Legislature(1995 - 1996)
01/10/1996 01:35 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 10, 1996
1:35 P.M.
TAPE HFC 96 - 1, Side 1, #000 - end.
TAPE HFC 96 - 1, Side 2, #000 - #399.
CALL TO ORDER
Co-Chair Mark Hanley called the House Finance Committee
meeting to order at 1:35 P.M.
PRESENT
Co-Chair Hanley Representative Martin
Co-Chair Foster Representative Mulder
Representative Brown Representative Navarre
Representative Grussendorf Representative Parnell
Representative Kelly Representative Therriault
Representative Kohring
ALSO PRESENT
Representative Ivan Ivan; Representative John Davies;
Representative Bettye Davis; Wilson Condon, Commissioner,
Department of Revenue; Dr. Charles Logsdon, Chief Petroleum
Economist, Department of Revenue; Mike Greany, Director,
Legislative Finance Division; Richard Pegues, Director,
Administrative Services Division, Department of Law.
SUMMARY
DEPARTMENT OF REVENUE - FALL REVENUE FORECAST
WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE
introduced Dr. Charles Logsdon, Chief Petroleum Economist,
Department of Revenue.
Commissioner Condon referenced charts included in the
Revenue Update Hearing packet provided to Committee members
by the Department of Revenue. [Attachment #1].
Commissioner Condon provided a review of the charts in the
Department's 1995 fall forecast of unrestricted general fund
revenues and the State's oil production cost. The Spring
1995 revenue forecast predicted the State would receive $1.8
billion dollars in general fund unrestricted revenue,
although, the closing price is anticipated to be $2.7
billion dollars. Given the difference, the State Treasury
will receive $194.5 million dollars more than anticipated in
unrestricted revenue.
1
Commissioner Condon summarized areas in which a divergence
from the spring revenue forecast existed: Corporate income
tax, miscellaneous other taxes, resource sales, investment
earnings, rents, royalties and miscellaneous revenues.
Representative Martin questioned the $900 million dollar
Constitutional Budget Reserve (CBR) payback decreed by the
court. He understood more funds should be available this
year for distribution resulting from the payback.
Commissioner Condon countered that the full amount had not
been removed from the account, and stressed that those funds
would not be available.
CHARLES LOGSDON, DR., CHIEF PETROLEUM ECONOMIST, DEPARTMENT
OF REVENUE, pointed the Committee members had received in
their packet a FY 1996 Petroleum Revenue Update from the
Department of Revenue. Dr. Logsdon referred to a series of
charts which compare the FY 1996\FY 1997 revenue base case
scenario. The Department of Revenue assumes that FY96 will
generate $1.8 billion dollars in revenues from unrestricted
general fund. The key oil providers would be Alaska North
Slope Oil (ANS) at 1.49/bbl providing $16.36 per barrel. He
advised that this year, production has not matched the
State's expectation and that the State is currently 13
thousand barrels a day under the targeted amount. At this
point, production is up.
Dr. Logsdon summarized fundamental points of the world oil
market which underlines the forecast. He noted that the
demand for oil is strong, interjecting that as the world
economy grows, so the demand for oil increases.
He continued that FY97 and FY96 assume similar international
oil prices, although, less oil per day will be pumped. Dr.
Logsdon added, the fundamental assumptions critical to the
projections were "rocky" oil prices. At the same time, the
Department assumes that the embargo will not be lifted. The
demand for oil has been trending globally upward with a 2%
increase per year.
Dr. Logsdon added that there have been concerns with the
Organization of Oil Exporting Countries (OPEC) market share.
The market predicts that oil prices should be coming down
with increased OPEC oil production, squeezing the market
shares. Current oil production forecasts do reflect that
information. Dr. Logsdon emphasized that current base price
predictions do support the evidence.
Dr. Logsdon addressed the possibility of lifting the export
ban, resulting in an additional $40 million dollar revenue.
By lifting the ban, Alaska will obtain the best possible
price for their oil and also a price base for rural market
2
trade.
In response to a concern of Representative Martin, Dr.
Logsdon stressed that Venezuela was currently a member of
OPEC and in agreement to follow production quotas. He
reminded members that all countries involved with OPEC want
to increase production. Dr. Logsdon added that Alaska oil
would always be the most desireable crude oil on the west
coast, although, by lifting the ban, oil sales could then
move to the Far East market.
Co-Chair Hanley questioned production reductions.
Commissioner Condon explained that change resulted from
differing oil and gas forecast predictions. The change in
the projected volume forecast resulted from an incorrect
analysis of prediction methods used in the past. The double
counting effect had been in place during the Fall 1994
forecast. To date, the State has not researched systems
used before that date.
Co-Chair Hanley provided Committee members with a comparison
sheet of FY96\FY97 revenue base case scenario. [Attachment
asked if that resulted from an incorrect analysis.
Commissioner Condon stated that the current charts will
provide more accurate information.
Representative Mulder inquired if the oil pipelines could be
shifted for use of natural gas. Commissioner Condon
explained that to consider a shift of line use would depend
on the market value of gas. He stressed that putting the
gas back into the ground would maximize liquid oil
production. By the year 2010, the amount of oil lost by use
of the gas would be substantially lower and would then be a
more reasonable investment.
(Tape Change, HFC 96 - 2).
Representative Mulder asked if there would be any completion
of tax dispute settlements this year and what the cumulative
value of those disputes would be. Commissioner Condon was
not aware of any cases at this time which were close to
resolution. He added that the pending amount owed to the
State was $1.5 billion dollars.
Representative Parnell questioned a FY 95 Supplemental
request made to the Department of Law in the amount of $2
million dollars which would be paid to a law firm to cover
costs for an analysis of the Department of Revenue's
forecasting methodology. Commissioner Condon explained that
an extremely complicated revenue forecast program had been
used by the Department of Revenue for many years. An
agreement was made with the Department of Law and the
3
Preston Law Firm in November 1995 to review that situation.
The assistance was utilized in order to create a complete
documentation of the program currently used by the
Department of Revenue.
Representative Parnell requested copies of correspondence
between the two departments indicating that decision.
Commissioner Condon was not aware of any correspondence
resulting from that decision. He added that the forecasting
model had been the focus of concern and attention during the
State's oil and gas litigation. Co-Chair Hanley interjected
that the amount had been reported as an encumbrance within
the supplemental, and the surplus amount should have lapsed
into the general fund.
Co-Chair Hanley questioned the Department of Revenue's
choice of the Department of Law to obtain modeling
information and funding. Commissioner Condon advised that
when a review of a revenue forecast occurs, a party that
understands how the State of Alaska obtains revenue is
solicited. He continued, that the Department of Law
understands how the economy within Alaska works and
therefore would be an appropriate choice to overview the law
firm and audit chosen. Co-Chair Hanley suggested the
possibility of a conflict of interest to choose a law firm
that provides litigation to perform the audit and then
suggest changes to the modeling procedures.
RICHARD PEGUES, DIRECTOR, DIVISION OF ADMINISTRATIVE
SERVICES, DEPARTMENT OF LAW, acknowledged that $100 thousand
dollars had been encumbered for the above mentioned needs,
adding that the $2 million encumbered dollars would be used
for a block of work. He stressed that the budget request in
FY96 had been reduced by $4 million dollars. Co-Chair
Hanley voiced concern that $2 million had been encumbered in
the FY96 Supplemental, although should have been used in
FY95. He concluded that either the FY96 budget had been
under funded or that the Legislature had not been adequately
informed of all situations affecting the budget during the
hearings.
In response to a question by Representative Martin regarding
the taps tariff, Dr. Logsdon referenced a chart in
Attachment #1. The taps tariff recent filing represents the
first result of a major attempt by Alyeska to reduce
operating expenses. Lower expenses this year will affect
the projected costs for future years.
Dr. Logsdon concluded that inflation will also affect costs
and profitability of the pipeline. Production also will
affect the taps tariff by establishing a method of
calculation; the anticipated costs per year would be divided
4
by the anticipated cost per barrel for shipment. The tariff
would be driven by inflation and those costs would increase
as a result of less barrels of oil extracted to handle the
increased costs.
ADJOURNMENT
The meeting adjourned at 2:40 P.M.
HOUSE FINANCE COMMITTEE
January 10, 1996
1:35 P.M.
TAPE HFC 96 - 1, Side 1, #000 - end.
TAPE HFC 96 - 1, Side 2, #000 - #399.
CALL TO ORDER
Co-Chair Mark Hanley called the House Finance Committee
meeting to order at 1:35 P.M.
PRESENT
Co-Chair Hanley Representative Martin
Co-Chair Foster Representative Mulder
Representative Brown Representative Navarre
Representative Grussendorf Representative Parnell
Representative Kelly Representative Therriault
Representative Kohring
ALSO PRESENT
Representative Ivan Ivan; Representative John Davies;
Representative Bettye Davis; Wilson Condon, Commissioner,
Department of Revenue; Dr. Charles Logsdon, Chief Petroleum
Economist, Department of Revenue; Mike Greany, Director,
Legislative Finance Division; Richard Pegues, Director,
Administrative Services Division, Department of Law.
SUMMARY
DEPARTMENT OF REVENUE - FALL REVENUE FORECAST
WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE
introduced Dr. Charles Logsdon, Chief Petroleum Economist,
Department of Revenue.
Commissioner Condon referenced charts included in the
Revenue Update Hearing packet provided to Committee members
by the Department of Revenue. [Attachment #1].
Commissioner Condon provided a review of the charts in the
Department's 1995 fall forecast of unrestricted general fund
5
revenues and the State's oil production cost. The Spring
1995 revenue forecast predicted the State would receive $1.8
billion dollars in general fund unrestricted revenue,
although, the closing price is anticipated to be $2.7
billion dollars. Given the difference, the State Treasury
will receive $194.5 million dollars more than anticipated in
unrestricted revenue.
Commissioner Condon summarized areas in which a divergence
from the spring revenue forecast existed: Corporate income
tax, miscellaneous other taxes, resource sales, investment
earnings, rents, royalties and miscellaneous revenues.
Representative Martin questioned the $900 million dollar
Constitutional Budget Reserve (CBR) payback decreed by the
court. He understood more funds should be available this
year for distribution resulting from the payback.
Commissioner Condon countered that the full amount had not
been removed from the account, and stressed that those funds
would not be available.
CHARLES LOGSDON, DR., CHIEF PETROLEUM ECONOMIST, DEPARTMENT
OF REVENUE, pointed the Committee members had received in
their packet a FY 1996 Petroleum Revenue Update from the
Department of Revenue. Dr. Logsdon referred to a series of
charts which compare the FY 1996\FY 1997 revenue base case
scenario. The Department of Revenue assumes that FY96 will
generate $1.8 billion dollars in revenues from unrestricted
general fund. The key oil providers would be Alaska North
Slope Oil (ANS) at 1.49/bbl providing $16.36 per barrel. He
advised that this year, production has not matched the
State's expectation and that the State is currently 13
thousand barrels a day under the targeted amount. At this
point, production is up.
Dr. Logsdon summarized fundamental points of the world oil
market which underlines the forecast. He noted that the
demand for oil is strong, interjecting that as the world
economy grows, so the demand for oil increases.
He continued that FY97 and FY96 assume similar international
oil prices, although, less oil per day will be pumped. Dr.
Logsdon added, the fundamental assumptions critical to the
projections were "rocky" oil prices. At the same time, the
Department assumes that the embargo will not be lifted. The
demand for oil has been trending globally upward with a 2%
increase per year.
Dr. Logsdon added that there have been concerns with the
Organization of Oil Exporting Countries (OPEC) market share.
The market predicts that oil prices should be coming down
with increased OPEC oil production, squeezing the market
6
shares. Current oil production forecasts do reflect that
information. Dr. Logsdon emphasized that current base price
predictions do support the evidence.
Dr. Logsdon addressed the possibility of lifting the export
ban, resulting in an additional $40 million dollar revenue.
By lifting the ban, Alaska will obtain the best possible
price for their oil and also a price base for rural market
trade.
In response to a concern of Representative Martin, Dr.
Logsdon stressed that Venezuela was currently a member of
OPEC and in agreement to follow production quotas. He
reminded members that all countries involved with OPEC want
to increase production. Dr. Logsdon added that Alaska oil
would always be the most desireable crude oil on the west
coast, although, by lifting the ban, oil sales could then
move to the Far East market.
Co-Chair Hanley questioned production reductions.
Commissioner Condon explained that change resulted from
differing oil and gas forecast predictions. The change in
the projected volume forecast resulted from an incorrect
analysis of prediction methods used in the past. The double
counting effect had been in place during the Fall 1994
forecast. To date, the State has not researched systems
used before that date.
Co-Chair Hanley provided Committee members with a comparison
sheet of FY96\FY97 revenue base case scenario. [Attachment
asked if that resulted from an incorrect analysis.
Commissioner Condon stated that the current charts will
provide more accurate information.
Representative Mulder inquired if the oil pipelines could be
shifted for use of natural gas. Commissioner Condon
explained that to consider a shift of line use would depend
on the market value of gas. He stressed that putting the
gas back into the ground would maximize liquid oil
production. By the year 2010, the amount of oil lost by use
of the gas would be substantially lower and would then be a
more reasonable investment.
(Tape Change, HFC 96 - 2).
Representative Mulder asked if there would be any completion
of tax dispute settlements this year and what the cumulative
value of those disputes would be. Commissioner Condon was
not aware of any cases at this time which were close to
resolution. He added that the pending amount owed to the
State was $1.5 billion dollars.
7
Representative Parnell questioned a FY 95 Supplemental
request made to the Department of Law in the amount of $2
million dollars which would be paid to a law firm to cover
costs for an analysis of the Department of Revenue's
forecasting methodology. Commissioner Condon explained that
an extremely complicated revenue forecast program had been
used by the Department of Revenue for many years. An
agreement was made with the Department of Law and the
Preston Law Firm in November 1995 to review that situation.
The assistance was utilized in order to create a complete
documentation of the program currently used by the
Department of Revenue.
Representative Parnell requested copies of correspondence
between the two departments indicating that decision.
Commissioner Condon was not aware of any correspondence
resulting from that decision. He added that the forecasting
model had been the focus of concern and attention during the
State's oil and gas litigation. Co-Chair Hanley interjected
that the amount had been reported as an encumbrance within
the supplemental, and the surplus amount should have lapsed
into the general fund.
Co-Chair Hanley questioned the Department of Revenue's
choice of the Department of Law to obtain modeling
information and funding. Commissioner Condon advised that
when a review of a revenue forecast occurs, a party that
understands how the State of Alaska obtains revenue is
solicited. He continued, that the Department of Law
understands how the economy within Alaska works and
therefore would be an appropriate choice to overview the law
firm and audit chosen. Co-Chair Hanley suggested the
possibility of a conflict of interest to choose a law firm
that provides litigation to perform the audit and then
suggest changes to the modeling procedures.
RICHARD PEGUES, DIRECTOR, DIVISION OF ADMINISTRATIVE
SERVICES, DEPARTMENT OF LAW, acknowledged that $100 thousand
dollars had been encumbered for the above mentioned needs,
adding that the $2 million encumbered dollars would be used
for a block of work. He stressed that the budget request in
FY96 had been reduced by $4 million dollars. Co-Chair
Hanley voiced concern that $2 million had been encumbered in
the FY96 Supplemental, although should have been used in
FY95. He concluded that either the FY96 budget had been
under funded or that the Legislature had not been adequately
informed of all situations affecting the budget during the
hearings.
In response to a question by Representative Martin regarding
the taps tariff, Dr. Logsdon referenced a chart in
Attachment #1. The taps tariff recent filing represents the
8
first result of a major attempt by Alyeska to reduce
operating expenses. Lower expenses this year will affect
the projected costs for future years.
Dr. Logsdon concluded that inflation will also affect costs
and profitability of the pipeline. Production also will
affect the taps tariff by establishing a method of
calculation; the anticipated costs per year would be divided
by the anticipated cost per barrel for shipment. The tariff
would be driven by inflation and those costs would increase
as a result of less barrels of oil extracted to handle the
increased costs.
ADJOURNMENT
The meeting adjourned at 2:40 P.M.
9
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