Legislature(1999 - 2000)
04/13/2000 06:20 PM House O&G
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HOUSE SPECIAL COMMITTEE ON OIL AND GAS
April 13, 2000
6:20 p.m.
COMMITTEE CALENDAR
HEARING ON IRS TREATMENT OF TAPS DR&R, AND TARIFFING
BY RICHARD FINEBERG
TAPE 00-22, SIDE A
CALL TO ORDER
Representative Jim Whitaker convened the meeting at 6:20 p.m.
PRESENT
Members present at the call to order were Representatives
Smalley, Dyson, Kemplen, Whitaker.
SUMMARY OF INFORMATION
CHAIRMAN WHITAKER introduced Richard A. Fineberg to testify
regarding the basis of his recent Anchorage Daily News "Compass"
piece on the Internal Revenue Service treatment of Trans-Alaska
Pipeline Service (TAPS), "Dismantlement, Removal and
Restoration" (DR&R) collections, and the effect that may have on
tariffs.
RICHARD A. FINEBERG explained that DR&R is the collection of
payments for the dismantling of the TAPS, stating that the
owners of the pipeline have, by their own calculations,
collected more than $760 million for income taxes, most of which
they never actually paid. He stated that this has probably cost
the State of Alaska more than $160 million in revenue. He went
on to say that the administration only recently discovered the
problem, and that they should have discovered it long ago.
According to Mr. Fineberg, Alaska North Slope (ANS) crude oil is
handicapped by its relatively high transportation costs, the
largest of which is the pipeline. From a policy standpoint the
state should be concerned about the tariff for three reasons:
First, the more it costs to deliver (ANS crude) to the
refinery, the less competitive that oil will be on the
world market.
Second, the three companies that presently own the
rights to more than 90 percent of the production, also
own more than 90 percent of the pipeline, therefore
standing to benefit from excessive tariffs to the
detriment of non-owner shippers. (He then referred to
exhibit "B" of his testimony packet)
Finally, if the tariffs are excessive, that deprives the
state of much needed revenue.
MR. FINEBERG questioned whether the Regulatory Commission of
Alaska (RCA) safeguards state revenue interests and (North)
Slope competition, and suggested that the tariff has served
industry purposes rather well, but (the RCA) functions as a
"rubber stamp". Up until August 23, 1999, the state had been
very clear that the tariffs were "just and reasonable," but on
that date, reversed its position with the governor's
announcement (during a speech on the BP/Arco merger) that the
tariffs were excessive and a barrier to competition.
MR. FINEBERG testified that while the tariff is formula driven,
DR&R is "cast in concrete," a set number that is "front-end
loaded" or accelerated. Further, the money is not put into
escrow or a reserve account, thus creating a windfall to the
pipeline owners.
MR. FINEBERG stated that the disclosure of what he refers to as
the "scam" came about in January, 2000, during an investigation
brought about a challenge to the tariffs brought by Tesoro. The
RCA had requested that all other parties to the case file briefs
on various aspects of the DR&R. In preparing its response, the
Department of Law discovered that although the 1985 settlement
increased DR&R collections tariffs to pay the federal income
tax, the TAPS owners then "took federal tax deductions for TAPS
DR&R in advance of incurring the actual expense." The
Department of Law brief says the TAPS agreement assumes that
DR&R funds are treated as taxable income, so the TAPS owners
cannot take a deduction for DR&R expenses until the actual
expense is incurred".
MR. FINEBERG, in answer to a question by Chairman Whitaker,
described how he arrived at his initial statement regarding the
amount of money this means to the state and to the producers.
MR. FINEBERG quoted from the Department of Law's filing to the
RCA, wherein it states that Exxon had filed a petition in United
States tax court in 1990 to increase its deduction. In the IRS
ruling, the need for an income tax surcharge for DR&R was
eliminated.
MR. FINEBERG stated that an attorney for the Department of Law
told him that the department is still trying to obtain documents
to determine what actually happened to both the state and
federal income tax payments, and that it would be premature to
quantify the consequences at this time.
MR. FINEBERG found, from public records, that the TAPS owners
and the state have said that the owners have collected $765
million ($663 million for federal taxes and $152 million for the
state) through the years of the tariff. He then looked at how
the state income taxes are collected, and commented that even
though the state and the IRS cannot comment as to whether or not
the taxes have been paid, nothing would prevent BP from
answering the question of its own volition. He went on to
suggest if the recent $460 million payment of tax settlement to
the State of Alaska included compensation for the failure to pay
tax on the income they received for TAPS DR&R, the following
question should be asked: To avoid recurrence of similar
problems, was a penalty sought or collected?
MR. FINEBERG then commented that it is unusual for the
Department of Law to be both making and executing policy.
Typically, the department represents a state agency such as the
Department of Natural Resources or Department of Revenue. He
said he has discovered in various conversations over the last
year that many of the people who have formulated state oil and
gas revenue administration and collection policies, are
responsible for implementing those policies today. He noted
that the external counsel who assisted the Department of Law in
negotiating the 1985 TAPS tariff settlement has continued to
represent the state in pipeline tariff matters at FERC (Federal
Energy Resource Commission). He mentioned several indicators
that might have prompted a look at this problem prior to this
year: several of his reports, testimony at the settlement
hearings pointing out the potential for problems, and articles
in publications.
CHAIRMAN WHITAKER asked Mike Barnhill to respond to Mr.
Fineberg's comments and reassure the committee that the
department is looking into the matter.
MIKE BARNHILL, Assistant Attorney General, Oil, Gas and Mining
Section, Department of Law, responded that he does not agree
with what Mr. Fineberg said in his article, and thinks those
allegations were premature. He testified that he has asked the
RCA to investigate this and develop a factual record. He
explained how the whole DR&R issue arose from the TAPS tariff
litigation by the state, including the inclusion of the tax
payments. After deciding how much money would be needed for
DR&R came the discussion of how to collect enough money for
pipeline dismantlement and how to approach the tax treatment of
that amount.
MR. BARNHILL, in responding to RCA's question about the
appropriate treatment of the DR&R payments, came across
information that raised questions about the collection and or
payment of federal income tax monies collected through the
tariff. He went on to say that it is very early in the
investigation of this issue. He expects the RCA in the not so
distant future to issue a ruling on his request, set a
procedural schedule, and afford the department the opportunity
of discovery. That discovery will allow the department will
develop a factual record. But until the department obtains all
the facts, they just don't know (whether there is any
malfeasance).
MR. BARNHILL, in response to a question by Representative Dyson,
stated that the IRS agreement with the TAPS carriers was made in
1988.
REPRESENTATIVE GREEN asked Mr. Barnhill to comment on the effect
that an extension of the life of the TAPS line would have on the
collection of DR&R funds.
MR. BARNHILL stated that the collection schedule was front-end
loaded, and that almost all of the money the carriers had been
committed to collect for DR&R had already been collected. The
issue, in his opinion, is how the money collected will accrue.
The operators, at the time of the TAPS settlement agreement, had
not anticipated that the pipeline could last until 2030; but
now, almost everyone agrees that it could, and production
predictions extend until 2020.
REPRESENTATIVE GREEN stated concern over how the DR&R monies
would be handled in relation to oil industry with mergers and
sales; and, that despite the amount of money already collected,
the cost of DR&R, after inflation, might exceed that amount.
MR. BARNHILL answered that with the accrual of interest, the
amount of money will grow, and should cover it, unless the rate
of inflation exceeds it.
REPRESENTATIVE PORTER asked if there was a separate account for
the DR&R money.
MR. BARNHILL replied, "No, all the DR&R collections are taken
into income by the TAPS carriers, and there's no requirement
that the money be kept in a separate account either internally
or externally, and that is why they are legitimately subject to
state and federal corporate income tax."
MR. BARNHILL, in response to a question from Representative
Kemplen, said that at the time of the 1985 TSM agreement, the
parties didn't know that the IRS would rule in favor a
deduction. He could not speculate how that knowledge might have
affected the settlement. He did say that the DR&R charges would
be less, but how much less, he didn't know.
REPRESENTATIVE KEMPLEN expressed concern that considering the
fact that this situation was discovered as the result of
"ancillary" research, he was wondering what else might be out
there and asked if there were some type of auditing being done
on TAPS tariffs.
MR. BARNHILL answered that the state has the right to audit all
of the TAPS carriers tariffs on an annual basis, and that has
been done regularly since at least 1990. But the audits look at
whether the costs the carriers include in their tariffs are
"prudent" costs, not whether certain provisions of the
settlement agreement are appropriate, he explained.
REPRESENTATIVE KEMPLEN asked what had been done during the years
1985 to 1990.
MR. BARNHILL said it is possible that audits had occurred during
that time, but that he just didn't know. He explained that the
Department of Law it is not charged with examining the formula
relating to the tariff, but with auditing the input into that
formula. He went on to say that the Department of Law has
sufficient concern about the tax deduction issue that they would
like to get some more information about it.
REPRESENTATIVE PORTER asked whether any of the recent
settlements preclude the [state's] ability to go back and look
into this.
MR. BARNHILL answered that it is a possibility that they do, but
that is not something that he has looked at yet. In response to
a further question by Representative Dyson as to what lessons
we've learned and how we could do better with regard to watching
for this type of situation, Mr. Barnhill stated that during the
1985 settlement the state tried to look at all of the
possibilities. However, this issue involved federal taxes and
thus it would be particularly difficult to obtain the
information. He was not sure that the state would have asked
specifically if the carriers were going to seek a deduction of
the taxes on the DR&R funds, but he supposed he could find that
out.
CHAIRMAN WHITAKER, in conclusion, asked Mr. Barnhill to reaffirm
that the Department of Law is looking into this matter.
MR. BARNHILL responded in the affirmative.
ADJOURNMENT
The meeting was adjourned at an unspecified time.
NOTE:
The meeting was recorded and handwritten log notes were taken. A
copy of the tape and log notes may be obtained by contacting the
House Records Office at Room 229, Terry Miller Legislative
Office Building, 129 Sixth Street, Juneau, Alaska 99801-1182,
(907) 465-2214, and after adjournment of the second session of
the Twenty-first Alaska State Legislature, in the Legislative
Reference Library.
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