Legislature(1999 - 2000)
02/17/2000 10:12 AM House O&G
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 17, 2000
10:12 a.m.
MEMBERS PRESENT
Representative Jim Whitaker, Chairman
Representative Fred Dyson
Representative Gail Phillips
Representative Joe Green
Representative John Harris
Representative Brian Porter
Representative Allen Kemplen
Representative Tom Brice
Representative Hal Smalley
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 290
"An Act relating to stranded gas pipeline carriers and to the
intrastate regulation by the Regulatory Commission of
Alaska of pipelines and pipeline facilities of stranded gas
pipeline carriers."
- MOVED CSHB 290(O&G) OUT OF COMMITTEE
HOUSE BILL NO. 307
"An Act establishing an oil and gas corporate income tax and
making conforming amendments; and amending the tax on
corporations levied under the Alaska Net Income Tax Act to
eliminate the state corporate income tax on taxable income of
less than $10,000; and providing for an effective date."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 290
SHORT TITLE: STRANDED GAS PIPELINE CARRIERS
Jrn-Date Jrn-Page Action
1/14/00 1924 (H) READ THE FIRST TIME - REFERRALS
1/14/00 1924 (H) O&G, RES, FIN
1/14/00 1924 (H) REFERRED TO O&G
1/27/00 (H) O&G AT 10:00 AM HOUSE FINANCE 519
1/27/00 (H) Heard & Held
1/27/00 (H) MINUTE(O&G)
2/01/00 (H) O&G AT 10:00 AM CAPITOL 17
2/01/00 (H) Heard & Held
2/01/00 (H) MINUTE(O&G)
2/10/00 (H) O&G AT 10:00 AM CAPITOL 17
2/10/00 (H) Heard & Held
2/10/00 (H) MINUTE(O&G)
2/15/00 (H) O&G AT 10:00 AM CAPITOL 17
2/15/00 <CANCELED>
2/17/00 (H) O&G AT 10:00 AM CAPITOL 17
BILL: HB 307
SHORT TITLE: OIL AND GAS CORPORATE TAX ACCOUNTING
Jrn-Date Jrn-Page Action
1/21/00 1972 (H) READ THE FIRST TIME - REFERRALS
1/21/00 1973 (H) O&G, L&C, FIN
1/21/00 1973 (H) REFERRED TO O&G
2/16/00 2225 (H) COSPONSOR(S): AUSTERMAN
2/17/00 (H) O&G AT 10:00 AM CAPITOL 17
WITNESS REGISTER
JAMES E. EASON
Alaska North Slope Gas Commercialization Sponsor Group
8611 Leeper Circle
Anchorage, Alaska 99504-4209
POSITION STATEMENT: Discussed amendments to HB 290.
ROGER MARKS, Petroleum Economist
Department of Revenue,
550 West Seventh Street
Anchorage, Alaska 99501-3555
POSITION STATEMENT: Discussed amendments to HB 290.
LORI BACKES, Legislative Aide
to Representative Jim Whitaker
Alaska State Legislature
Capitol Building, Room 13
Juneau, Alaska 99801
POSITION STATEMENT: Provided information on HB 290.
MICHAEL HURLEY
Alaska North Slope Gas Commercialization Sponsor Group
ARCO Alaska, Inc.
700 G Street
Anchorage, Alaska 99510-0360
POSITION STATEMENT: Discussed amendments to HB 290.
WILLIAM G. BRITT, JR., State Pipeline Coordinator
Department of Natural Resources
411 West Fourth Avenue, Suite C
Anchorage, Alaska 99501-2343
POSITION STATEMENT: Discussed amendments to HB 290.
MIKE BARNHILL, Assistant Attorney General
Oil, Gas and Mining Section
Department of Law
P.O. Box 110300
Juneau, Alaska 99811-0300
POSITION STATEMENT: Discussed amendments to HB 290.
REPRESENTATIVE ERIC CROFT
Alaska State Legislature
Capitol Building, Room 400
Juneau, Alaska 99801
POSITION STATEMENT: Sponsor of HB 307.
JOHN R. MESSENGER, Attorney at Law
Preston Gates & Ellis
Anchorage, Alaska
POSITION STATEMENT: Testified regarding legal issues pertaining
to HB 307.
ACTION NARRATIVE
TAPE 00-12, SIDE A
Number 0005
CHAIRMAN JIM WHITAKER called the House Special Committee on Oil
and Gas meeting to order at 10:12 a.m. Members present at the
call to order were Representatives Whitaker, Dyson, Phillips,
Green, Harris, Porter, Kemplen and Smalley. Representative Brice
arrived as the meeting was in progress.
HB 290-STRANDED GAS PIPELINE CARRIERS
Number 0177
CHAIRMAN WHITAKER announced the first order of business would be
HOUSE BILL NO. 290, "An Act relating to stranded gas pipeline
carriers and to the intrastate regulation by the Regulatory
Commission of Alaska of pipelines and pipeline facilities of
stranded gas pipeline carriers." Chairman Whitaker said HB 290
dealt with intrastate access to a gas pipeline both initially and
after its construction.
CHAIRMAN WHITAKER noted for the record that Representative Brice
had arrived.
CHAIRMAN WHITAKER directed attention to a series of draft
amendments in members' packets. He introduced Amendment 1 [1-
LS1269\A.2, Chenoweth, 2/14/00]. [Please refer to the bill
packet for the specific changes incorporated in Amendment 1.] He
explained that the only change made by Amendment 1 is this: the
phrase "undeveloped natural gas pipeline" is stricken and
replaced by "North Slope natural gas pipeline."
CHAIRMAN WHITAKER outlined the rationale for the change. He said
that HB 290 as originally drafted used the phrase "stranded gas
pipeline," which relates to the Stranded Gas Act; the basic
premise of that Act is that the state and its subdivisions will
lower their taxing regime to a point at which a [stranded gas]
project becomes feasible. As originally submitted, HB 290 infers
that the state must reduce its taxing regime on a natural gas
pipeline regardless of whether a project involves stranded gas.
Amendment 1 still offers the opportunity for a tax reduction
under the Stranded Gas Act, but it also allows the option of not
reducing state and municipal taxes on other pipeline projects.
REPRESENTATIVE BRICE asked whether this amendment would preclude
either of the two pipeline projects now proposed.
CHAIRMAN WHITAKER assured him it would not.
REPRESENTATIVE PHILLIPS inquired about an earlier draft of
Amendment 1.
CHAIRMAN WHITAKER said it was likewise related to the concern
about precluding projects that did not need the tax break
adherent to the Stranded Gas Act.
Number 0702
REPRESENTATIVE PORTER made a motion to adopt Amendment 1. He
then asked why the current version of the amendment specifies
North Slope gas rather than being geographically neutral.
CHAIRMAN WHITAKER said there had been some concern that Cook
Inlet would be adversely affected by HB 290, and that to deal
with that concern, those drafting Amendment 1 were geographically
specific.
REPRESENTATIVE PHILLIPS requested input from James E. Eason.
JAMES E. EASON, Alaska North Slope Gas Commercialization Sponsor
Group, spoke from Anchorage by teleconference. He said the
sponsor group does not have a problem with the amendment as it is
now drafted, but he thought the earlier version could have opened
up a universe of concerns.
Number 0893
REPRESENTATIVE PHILLIPS asked for some clarification, then made a
motion to adopt the amendment to the amendment.
CHAIRMAN WHITAKER declared that the amended version of Amendment
1 had been moved. Hearing no objections, he invited further
questions.
REPRESENTATIVE KEMPLEN asked if someone from the Department of
Revenue was available to comment.
CHAIRMAN WHITAKER confirmed that Roger Marks was on the
teleconference line.
REPRESENTATIVE KEMPLEN asked Mr. Marks if from the
Administration's perspective he could see any difficulties
regarding the language of the proposed amendment.
ROGER MARKS, Petroleum Economist, Department of Revenue,
testified from Anchorage by teleconference. He said the
Administration thinks that the proposed language is fine. He
added that the Administration had foreseen potential regulatory
confusion with earlier wording.
Number 1000
REPRESENTATIVE PORTER AND CHAIRMAN WHITAKER briefly discussed and
clarified that the amendment to Amendment 1 replaces the words
"undeveloped natural gas" with "North Slope natural gas"
throughout HB 290. [The bill as originally drafted used the words
"stranded natural gas." The first draft of Amendment 1 replaced
that phrase with "undeveloped natural gas." The amendment to
Amendment 1 replaced "undeveloped natural gas" with North Slope
natural gas."]
CHAIRMAN WHITAKER, hearing no objection, declared that Amendment
1 [in its final version, as amended] was adopted.
Number 1049
CHAIRMAN WHITAKER then turned to Amendments 2 and 2B.
REPRESENTATIVE GREEN made a motion to adopt Amendment 2. [Please
refer to the bill packet for the specific changes incorporated in
Amendment 2.]
CHAIRMAN WHITAKER explained that Amendment 2 deals with
intrastate access, removing the requirement for a take-or-pay
contract. It also allows public utilities with fairly small-
volume individual customers to submit a written commitment with a
"best current estimate" of needs. It further requires public
utility shippers and non-public utility shippers with large-
volume individual customers to submit a take-or-pay contract with
their application. Thus Amendment 2 allows a bit more
flexibility in initial entry.
REPRESENTATIVE KEMPLEN asked if a representative from the
Regulatory Commission of Alaska (RCA) was available.
CHAIRMAN WHITAKER said no, unfortunately.
REPRESENTATIVE HARRIS objected for purposes of discussion.
REPRESENTATIVE KEMPLEN expressed a desire to know if the RCA
considered the solution to be a workable one.
MR. MARKS said he thought the concern the Administration had
voiced the previous week would not disappear with Amendment 2.
That concern was related to the possibility of building for a
capacity that is not used, thereby creating additional risks for
the project.
CHAIRMAN WHITAKER asked his aide, Lori Backes, to testify, saying
she had been in close contact with Nan Thompson,
Commissioner/Chair of the RCA.
LORI BACKES, Legislative Aide for Representative Jim Whitaker,
Alaska State Legislature, confirmed that she had been in contact
with Nan Thompson regarding her concerns and the manner in which
Amendment 2 would resolve those concerns. Ms. Backes said that
with regard to initial capacity and Amendment 2, Ms. Thompson is
satisfied that the determination of what constitutes a commitment
would fall under the RCA and that there would be a period for
public comment.
MS. BACKES added that she and Ms. Thompson also had discussed
Amendment 3, and that the same comments apply to it.
REPRESENTATIVE HARRIS withdrew his objection.
Number 1382
CHAIRMAN WHITAKER, hearing no further objections, declared that
Amendment 2 would be incorporated into an eventual committee
substitute (CS).
REPRESENTATIVE PORTER made a motion to adopt Amendment 2B.
[Please refer to the bill packet for the specific changes
incorporated in Amendment 2B.]
CHAIRMAN WHITAKER addressed Amendment 2B, saying it simply
restates what is in existing law but restates emphatically that
the commissioner of [the Department of] Natural Resources is
required to consider in-state, in-kind usage as a very high
priority, and that there will be legislative review and approval
of the commissioner's decision. The concern being addressed was
that there be intrastate access to gas after pipeline
construction. In response to a question from Representative
Phillips, Chairman Whitaker provided clarification that it was
not necessary to make the language in Amendment 2B match that in
Amendment 1.
CHAIRMAN WHITAKER advised the committee that concern had been
expressed by legislative counsel in the Legal and Research
Services Division that Amendment 2B may be entering a gray area
of legislative power as opposed to the power of the
administration. Chairman Whitaker said he thinks this question
will be addressed in another committee of purview.
CHAIRMAN WHITAKER, hearing no objections, declared that Amendment
2B would be incorporated into an eventual CS for HB 290.
Number 1512
REPRESENTATIVE GREEN made a motion to adopt Amendment 3. [Please
refer to the bill packet for the specific changes incorporated in
Amendment 3.]
CHAIRMAN WHITAKER explained Amendment 3, saying that if
expansion, extension or enlargement of the pipeline is necessary,
HB 290 sets forth the criteria upon which the RCA must make its
determination, stating that "the requirement must not impose
undue financial burden on the carrier or its customers."
Amendment 3 also sets into law the requirement that the cost of
expansion be borne by the person making the request, considering
any benefits to customers of the carrier. The amendment simply
rewords the criteria in a less ambiguous fashion and removes any
mention of who must bear the costs. Amendment 3 allows the RCA
to use a utility methodology rather than a common carrier
methodology to determine who will bear the cost. The ultimate
criterion used for making a decision under utility methodology is
public interest, as opposed to a simple pro-rata basis.
CHAIRMAN WHITAKER, in response to Representative Brice, provided
clarification that language in Amendment 3 would conform to that
of Amendment 1.
REPRESENTATIVE DYSON asked to hear any comments from Jim Eason.
CHAIRMAN WHITAKER, at the request of Mr. Eason, clarified that
the Amendment 3 before the committee was the same as a draft he
had previously seen.
MR. EASON said the sponsor group had worked very closely with Ms.
Thompson to draft it. He said Amendment 3 was designed to
resolve the hybrid issue, which the sponsor group believes it
does.
Number 1707
CHAIRMAN WHITAKER, hearing no further questions or objections,
declared that Amendment 3 would be incorporated into an eventual
CS for HB 290.
CHAIRMAN WHITAKER then pointed out that Amendment 5 dealt further
with the difference between methodologies, that is, utility as
opposed to common carrier.
Number 1741
CHAIRMAN WHITAKER clarified that Amendment 4B had replaced
Amendment 4.
REPRESENTATIVE GREEN moved to adopt Amendment 4B, which read as
follows:
Page 8, lines 15 and 16:
Delete ",but excluding"
Insert "; the term includes"
CHAIRMAN WHITAKER stated that this issue has become somewhat
contentious. Some parties have said that if Amendment 4B is
included, it is a "deal killer." Other interested parties have
said that if it is not included, it is a deal killer. He said
that, quite frankly, he was confused and had not been able to
discern one way or another. He pointed out that this is not the
last committee of purview. He said the reason for making
Amendment 4B at this time is that the exclusion of the marine
facilities from the definition also excludes the marine terminal
from oversight by the Joint Pipeline Office, Department of
Revenue. If the Joint Pipeline Office does not have regulatory
oversight, who does? The best he had been able to determine was
that the Alaska Departments of Natural Resources, Commerce [and
Economic Development] and Labor [and Workforce Development, and
so forth, as well as a host of federal regulatory agencies, will
have oversight; the effect might be to take a step backward into
anarchy. It was the purpose of the Joint Pipeline Office in the
first place to do away with that anarchy.
CHAIRMAN WHITAKER expressed a second concern, that the marine
terminal's exclusion from the definition of a North Slope natural
gas pipeline also by extension excludes the marine terminal from
the Right of Way Leasing [Act], eliminating that oversight. He
said he wanted not to "regulate this thing to death" but to look
for the pitfalls. Exclusion from the Right of Way Leasing Act
could have a negative effect on another project, and those
associated with another project have voiced that very concern.
However, he said he was prepared to pass HB 290 from the
committee that day with Amendment 4B as proposed, and then, if
there are concerns about the terminal being excluded or included,
other committees of purview can deal with them.
REPRESENTATIVE PHILLIPS said she was opposed to Amendment 4B; it
would be a mistake to exclude the terminal facilities from the
oversight of the Joint Pipeline Authority, leaving operators
subject to all of the state and federal agencies that could be
applicable.
CHAIRMAN WHITAKER said he agreed with Representative Phillips but
thought that passage of Amendment 4B would have that effect.
[After brief discussion, Representative Phillips and Chairman
Whitaker reached a mutual understanding that if the committee
does not amend HB 290, there will not be Joint Pipeline Office
purview, but will be a host of regulatory agencies that the Joint
Pipeline Office has replaced. Chairman Whitaker then invited
either Michael Hurley or Jim Eason to express a differing
position.]
Number 1956
MICHAEL HURLEY, Alaska North Slope Gas Commercialization Sponsor
Group, ARCO Alaska, Inc., said the Alaska North Slope Pipeline
Sponsor Group's original intent, in putting the language in
place, was not to in any way change the Joint Pipeline Office's
current statutory authority. The Joint Pipeline Office has
authority now over pipelines, and that is understood and
accepted. The question that came up was whether the marine
terminal and the LNG plant itself were going to be covered.
Traditionally, the Joint Pipeline Office has regulated all the
pipelines in the state but not the plants at the end of
pipelines, regardless of whether those plants are producing
fertilizer or LNG.
MR. HURLEY said the sponsor group wondered what other kinds of
plants there might be at the ends of pipelines, and whether it
was desirable to have the Joint Pipeline Office regulating all of
those plants. The sponsor group was not trying to do things one
way or the other, but, in the exclusion the sponsors had made,
the sponsors also took the LNG plant and marine terminal
facilities out of the rate base upon which intrastate users'
tariff is calculated. Including a terminal in the system raises
the cost of all intrastate movements because the system thereby
becomes larger.
CHAIRMAN WHITAKER acknowledged that Mr. Hurley's point was valid.
REPRESENTATIVE BRICE asked if it would be acceptable to the
sponsor group to deal with a plethora of regulatory agencies.
MR. HURLEY replied that it would be, and that sponsors had
planned for that as normal operation. He said there are certain
laws and regulations one needs to follow, and the sponsors are
prepared to follow those.
REPRESENTATIVE PHILLIPS observed that as the late Representative
Ron Larson used to say, "Some of my friends think I should vote
this way, and some of my friends think I should vote that way,
and I'm going to vote with my friends."
Number 2113
REPRESENTATIVE KEMPLEN expressed interest in hearing the
Administration's perspective on Amendment 4B.
WILLIAM G. BRITT, JR., State Pipeline Coordinator, Department of
Natural Resources, said oversight and common carriage are two
separate issues. Neither the State Pipeline Coordinator's Office
nor its parent agency, the Department of Natural Resources, has
an opinion on the common carriage issues associated with the
terminal. They do have an opinion, however, on the systems
approach to oversight of the facilities that they oversee, an
opinion in favor of a coordinated approach as opposed to a
fractured one.
MR. BRITT explained that the Joint Pipeline Office neither adds
nor subtracts oversight to any facility. The various agencies
within the Joint Pipeline Office have the same missions within
that office that they would have otherwise. For an LNG facility,
the Department of Environmental Conservation would still have
authority over air emissions and water emissions, and the
Department of Labor [and Workforce Development] would still do
electrical and safety work; that would be true whether they were
co-located in the single office or in different locations. It is
just an exercise in efficiency to have the agencies working
together in a single location.
CHAIRMAN WHITAKER asked if that efficiency would adhere not only
to the governmental agencies but also to the facility itself.
MR. BRITT said he believed so, but suggested that it might be
appropriate to ask those who would be operating that facility.
REPRESENTATIVE KEMPLEN asked Mr. Britt if he thought making
Amendment 4B would be a prudent thing to do.
MR. BRITT replied that he thought it would be. There are
existing definitions of "pipeline" and "pipeline facilities"
within the Right of Way Leasing Act, and that definition has been
perfectly serviceable for every facility dealt with, both new and
historic. Amendment 4B would bring the definition in HB 290 into
line with that existing statutory definition.
REPRESENTATIVE GREEN noted that the mission statement for the
Joint Pipeline Office does not mention facilities. He asked Mr.
Britt if that was an omission that needs to be corrected.
MR. BRITT said the Joint Pipeline Office considers pipelines to
include facilities, as that is the definition included in the
Right of Way Leasing Act. At present, out of the plethora of
pipelines that are overseen, the only pipeline that has a
facility is the Trans-Alaska Pipeline System (TAPS), and the
Joint Pipeline Office oversees that marine terminal at Valdez.
REPRESENTATIVE GREEN said he was just wondering why the mission
statement was fairly detailed about pipelines, with no mention at
all about facilities; it seemed a little incongruous.
Number 2303
MR. BRITT reiterated that in the Right of Way Leasing Act, the
term "pipeline" is defined to include facilities.
REPRESENTATIVE BRICE requested clarification from the Department
of Revenue of a point Mr. Hurley had made about the impact
Amendment 4B would have on the tariff paid by in-state users.
ROGER MARKS responded, saying it was his understanding that it
would be possible to include the marine terminal facilities in
the definition of the pipeline for the Right of Way Leasing Act
but exclude those facilities from the definition for purposes of
RCA jurisdiction or rate making; therefore, he thought including
the marine terminals in the Right of Way Leasing Act would not
necessarily mean that the cost of those terminals would have to
be included in the tariff for intrastate use.
MR. HURLEY asked if the effect of the amendment would be to bring
the terminal facilities back under the common carriage rubric for
the entire system.
CHAIRMAN WHITAKER said he did not know the answer to that
question. That is not the intent, he said, indicating the
committee would try to take action that would preclude that. He
again acknowledged that there are pros and cons and, as yet, no
answer with regard to them. His suggestion was that the House
Special Committee on Oil and Gas [adopt] Amendment 4B and leave
the issue to a committee of later purview. He said he did not
like to do that, but that it was necessary to be realistic with
regard to the time constraints. he added that everyone wants a
good piece of legislation on this to pass.
REPRESENTATIVE PHILLIPS maintained her opposition to Amendment
4B, saying there were still too many questions. She pointed out
that the committee had the alternative of simply removing the
amendment from the table, leaving clarification for a later time.
Number 2433
CHAIRMAN WHITAKER asked Mr. Britt a question regarding possible
negative effects on another project, such as a terminal facility
that has been substantially permitted in Valdez. Would the
inclusion of Amendment 4B negatively affect the status of that
proposed project?
MR. BRITT said he was not sure.
TAPE 00-12, SIDE B
Number 2742
MR. BRITT continued, saying that he was not certain that the
amendment would have any effect on the proposed facility at
Valdez, considering the authorizations it already has in hand.
REPRESENTATIVE GREEN moved to amend the amendment [4B] by
deleting lines 15 through 20. There was discussion concerning
confusion over drafts of the Amendments 4 and 4B, after which
Representative Green withdrew his motion.
CHAIRMAN WHITAKER stated that the committee is dealing with 4B,
not 4. He then declared that 4B has not been proposed, nor will
it be.
CHAIRMAN WHITAKER then asked Mike Barnhill to address some of the
issues and questions that had been put forward.
Number 2125
MIKE BARNHILL Assistant Attorney General, Oil, Gas and Mining
Section, Department of Law, said the Right of Way Leasing Act has
governed pipelines in Alaska since 1972, and the definition of
pipelines [always] has included marine terminal facilities.
Amendment 4B changes that for the first time in 25 years by
removing marine terminal facilities from the definition of
"pipeline."
MR. BARNHILL said, with all due respect to Mr. Hurley, that he
categorically disagreed with his contention that inclusion of
marine terminal facilities in the Right of Way Leasing Act for
purposes of DNR oversight means that marine terminal facilities
will be included in the rate base for the purposes of the
Pipeline Act. That is absolutely incorrect, he stated. All it
does is provide for oversight by the land management agency of
the state. If it is excluded from the definition of pipeline in
the Pipeline Act, it will be excluded from the rate base.
MR. BARNHILL expressed concern about changing a definition that
has been in the Pipeline Act since 1972. He thought it might be
more appropriate for Mr. Britt to address the issue, but
volunteered that land management oversight of marine terminal
facilities in this state is of critical importance. The Valdez
marine terminal has been regulated under the Right of Way Leasing
Act for 25 years, and the sponsor group is proposing to change
that. He thought the legislature would be well advised to
consider that suggestion very cautiously.
Upon a roll call vote, Representatives Porter, Kemplen, Brice and
Whitaker voted in favor of Amendment 4B. Representatives Dyson,
Phillips, Green, Harris and Smalley voted against it. Therefore,
Amendment 4B failed by a vote of 4-5.
REPRESENTATIVE GREEN moved to adopt Amendment 5, which read:
Page 4, line 24:
Delete "The"
Insert "Except as provided by AS
42.06.370(c), the"
Page 7, following line 21:
Insert a new bill section to read:
"*Sec. 7. AS 42.06.370 is amended by adding a new
subsection to read:
(c) Rates demanded, observed, charged,
or collected by a stranded gas pipeline
carrier for intrastate service shall be
designed as if that portion of the stranded
gas pipeline were a public utility regulated
under the provisions of AS 42.05."
Renumber the following bill section accordingly.
CHAIRMAN WHITAKER explained that HB 290 acknowledges that the RCA
will set the rate of tariff on the intrastate portion of the
pipeline. However, there had been some question about which rate
method would apply, common carrier or utility. Amendment 5 sets
out very clearly that the utility rate methodology would apply,
the concern being that public interest be the highest priority
with regard to determining the rate and usage. He invited
comments.
REPRESENTATIVE PHILLIPS said she did not support the utility rate
methodology for this and so was going to vote no.
CHAIRMAN WHITAKER asked whether there is a higher priority than
public interest.
REPRESENTATIVE PHILLIPS replied that she thought the common
carrier rate methodology would benefit intrastate usage. She
emphasized that the issue was, in her mind, a matter of
structure.
CHAIRMAN WHITAKER asked if a pro-rata basis, which is the
determinant for prioritization on a common carriage line, takes
priority over public interest.
REPRESENTATIVE PHILLIPS explained that she was not saying that.
Rather, she was saying that she does not look at the proposed
pipeline as a utility and therefore does not think the utility
rate structure is applicable.
CHAIRMAN WHITAKER said that while he appreciated her comments and
took them with all due respect, he disagreed with her logic.
Number 2162
REPRESENTATIVE BRICE questioned whether the committee might be
creating a hybrid, as addressed in discussion of Amendment 3,
blurring the line between utility and common carrier.
CHAIRMAN WHITAKER said he thought the committee was doing the
opposite, providing further clarification.
MR. MARKS reiterated the concern that the Administration had
expressed the previous week that the thrust of HB 290 places the
proposed pipeline under the Pipeline Act, and that specifying
utility rate making under the Pipeline Act is opening the door to
a great deal of ambiguity that could increase rather than
decrease risks for the proposed project. Mr. Marks confirmed
that he had the same concerns as those expressed by
Representative Brice.
REPRESENTATIVE PHILLIPS asked to hear from Mr. Eason.
Number 2083
MR. EASON said the sponsor group believes that the amendment is
inappropriate at this time. It is important to try to maintain
options and keep open the possibility of looking at the facts
that are going to develop with any project as it works toward
viability. It is important to leave open the discussions for
what kind of methodology will be used. Sponsors believe that the
RCA has the authority, under existing law and under case law, to
[create a rate] structure, that they will have a public process
to do so, and that it is premature at this time to specify that
the RCA must use a utility rate making methodology.
MR. EASON further stated that the sponsors share the same
concerns that Representative Phillips has expressed. The
sponsors have tried very hard to resolve the ambiguities and the
hybrid appearance of what the sponsor group originally had
proposed. Sponsors certainly did not intend to create a hybrid
or to create any confusion around a hybrid, but when the hybrid
issue was brought to their attention and suggestions were made
for resolving it, they thought it was important to do that, so
that everyone was comfortable that jurisdiction was under either
the Pipeline Act or the Utilities Act. Amendment 5 seemed, to
the sponsors, a step back toward potential conflict and confusion
as to how the proposed pipeline would be regulated.
Number 2011
REPRESENTATIVE DYSON asked Mr. Eason how Amendment 5 further
confuses the hybrid issue.
MR. EASON said that under existing state law, a pipeline can
operate either under the utility statutes or under the Pipeline
Act. The RCA has a long history of rate making under each. With
Amendment 5, the proposed pipeline would be the first pipeline
operating under the Pipeline Act that would come under a tariff-
setting methodology that was never applied before to a pipeline
under that Act.
MR. EASON said he thought there would also be a risk of creating
ambiguities for future administrators of the RCA, or for future
administrators of the Department of Law or future legislators, as
to what the real intent was and whether or not one could infer
that there would be some obligation for the pipeline project -
this one or another - to operate as a utility. The sponsors of
this project do not want to operate as a utility. They want to
provide [gas] for in-state use, and for utilities to serve as
utilities. He said the sponsor group does not want it to become
muddied or unclear as to whether their pipeline project would
have the obligation, at some point in the future, to serve as a
utility.
REPRESENTATIVE DYSON stated that, in his mind, the discussion was
getting at the heart of the issue. From the position of the
owners of the gas, getting it to market in the most advantageous
terms makes sense. It also makes sense to individual citizens
that it is not the sponsor group's responsibility to look out for
them. That is the legislature's job, so legislators have an
additional concern that Mr. Eason and the sponsor group do not
have. It was his sense that having something like a utility
structure that takes into account a public good that might
slightly adversely affect the bottom line is something that the
legislators need to consider. Legislators very clearly have an
interest that is not just a profit and a bottom line.
Number 1847
MR. EASON said he thought the most productive part of the
discussion since introduction of the bill had been the discussion
around how to make gas available under reasonable terms and
conditions, without creating unusual barriers or impediments for
small utilities, large utilities, individual homeowners and
landowners along the proposed pipeline. Virtually all the
discussion the RCA brought to the table was directed toward that,
and subsequent discussion produced Amendments 2 and 3.
MR. EASON said the sponsor group had done its best to try to
remove any barrier to those parties needing instate gas from the
beginning of the project and in the future beyond that. Sponsors
lowered the barriers originally in the bill: the take-or-pay
contract, a reservation fee, and other provisions. All that a
small utility, or a customer served by a small utility, needs to
do now is to provide the RCA with a best estimate of what that
applicant is going to need in the way of gas, and the RCA has
full authority, representing all Alaskans, to make sure that
there is enough capacity built in the gas pipeline, and that it
is available with rates the RCA approves. That will ensure that
the public's interest is preserved.
REPRESENTATIVE DYSON asked Mr. Eason if he meant that would be
possible under the common carrier model.
MR. EASON affirmed that.
REPRESENTATIVE DYSON said that if there was a respectful and
informed contrary opinion to what Mr. Eason had said, he would
like to hear it.
MR. BARNHILL asked for an opportunity to look over materials for
a few minutes and then speak to the question.
REPRESENTATIVE PHILLIPS commented that if the committee were to
put something like Amendment 5 in statute, mandating the way the
rates are going to be structured, there could be a problem in the
future when the regulatory commission went through its job and
the whole public process, and might come up with a different
opinion than what is in the statute.
CHAIRMAN WHITAKER said he did not think that was what the
committee was considering. It is determining the criteria by
which rates are determined and including the notion that public
interest is a higher priority than a common carrier determinant,
which is pro rata.
REPRESENTATIVE PHILLIPS replied that by putting the utility rate
into statute, the committee would be making a predetermination
for the RCA.
MR. BARNHILL commented that there is no legal impediment to
Amendment 5. Whether this [specifying a rate-making methodology]
is a wise idea as a policy matter is a question best addressed to
the chair of the RCA, Nan Thompson. Mr. Barnhill said he was
having difficulty understanding how Amendment 5 would create
ambiguity, because it says that only for rate-making purposes is
this entity to be treated as a public utility. He said he
thought there were more policy issues than legal issues at stake.
Number 1650
REPRESENTATIVE DYSON asked Mr. Barnhill if he shared Mr. Eason's
opinion that the RCA has the authority to look after consumers'
and utilities' interests, and that authority is not impeded in
the absence of Amendment 5.
MR. BARNHILL asked Representative Dyson if he was asking whether
the RCA can accomplish public interest objectives at the moment
under the Pipeline Act.
REPRESENTATIVE DYSON affirmed that.
MR. BARNHILL said he thought the origin of the differences folks
have been addressing between the Utilities Act and the Pipeline
Act have to do with how property is valued for rate-making
purposes under the Utility Act and how property is valued under
the Pipeline Act. They are different. Beyond that, there are
public interest provisions in the Public Utilities Act which do
not appear in the Pipeline Act, but whether that means that one
cannot consider public interest in the Pipeline Act, he did not
know. Mr. Barnhill said he would prefer to defer to Ms. Thompson
on that.
CHAIRMAN WHITAKER explained that Ms. Thompson was not available
that day. He said he was sure Amendment 5 would receive further
discussion in other committees. He asked for a roll call vote on
Amendment 5.
Number 1517
Upon a roll call vote, Representatives Dyson, Harris, Kemplen,
Brice, and Whitaker voted in favor of Amendment 5.
Representatives Phillips, Green, Porter, and Smalley voted
against Amendment 5. Therefore, Amendment 5 was adopted by a
vote of 5-4.
REPRESENTATIVE PHILLIPS asked about previous drafts of two
amendments.
CHAIRMAN WHITAKER explained that one of them had become Amendment
2 and one had become Amendment 3, so both had been addressed.
REPRESENTATIVE PORTER made a motion to move HB 290, as amended,
out of committee with individual recommendations and the
accompanying fiscal notes. There being no objection, CSHB
290(O&G) was moved out of the House Special Committee on Oil and
Gas.
HB 307-OIL AND GAS CORPORATE TAX ACCOUNTING
Number 1397
CHAIRMAN WHITAKER announced that the next order of business would
be HOUSE BILL NO. 307, "An Act establishing an oil and gas
corporate income tax and making conforming amendments; and
amending the tax on corporations levied under the Alaska Net
Income Tax Act to eliminate the state corporate income tax on
taxable income of less than $10,000; and providing for an
effective date."
[The committee took a five minute at-ease; the meeting was called
back to order at 11:30 a.m.]
Number 1273
REPRESENTATIVE ERIC CROFT, Alaska State Legislature, sponsor of
HB 307, explained that the basic question addressed in the bill
is whether Alaska's corporate income tax structure is fair and
accurate for all. The bill presumes that the answer is no. It
proposes two changes: taking to zero some of the taxes on the
smallest corporations, to encourage small business development;
and closing a loophole that allows the largest oil and gas
corporations to pay less than the established rate of 9.4
percent. The loophole was related to separate accounting, which
has to do with taxing businesses that operate in many states and
how to apportion the part of the total profit that comes to any
one state [in this case, Alaska].
REPRESENTATIVE CROFT described another accounting method - known
as formula apportionment - which says that one estimates profit
by considering three factors: property, sales and payroll. One
can estimate from that basis the taxable income for one state, a
percentage of the corporation's nationwide or worldwide profit.
Formula apportionment works fairly well for retail industries,
and it is the way Alaska began taxing oil development in the late
1970s. It later became clear, however, that the formula was not
going to work very accurately for the oil industry. The result
of using the formula was a dramatic underestimate of the profit
made.
Number 0923
REPRESENTATIVE CROFT explained that the alternative to formula
apportionment is to treat Alaska like a separate corporate
entity, with separate accounting; that is the model adopted in
the late 1970s and applied in Alaska for three years, from 1978
to 1981. It is also the method used in other oil-producing
states, and it is the way in which the federal government
assesses federal income tax on multi-national corporations.
REPRESENTATIVE CROFT recalled that after passage of separate
accounting in 1978, the oil companies sued, challenging separate
accounting on constitutional grounds. If the oil companies had
won that suit, there would have been a very large tax refund due
them from the state, and this was part of reason that separate
accounting was repealed. In 1982, the state and the oil
companies agreed to use a modified apportionment. That agreement
was part of a potential settlement of the lawsuit. In place of
separate accounting, the state and the oil companies tweaked some
of the factors in formula apportionment. The suit continued. In
1985, Alaska's Supreme Court said there was nothing wrong with
separate accounting. An appeal to the United States Supreme
Court was rejected; so that, in legal terms, is the end of the
road. Separate accounting was approved as an appropriate method.
Number 0741
REPRESENTATIVE CROFT referred to a sheet of figures prepared by
Dan Dickinson of the Department of Revenue, which detailed the
difference between the amount of money the state would have
received under separate accounting and the actual amount received
under the modified apportionment. In every year since separate
accounting was repealed, he noted, the state would have received
more from separate accounting than it actually received from
modified apportionment. The total for those years, 1982-1997,
was $4.6 billion of lost revenue to the state.
REPRESENTATIVE CROFT stressed that separate accounting was
instituted in the first place because it makes sense, and because
it is appropriate to use as an accuracy measure. Proponents of
HB 307 want an accurate statement of the actual profit made and
an appropriate tax on what actually was made in Alaska.
Number 0412
JOHN R. MESSENGER, Attorney at Law, Preston Gates & Ellis,
testified from Anchorage by teleconference. He began by
summarizing his experience with separate accounting and related
issues, which began when he was deputy commissioner of the
Department of Revenue during the time the legislature considered
separate accounting, in the late 1970s. He was a member of the
legal team that defended the state's separate accounting tax
bill. Since that time, he has been working with Department of
Revenue and Department of Law with respect to defending audit
assessments, including those with related to separate accounting.
He recently gave testimony at the request of the Joint Special
Committee on Mergers with respect to separate accounting.
Representative Croft had asked him to testify on HB 307, he
explained, and to give his perspective on the legal issues.
MR. MESSENGER said the legislature is not starting from scratch
on this issue. Voluminous legislative history has been compiled
and indexed regarding separate accounting.
TAPE 00-13, SIDE A
Number 0013
MR. MESSENGER explained that when separate accounting was first
enacted in 1978, there had been no experience with the tax, and
there were some misgivings. Today, however, there is a track
record with respect to this tax. In addition, those reviewing it
have the results of litigation regarding its constitutionality.
In summation, this tax is a known quantity that has been examined
and tested in minute detail over the years.
MR. MESSENGER reminded members that separate accounting was
enacted because the legislature determined that the formula
apportionment method did not accurately represent the level of
business activity in the state by the oil companies; separate
accounting was a more accurate way of measuring the oil
companies' income in the state. The change to separate
accounting was to correct that inequity, to put the oil industry
on an equal footing with other corporations doing business in the
state, so that all corporations would pay something close to the
9.4 effective tax rate.
MR. MESSENGER said the [separate accounting] tax was not repealed
in 1981 because the state was dissatisfied with the tax or felt
it was flawed or inaccurately reflected the industry activities
or profits in the state. Rather, it was repealed because the
litigation that was pending at that time put a cloud over the
tax; the potential contingent liability of $2 billion was so
large that any chance that the tax might be struck down was
intolerable. That litigation was ultimately resolved in the
state's favor.
MR. MESSENGER pointed out that with respect to the legal issues,
this legislature is in a unique position, different from that of
the legislatures in 1978 and 1981. Legislators now are
considering a tax that already has been declared constitutional.
Every court - the Alaska Superior Court, the Alaska Supreme Court
and the United States Supreme Court - has ruled in the State of
Alaska's favor. Those decisions have not been overruled, and no
doubt has been cast on their validity. Court cases since then
have reaffirmed the grounds on which separate accounting was
upheld. The safest course, from a legal standpoint, would be to
adopt a tax as close as possible to the one that was reviewed [by
the courts].
CHAIRMAN WHITAKER and REPRESENTATIVE CROFT agreed to defer
additional testimony until later because of the limited time
available. [HB 307 was held over.]
Number 0721
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 11:59
a.m.
| Document Name | Date/Time | Subjects |
|---|