costs.  This could help                       
facilitate the production of crude oil from some of the                        
smaller accumulations on the North Slope.                                      
                                                                               
Secondly, enhanced flows down TAPS would prolong the useful                    
life of TAPS and ensure that refineries and communities                        
along the pipeline continue to have access to energy derived                   
from North Slope reserves.                                                     
                                                                               
Mr. Brooks added that the options of LNG and Gas to liquids                    
are not mutually exclusive.  The vast quantities of gas                        
already proven on the North Slope means that BP could do                       
both a LNG project and a gas to liquids project.                               
                                                                               
Mr. Brooks urged that the scope of the legislation be                          
widened to include all options for gas commercialization, in                   
particular the options of LNG and gas to liquids technology.                   
                                                                               
Mr. Brooks noted that BP's second area of concern is the                       
sunset clause on page 10 of the Bill.  The clause limits the                   
applicability of the legislation to projects making an                         
application before the end of June 2001.   He stressed that                    
this would close off options for the future.                                   
                                                                               
Mr. Brooks stressed that BP cannot control the development                     
of technology or markets for the gas.  He felt that a cut                      
off date would reduce options and gives a negative message                     
to the potential developers of technology and stranded gas                     
resources.  He recommended that the sunset clause be                           
deleted.                                                                       
                                                                               
Mr. Brooks emphasized that the HB 393 is enabling                              
legislation that does not commit the State.  He maintained                     
that the legislation provides a positive signal to industry                    
and to developers of stranded gas that the State is open for                   
business.                                                                      
                                                                               
Representative Davies asked for a summary of work by BP to                     
commercialize stranded gas through a reduction in                              
transportation costs.  Mr. Brooks noted that BP has worked                     
with Arco and Exxon to look at reducing costs by sharing                       
infrastructure.  He stated that the cost of the project is                     
between $12 and $15 billion dollars.  He expressed                             
confidence that the project could be built for $12 billion                     
dollars.  He maintained that the project is not competitive                    
at either $15 or $12 billion dollars.  The next stage of                       
their work program tries to find innovative ways to reduce                     
costs, particularly the pipeline.  A workshop with experts                     
in building and operating a pipeline in harsh conditions was                   
held two weeks ago with other companies.  Plans to bring a                     
pipeline from the North Slope to Cook Inlet are being                          
addressed.                                                                     
                                                                               
Representative Mulder asked if they would be concerned about                   
the applicability of gas to liquid still warranted.  Mr.                       
Brook stated that there are people discussing gas to liquid                    
plants.  The issue is site specific.  The technology is                        
present.  He emphasized that the legislation is enabling                       
legislation.  Removal of the sunset clause would allow work                    
to progress.  The clause would potentially remove options                      
from the State for discussions of ways to develop stranded                     
gas at a later date.                                                           
                                                                               
Representative Martin asked how much investment would be                       
needed to liquid gas, would the same pipeline be used, and                     
where is the market.                                                           
                                                                               
Mr. Brooks stressed that the cost is unknown.  The gas could                   
be sent down the pipeline, blended into the crude oil.  It                     
would increase the value of the crude oil.  This would                         
increase the value of Alaskan oil.                                             
                                                                               
JIM JOHNSON, DEVELOPMENT MANAGER, ALASKA REGION, PHILLIPS                      
PETROLEUM COMPANY observed that the Alaska Region in                           
Phillips includes North Slope assets operated by other                         
companies, and the Tyonek Platform in the North Cook Inlet.                    
Gas from the North Cook Inlet Unit goes to the Kenai LNG                       
plant for processing and shipment as LNG to Asia.                              
                                                                               
He observed that Phillips has looked at the implementation                     
of a North Slope gas project, and believes that it has the                     
potential to be economic, although with current conditions                     
it is not economic.  He observed elements that will be key                     
in determining the ultimate economic viability of such a                       
project:                                                                       
                                                                               
     1. The project costs (pipeline, plants, LNG tankers);                     
     2. The market for LNG sales overseas; and                                 
     3. The regulatory and tax structure.                                      
                                                                               
He stressed that Phillips believes that timely definition of                   
a project structure, including potential improvements in all                   
three of these elements, is important for such a project to                    
ultimately come to fruition.  As companies work toward                         
addressing project costs and marketing arrangements, it will                   
be important to be able to define any improvements in the                      
tax structure that will be available to bring the project                      
into being.                                                                    
                                                                               
MICHAEL HURLEY, SENIOR TAX ADVISOR, ARCO ALASKA, ANCHORAGE                     
testified in support of HB 393, The Alaska Stranded Gas                        
Development Act.  He pointed out that ARCO has been                            
aggressively pursuing the development of North Slope gas                       
resources for some time now.  As one of the major gas                          
interest owners on the slope, these resources represent one                    
of Arco's most significant undeveloped assets.  Finding a                      
way to commercialize them is an important priority.                            
                                                                               
Mr. Hurley stated that their most encouraging work to-data                     
has been in the development of plans to commercialize the                      
gas as LNG sold into Far East markets.  While this project                     
is not yet economically viable, ARCO has been working on                       
four key areas which, if successfully addressed, could lead                    
to an economically viable project:                                             
                                                                               
1)   Reduction in the cost of the project;                                     
2) Development of a viable project structure;                                  
3) Development of a viable market; and                                         
4)  Pursuit of federal and state fiscal & commercial                           
regulatory matters.                                                            
                                                                               
He stated that ARCO believes HB 393 represents an important,                   
indeed a vital, component of their plan to develop a viable                    
economic project.                                                              
                                                                               
(Tape Change, HFC 98 - 93, Side 2)                                             
                                                                               
Mr. Hurley observed that while they have been pursuing their                   
plan for an LNG project to commercialize these gas                             
resources, alternative plans to commercialize the gas have                     
been and continue to be studied.  Over the last twenty years                   
several serious efforts were initiated to move the gas in                      
conventional gas pipelines through Canada to lower-48                          
markets.  Unfortunately, none of those efforts achieved                        
economic viability.  Other, more technologically                               
challenging, alternatives for commercializing the gas                          
continue to be researched, including gas to liquids                            
technology.                                                                    
                                                                               
Mr. Hurley maintained that HB 393 is important because it                      
puts in place a process and structure within which sponsors                    
or sponsor groups may work with the administration to                          
develop alternative fiscal regimes more appropriate to the                     
kind and structure of project.  These alternative fiscal                       
regimes would then be open to public comment, and would                        
ultimately return to the legislature, in the form of                           
contracts.                                                                     
                                                                               
In response to a question by Representative Davies, Mr.                        
Johnson observed that the legislation accepts several kinds                    
of project structures.  The bill is flexible enough to take                    
care of different kinds of structures.  He stressed that the                   
legislation should be broad in the sense of time.                              
                                                                               
BEVERLY MENTZER, ALASKA GAS COMMERCIALIZATION MANAGER, EXXON                   
COMPANY U.S.A.'S observed ways that the legislation would                      
facilitate the commercialization of Alaska's gas and                           
highlighted key areas of interest during the prior hearings.                   
She assured the Committee that Exxon continues to have a                       
keen interest in commercializing Alaska's North Slope gas,                     
which represents over one-half of Exxon U.S.A.'s gas                           
resources.  Since discovery of Prudhoe Bay, Exxon has                          
devoted a significant amount of their technical and                            
financial resources searching for a way to commercialize the                   
gas.  They have spent in excess of $100 million dollars on                     
these efforts.                                                                 
                                                                               
Ms. Mentzer emphasized that this work has demonstrated that                    
it will take a combination of fiscal and regulatory                            
modifications and certainty, favorable market terms and                        
significant cost reductions for a North Slope gas project to                   
be economic.  She observed that the State's fiscal                             
consultant, Pedro Van Meurs said that, "In order to make the                   
Alaska North Slope LNG project economic, three objectives                      
have to be achieved:                                                           
                                                                               
1. The costs of the project have to be reduced                                 
substantially.                                                                 
2. The profitability of the project has to be improved                         
through a fiscal package in which federal, state and                           
local governments cooperate, and                                               
3. The risks of the project have to be considerably                            
reduced."                                                                      
                                                                               
Ms. Mentzer noted that risks include such things as gas                        
price, cost overruns, fiscal stability and market access.                      
To help reduce fiscal risk, the legislation provides                           
reasonable guidelines and boundaries for development of a                      
fiscal contract.  It includes the opportunity for input from                   
the legislature, local municipalities and the public during                    
the contract development stage.  It also appropriately                         
requires legislative review and authorization of any fiscal                    
contract.                                                                      
                                                                               
Ms. Mentzer pointed out that a key objective of the bill is                    
to keep options open for the state of Alaska, so that it can                   
maximize the value of its gas resources.  She noted that the                   
bill is not field-specific, but keeps options open by                          
defining criteria for a qualified project.  She observed                       
that there are only criteria to judge the intent and                           
financial strength of potential qualified sponsors.  She                       
added that there are only guiding principles for future                        
negotiations, and options for taxes to be considered and                       
that there are only three years to apply for a fiscal                          
contract.                                                                      
                                                                               
Ms. Mentzer asserted that following recent removal of the                      
gas-to-liquids language, it is debatable whether Alaska                        
wants to keep the door open today to encourage the valuation                   
of new technology which may expedite commercialization of                      
Alaska's gas.                                                                  
                                                                               
Ms. Mentzer explained the options and issues surrounding                       
gas-to-liquids conversion.  She noted that the most                            
frequently asked question is whether gas-to-liquids                            
conversion is really an option worthy of Alaska's serious                      
consideration today.  From Exxon's perspective the answer is                   
"yes."   Exxon has spent over $300 million dollars on                          
technology development and acquired 1500 patents worldwide.                    
They have completed a feasibility study with the Qatar                         
General Petroleum Company and are currently in negotiations                    
with them on commercial terms for a possible project.  She                     
stressed that the issue is not whether the technology is                       
ready, but whether or not the technology is economic.  The                     
site-specific economics will be determined by such factors                     
as product price, construction, operating and transportation                   
cost and fiscal terms.  A Department of Energy report, which                   
compared the economics of similar size LNG and GTL projects                    
for Alaska, concluded that "both options are economically                      
promising and warrant consideration in industry and                            
government decision making."                                                   
                                                                               
Ms. Mentzer concluded that the passage of House Bill 393 is                    
a necessary step in the process of developing appropriate                      
fiscal terms that could be specified for the life of the                       
project.  Such a fiscal contract could increase the                            
competitiveness of an Alaska gas project, while meeting the                    
long-term fiscal interests of the state.                                       
                                                                               
Representative Mulder asked if there are any successful gas                    
to liquid projects.  Ms. Mentzer observed that there are                       
three operating plants in the world.  They are not economic.                   
                                                                               
Co-Chair Therriault pointed out that the economics are                         
different.  He was not supportive of adding gas to liquid                      
back into the legislation.  Ms. Mentzer stressed that HB 393                   
is a general framework.  The criteria in HB 393 would be                       
applicable to any major resource development project.  She                     
pointed out that LNG and gas to liquid are both uneconomic,                    
they face some of the same hurdles.  The issue is whether                      
the door will remain open.                                                     
                                                                               
In response to a question by Co-Chair Therriault, Ms.                          
Mentzer clarified that the gas to liquid process is about 60                   
to 65 percent energy efficient.  It is a heat intense                          
process and requires a lot of fuel.  The BTU potential can                     
be more valuable than LNG.  The energy lost in the process                     
is not regained directly in the product.  However, heat can                    
be used for electric power generation or waste heat based on                   
site-specific opportunities.  The third step of the gas to                     
liquid process can result in a range of high quality                           
products.                                                                      
                                                                               
In response to a questions by Representative Davis, Ms.                        
Mentzer explained that some products could be used in the                      
community without additional processing.  The climate is not                   
a significant detriment to the processing.  Arctic                             
conditions, in general, raise operation costs.  She                            
emphasized that they do not know when the Asian economy is                     
going to recover and take increasing amounts of LNG from                       
Alaska.  She spoke against the sunset provision.                               
                                                                               
In response to a question by Representative Martin, Ms.                        
Mentzer interpreted the removal of the gas to liquid option                    
to indicate that it is not the intent of the legislature to                    
consider the option.                                                           
                                                                               
Representative Davies observed that communities are                            
concerned that fiscal terms not prohibit an appropriate                        
return to the community at some place and time.  They are                      
also concerned about having input into contracts.                              
                                                                               
WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE stated                      
that communities have several opportunities to voice                           
concerns.  The bill creates a municipal advisory group that                    
would be consulted throughout the negotiation of the                           
contract.  The commissioner of Revenue is directed to                          
consult with and seek the advice of the municipal advisory                     
group.  There is a period of public comment.  The                              
commissioner must consult with municipalities and others                       
during the public comment period.  The contract can be                         
amended to address concerns before legislation is presented.                   
Legislation can also be amended.  The proposing group would                    
be consulted on amendments.                                                    
                                                                               
Representative Mulder MOVED to report CSHB 393 (RES) out of                    
Committee with the accompanying fiscal notes.  There being                     
NO OBJECTION, it was so ordered.                                               
                                                                               
CSHB 393 (RES) was REPORTED out of Committee with "no                          
recommendation" and with two fiscal impact notes, one by the                   
Department of Revenue and one by the Department of Natural                     
Resources, both dated 2/11/98.                                                 
ADJOURNMENT                                                                    
                                                                               
The meeting adjourned at 4:40 p.m.                                             
                                                                               
                                                                               
House Finance Committee 19 4/6/98                                              

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