Legislature(2007 - 2008)HOUSE FINANCE 519
11/04/2007 10:00 AM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB2001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
November 4, 2007
10:21 a.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Anna Fairclough
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Sharon Cissna
Representative Les Gara
Representative Max Gruenberg
Representative Kyle Johansen
Representative Mike Kelly
Representative Beth Kerttula
Representative Kurt Olson
Representative Ralph Samuels
COMMITTEE CALENDAR
HOUSE BILL NO. 2001
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to the issuance of
advisory bulletins and the disclosure of certain information
relating to the production tax and the sharing between agencies
of certain information relating to the production tax and to oil
and gas or gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas auditors
and their immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund; providing
for retroactive application of certain statutory and regulatory
provisions relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming amendments;
and providing for an effective date."
- MOVED CSHB 2001(RES) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB2001
SHORT TITLE: OIL & GAS TAX AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
10/18/07 (H) READ THE FIRST TIME - REFERRALS
10/18/07 (H) O&G, RES, FIN
10/19/07 (H) O&G AT 1:30 PM HOUSE FINANCE 519
10/19/07 (H) Heard & Held
10/19/07 (H) MINUTE(O&G)
10/20/07 (H) O&G AT 12:00 AM HOUSE FINANCE 519
10/20/07 (H) Heard & Held
10/20/07 (H) MINUTE(O&G)
10/21/07 (H) O&G AT 1:00 PM HOUSE FINANCE 519
10/21/07 (H) Heard & Held
10/21/07 (H) MINUTE(O&G)
10/22/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/22/07 (H) Heard & Held
10/22/07 (H) MINUTE(O&G)
10/23/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/23/07 (H) Heard & Held
10/23/07 (H) MINUTE(O&G)
10/24/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/24/07 (H) Heard & Held
10/24/07 (H) MINUTE(O&G)
10/25/07 (H) O&G AT 10:00 AM HOUSE FINANCE 519
10/25/07 (H) Heard & Held
10/25/07 (H) MINUTE(O&G)
10/26/07 (H) O&G AT 10:00 AM HOUSE FINANCE 519
10/26/07 (H) Heard & Held
10/26/07 (H) MINUTE(O&G)
10/27/07 (H) O&G AT 2:00 PM HOUSE FINANCE 519
10/27/07 (H) Heard & Held
10/27/07 (H) MINUTE(O&G)
10/28/07 (H) O&G AT 2:00 PM HOUSE FINANCE 519
10/28/07 (H) Moved CSHB2001(O&G) Out of Committee
10/28/07 (H) MINUTE(O&G)
10/29/07 (H) O&G RPT CS(O&G) NT 4DP 1NR 2AM
10/29/07 (H) DP: SAMUELS, NEUMAN, RAMRAS, OLSON
10/29/07 (H) NR: DOOGAN
10/29/07 (H) AM: KAWASAKI, DAHLSTROM
10/29/07 (H) RES AT 1:00 PM HOUSE FINANCE 519
10/29/07 (H) Heard & Held
10/29/07 (H) MINUTE(RES)
10/30/07 (H) RES AT 9:00 AM HOUSE FINANCE 519
10/30/07 (H) Heard & Held
10/30/07 (H) MINUTE(RES)
10/30/07 (H) RES AT 6:30 PM HOUSE FINANCE 519
10/30/07 (H) Heard & Held
10/30/07 (H) MINUTE(RES)
10/31/07 (H) RES AT 9:00 AM HOUSE FINANCE 519
10/31/07 (H) Heard & Held
10/31/07 (H) MINUTE(RES)
11/01/07 (H) RES AT 9:00 AM HOUSE FINANCE 519
11/01/07 (H) Heard & Held
11/01/07 (H) MINUTE(RES)
11/02/07 (H) RES AT 9:00 AM HOUSE FINANCE 519
11/02/07 (H) Heard & Held
11/02/07 (H) MINUTE(RES)
11/03/07 (H) RES AT 9:00 AM HOUSE FINANCE 519
11/03/07 (H) Heard & Held
11/03/07 (H) MINUTE(RES)
11/04/07 (H) RES AT 10:00 AM HOUSE FINANCE 519
WITNESS REGISTER
PAT GALVIN, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During hearing on HB 2001, provided
information and answered questions.
NANETTE THOMPSON, Unit/Tech Support
Central Office
Division of Oil & Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: During hearing on HB 2001, provided
information and answered questions.
JULIE HOULE, Resource Evaluation
Central Office
Division of Oil & Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: During hearing on HB 2001, answered
questions.
JOHN MESSENGER, Staff
to Representative Beth Kerttula
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: During hearing on HB 2001, provided
information and answered questions.
STEVE PORTER, Consultant
to the Legislative Budget and Audit Committee
Alaska State Legislature
Tehachapi, California
POSITION STATEMENT: During hearing on HB 2001, provided
information and answered questions.
REPRESENTATIVE MAX GRUENBERG
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: During hearing on HB 2001, provided
information and answered questions.
DAN BRITTON, President
Fairbanks Natural Gas
Fairbanks, Alaska
POSITION STATEMENT: During hearing on HB 2001, answered
questions.
REPRESENTATIVE MIKE KELLY
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: During hearing on HB 2001, presented
information and answered questions.
KEVIN BANKS, Director
Central Office
Division of Oil & Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: During hearing on HB 2001, provided
information and answered questions.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 10:21:38 AM. Representatives
Gatto, Johnson, Fairclough, Roses, Seaton, Wilson, Edgmon,
Guttenberg, and Kawasaki were present at the call to order.
Also present were Representatives Cissna, Gara, Gruenberg,
Johansen, Kelly, Kerttula, Olson, and Samuels.
HB 2001 - OIL & GAS TAX AMENDMENTS
10:21:38 AM
CO-CHAIR GATTO announced that the only order of business would
be HOUSE BILL NO. 2001, "An Act relating to the production tax
on oil and gas and to conservation surcharges on oil; relating
to the issuance of advisory bulletins and the disclosure of
certain information relating to the production tax and the
sharing between agencies of certain information relating to the
production tax and to oil and gas or gas only leases; amending
the State Personnel Act to place in the exempt service certain
state oil and gas auditors and their immediate supervisors;
establishing an oil and gas tax credit fund and authorizing
payment from that fund; providing for retroactive application of
certain statutory and regulatory provisions relating to the
production tax on oil and gas and conservation surcharges on
oil; making conforming amendments; and providing for an
effective date." [Before the committee was CSHB 2001(O&G), as
amended on 11/3/07; left pending from 11/3/07 was the motion
regarding whether to adopt Amendment 21.]
10:22:12 AM
REPRESENTATIVE EDGMON withdrew Amendment 21.
REPRESENTATIVE KAWASAKI requested that Amendment 22 be held for
consideration after Amendment 44.
REPRESENTATIVE EDGMON withdrew Amendment 23.
10:24:12 AM
REPRESENTATIVE GUTTENBERG moved that the committee adopt
Amendment 24, labeled 25-GH0014\L.74, Bullard/Bullock, 11/4/07,
which read:
Page 23, following line 14:
Insert a new bill section to read:
"* Sec. 31. AS 43.55.150(b) is amended to read:
"(b) If the department finds that a condition
[THE CONDITIONS] in (a)(1), (2), or [AND] (3) of this
section is [ARE] present, the department shall
determine the reasonable costs of transportation,
using the fair market value of like transportation,
the fair market value of equally efficient and
available alternative modes of transportation, or
other reasonable methods. Transportation costs fixed
by tariff rates that have been adjudicated just and
reasonable by [PROPERLY ON FILE WITH] the Regulatory
Commission of Alaska or other regulatory agency shall
be considered prima facie reasonable."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "32 - 34, and 37"
Insert "33 - 35, and 38"
Page 31, line 27:
Delete "31, and 38"
Insert "32, and 39"
Page 32, line 31:
Delete "32 - 34, and 37"
Insert "33 - 35, and 38"
Page 33, line 2:
Delete "31, and 38"
Insert "32, and 39"
Page 33, line 20:
Delete "32 - 34, and 37"
Insert "33 - 35, and 38"
Page 33, line 21:
Delete "31, and 38"
Insert "32, and 39"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 45"
CO-CHAIR JOHNSON objected to Amendment 24.
The committee took an at-ease from 10:25 a.m. to 10:28 a.m.
REPRESENTATIVE GUTTENBERG restated his earlier motion to adopt
Amendment 24.
CO-CHAIR JOHNSON restated his objection to Amendment 24.
REPRESENTATIVE FAIRCLOUGH objected to Amendment 24.
10:28:36 AM
REPRESENTATIVE GUTTENBERG moved to amend Amendment 24 to read as
follows [original punctuation provided]:
Page 23, following line 14:
Insert new bill sections to read:
..."*Sec. 31. AS 43.55.150(a) is amended to read:
(a) For the purposes of AS 43.55.011 - 43.55.180,
the gross value at the point of production is
calculated using the reasonable costs of
transportation of the oil or gas. The reasonable
costs of transportation are the actual costs, except
when the
(1) parties to the transportation of oil or
gas affiliated;
(2) contract for the transportation of oil
or gas (A) is not an arm's length transaction or (B)
is not representative of the market value of that
transportation; or [AND]
(3) method of transportation of oil or gas
is not reasonable in view of existing alternative
methods of transportation.
"* Sec. 32. AS 43.55.150(b) is amended to read:
"(b) If the department finds that a condition
[THE CONDITIONS] in (a)(1), (2), or [AND] (3) of this
section is [ARE] present, the department shall
determine the reasonable costs of transportation,
using the fair market value of like transportation,
the fair market value of equally efficient and
available alternative modes of transportation, or
other reasonable methods. Transportation costs fixed
by tariff rates that have been adjudicated just and
reasonable by [PROPERLY ON FILE WITH] the Regulatory
Commission of Alaska or other regulatory agency shall
be considered prima facie reasonable."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "32 - 34, and 37"
Insert "33 - 35, and 38"
Page 31, line 27:
Delete "31, and 38"
Insert "32, and 39"
Page 32, line 31:
Delete "32 - 34, and 37"
Insert "33 - 35, and 38"
Page 33, line 2:
Delete "31, and 38"
Insert "32, and 39"
Page 33, line 20:
Delete "32 - 34, and 37"
Insert "33 - 35, and 38"
Page 33, line 21:
Delete "31, and 38"
Insert "32, and 39"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 45"
REPRESENTATIVE FAIRCLOUGH objected to the amendment to Amendment
24 for explanation purposes.
10:29:25 AM
REPRESENTATIVE GUTTENBERG referred to the memorandum
accompanying Amendment 24 from [Alpheus Bullard], Legislative
Counsel, Legal Services. He said Mr. Bullard had been unable to
contact him regarding clarification so had drafted the amendment
as best as possible. Representative Guttenberg stated that he
had collaborated with the administration on this amendment and
the amendment to Amendment 24 was necessary to make it work.
REPRESENTATIVE FAIRCLOUGH maintained her objection to the
amendment to Amendment 24.
REPRESENTATIVE WILSON requested further explanation of the
amendment to Amendment 24.
10:30:07 AM
REPRESENTATIVE GUTTENBERG said that Amendment 24, as written,
would not work because [Mr. Bullard] had been unable to
communicate with the committee in order to make the amendment
consistent and do what the committee wanted it to do.
CO-CHAIR GATTO stated that the amendment to Amendment 24 was
mostly for reformatting purposes.
REPRESENTATIVE FAIRCLOUGH withdrew her objection to the
amendment to Amendment 24.
There being no further objection, the amendment to Amendment 24
was passed.
10:30:47 AM
REPRESENTATIVE GUTTENBERG said Amendment 24 was needed because
the Trans-Alaska Pipeline System (TAPS) had inflated its charges
according to a decision by the Regulatory Commission of Alaska
(RCA). The producers are using that inflated number, $5 per
barrel, to calculate their taxes. Amendment 24 would allow
[DOR] to use a calculation that has already been adjudicated.
Therefore, the department would be able to use the RCA numbers
to do the calculation if it meets the tests as outlined in
Section 31 [of Amendment 24, as amended].
10:31:47 AM
PAT GALVIN, Commissioner, Department of Revenue (DOR), explained
that for royalty purposes [the state] is contractually obligated
to use the tariff that has been reported and filed with the
Federal Energy Regulatory Commission (FERC). However, for tax
purposes, [the state] does not have a similar legal requirement
and can base it upon what [DOR] believes would be the
transportation costs. When the petroleum production profits tax
(PPT) passed last year, he said, Section 31 was modified to the
current language by changing "or" to "and". Thus, exceptions to
the reported tariff can be made only when all three parts of the
three-part test are met, rather than meeting any one of the
three parts. It is a three-part test that will never be met, he
continued because there are no existing alternative methods of
transportation as contained in [paragraph] (3). Therefore, [the
state] will always be stuck with whatever the filed tariff is.
Amendment 24 would give DOR the authority to look at what is the
reasonable cost of transportation rather than being bound by the
tariff on file with a regulatory agency. Commissioner Galvin
said the two sections would work together: Section 31 would
make it a multi-part test where the actual [tariffs] would be
used except when there is reason not to take them; and Section
32 would transfer in the "or" and it would become that test and
DOR would no longer be required to use the tariff on file with a
regulatory agency unless it has been adjudicated by that agency
as just and reasonable. So, when there is an adjudicated
tariff, DOR would use that; and when the tariff is only filed
with an agency and is an agreement between parties or
potentially affiliated parties, the department would have the
authority to determine what the reasonable cost of
transportation is.
10:34:38 AM
CO-CHAIR GATTO asked what procedure would be followed when the
reasonable cost was challenged by the parties.
COMMISSIONER GALVIN replied that DOR would have the discretion
to determine the appropriate method for establishing what is
reasonable. [Amendment 24] would provide clarity for situations
like what the state is in today with the TAPS tariff. In this
particular case, he explained, the filed tariff of about $5 [per
barrel] was challenged by shippers. Both the RCA and an
administrative law judge at FERC ruled that reasonable rates are
about $2. Yet, the state cannot rely upon those rulings to make
a decision on what is the reasonable rate to allow for a
deduction.
10:35:31 AM
REPRESENTATIVE FAIRCLOUGH inquired whether Amendment 24 affected
the charges for intra-state, inter-state, or both.
COMMISSIONER GALVIN responded that it would affect both and that
it would not matter either way. The only reason why the
distinction exists right now, in the context of TAPS, is because
of the dual jurisdiction that exists where FERC regulates the
inter-state transport and RCA regulates the intra-state
transport. In response to further questions from Representative
Fairclough, Commissioner Galvin said there is litigation on [the
tariff] for inter-state transportation. He stated that
[Amendment 24] would treat all tariff issues, all transportation
deductions, the same. The question is whether or not [DOR] is
going to rely upon a filed rate or upon a determination of what
is the reasonable cost. The current controversy that exists
outside of this is isolated to the inter-state on TAPS. But, he
continued, there will be similar issues associated with the
rates for any of the pipelines providing transport.
10:37:02 AM
REPRESENTATIVE FAIRCLOUGH understood there is an approved FERC
ruling for inter-state transportation costs.
COMMISSIONER GALVIN said the question is whether it would be
considered approved - there is an agreement that is on file with
FERC.
REPRESENTATIVE FAIRCLOUGH further understood that it is part of
the inter-agency charges between the corporations that are in
partnership on the pipeline and new producers coming onto the
line.
COMMISSIONER GALVIN replied that it is part of the rate that the
customers to the line have to pay.
10:37:34 AM
REPRESENTATIVE FAIRCLOUGH asked whether the challenge from RCA
on the inter-state [tariff] is what is being litigated.
COMMISSIONER GALVIN answered that it is not a challenge by RCA.
The RCA adjudicated the intra-state and came up with a different
result, so the shippers have challenged the FERC rate and are
using the RCA rate as part of their evidence. It is important
to note, he continued, that the issue is what rate the shipper
is allowed to deduct. It is not the rate that anybody is going
to pay; the payment between parties is not affected. Rather,
the issue is what the appropriate allowable rate is for
deducting transportation costs. If the issue is isolated to
TAPS, then the effect is that the owners of TAPS are going to
have to pay a rate that [DOR] determines is the reasonable rate,
not just the one that the owners have filed at FERC.
10:38:51 AM
REPRESENTATIVE FAIRCLOUGH inquired whether it is the state's
assertion that deducting the FERC rate is allowing too high a
deduction.
COMMISSIONER GALVIN replied yes, assuming that [DOR] had
determined the reasonable rate would be lower than the currently
deducted rate. If this change is not made, then [DOR] would be
allowing companies to deduct more than what [DOR] would consider
being reasonable.
10:40:13 AM
REPRESENTATIVE FAIRCLOUGH supported the administration trying to
establish a reasonable rate, but submitted that it is a guess.
"... We have a guess that is in federal law that isn't a guess
per se, that supposedly they have backup information [to]
document the FERC transportation, and that's what's being
challenged," she said.
COMMISSIONER GALVIN responded that the question is "whether you
believe the RCA ruling to be proper or not." The RCA ruling was
an in-depth analysis of the economics of the line and what is
filed is not based upon an economic analysis. What is on file
is based upon a settlement of a royalty dispute. There was no
federal analysis done, there was no federal backup to justify
the rate that is on file. But the question comes down to what
is the reasonable rate.
REPRESENTATIVE GUTTENBERG added that the RCA determination has
been through adjudication process and the FERC has not.
10:42:01 AM
CO-CHAIR GATTO requested Nanette Thompson to address the
preceding dialog.
NANETTE THOMPSON, Unit/Tech Support, Central Office, Division of
Oil & Gas, Department of Natural Resources (DNR), said the RCA
ruled that the allowable tariff should be considerably lower.
That decision by the RCA was appealed to [Alaska] Superior Court
and affirmed in 2006. The superior court's decision was
appealed to the Alaska Supreme Court. The argument was held in
March 2007 and a ruling is being awaited as to whether or not
the RCA will be affirmed. After the state proceedings went
forward, the owners of the pipeline adjusted their federal rates
to compensate for what they had been required to reduce in their
state rates, and they filed that with the FERC. That adjustment
was protested at FERC and it had a separate proceeding. For
FERC proceedings, cases are first referred to the National
Association of Administrative Law Judges (NAALJ), and then the
FERC decides whether or not it will adopt the NAALJ ruling. The
NAALJ ruling came out earlier this year and it reached the same
decision as did the RCA. Adoption of the NAALJ ruling by FERC
is still pending. So, continued Ms. Thompson, the issue of
whether or not the RCA correctly adjudicated the just and
reasonable rate is under advisement in both the state and
federal forums.
10:43:54 AM
CO-CHAIR GATTO requested Ms. Thompson's thoughts on the
"adjudicated just and reasonable clause" within Amendment 24.
MS. THOMPSON said she believed the language adequately protected
DOR's interests. She understood this was the same language
adopted yesterday by the [Senate Judiciary Standing Committee
(SJUD)]. She said she had suggested to that committee that the
original language be modified because of the way tariff filings
work. The owners of the pipeline file a tariff and then it is a
filed rate. The process for protesting that rate comes after
the filing. So, the shippers have to pay the protested rate
until it is adjudicated. Thus, Amendment 24 would have the
effect of only allowing a deduction for a rate that was truly
adjudicated as just and reasonable, rather than simply a filed
rate.
10:45:41 AM
REPRESENTATIVE FAIRCLOUGH supported the amendment in regard to
allowing reasonable costs, but said she was concerned the state
would be exposed to litigation if a third rate is picked while
the current legal process is still ongoing.
COMMISSIONER GALVIN stated that Section 1 in [HB 2001, as
introduced,] referenced the application of the statute of
limitations such that when there was a regulatory ruling with a
retroactive effective application, the taxpayer would be able to
supply an amended tax return and the statute of limitations
would then respond to that tax return. He said he thought the
risk of ancillary litigation would be minimal because it would
all center on the primary issue of that regulated rate and, by
having this connection, the decision on that regulated rate
would just roll into the tax issue.
MS. THOMPSON, in response to Co-Chair Gatto, said she believed
Commissioner Galvin had answered correctly.
JULIE HOULE, Resource Evaluation, Central Office, Division of
Oil & Gas, Department of Natural Resources (DNR), in response to
Co-Chair Gatto, said she was not qualified to talk to the
aforementioned issue.
10:48:50 AM
REPRESENTATIVE ROSES observed that this was not in either CSHB
2001(O&G) or ACES [HB 2001, as introduced]. He asked whether
this was something forgotten in the original bill or something
that had transpired afterward that necessitated this be added.
REPRESENTATIVE GUTTENBERG replied that he was working on this
outside of the administration's interest and that he and the
administration just happened to find a common point right here.
So, it is a shared interest, he said.
COMMISSIONER GALVIN explained that this was not something the
administration had included in the original bill; it came up
through the interest of legislators. The administration was
approached by a number of legislators, he said, "and this is our
response to ... the concern that was brought to our attention."
10:49:54 AM
CO-CHAIR JOHNSON asked what would happen to that portion of a
[taxpayer's] credit that was taken beyond the ruled amount if
the system is left as it is and the state ends up being right.
COMMISSIONER GALVIN replied that the issue with the
retroactivity would rest upon the decision and what had been
appealed. He said he did not believe that the rate is under
appeal - as it relates to the owners of the pipeline - and that
he did not think this would be changed by the regulatory agency
through this process. When discussing the difference between
what is reasonable and what is actual, the question does not
totally revolve around whether the regulatory agency is going to
change the filed rate. He said the state faces multiple
jurisdictions and multiple affected parties and this would
establish a single method of determining what the appropriate
deduction is. If a ruling affected a tariff that had already
been paid, that taxpayer could come back with an amended filing.
"It doesn't necessarily mean that it's going to result in the
rate being brought to what we would consider to be the
reasonable rate," he said.
CO-CHAIR JOHNSON said he was still unclear about what would
happen with the excess credit.
COMMISSIONER GALVIN stated that it is a deduction that a
taxpayer is taking based upon what is claimed to be the
transportation costs.
10:52:24 AM
CO-CHAIR JOHNSON inquired whether the state would have a way to
recoup the money, with interest, should a deduction be proven
invalid through adjudication or some other process.
COMMISSIONER GALVIN responded yes. The taxpayer would have to
file an amended return with the state if the regulatory agency
ruled that the rate was improper. In further response to Co-
Chair Johnson, Commissioner Galvin said that the state could
recover the money if the rate that was paid was determined by
the regulatory agency to be improper.
10:53:30 AM
CO-CHAIR JOHNSON asked if the state would be required to write a
check to the taxpayer should the rate be determined
inappropriate in the taxpayer's favor.
CO-CHAIR GATTO added that this would also apply if the rate is
correct.
COMMISSIONER GALVIN stated that, under current law, the answer
would be what the taxpayer's actual expenditures were. If
adjudicated to have underpaid and forced by the regulatory
agency to pay more, the taxpayer could seek a refund of overpaid
taxes by filing an amended return that showed costs had
increased for that fiscal year.
CO-CHAIR JOHNSON understood that there is, then, a mechanism in
place for recovering the money.
COMMISSIONER GALVIN replied that the mechanism for recovering
the money is not reliable in the sense that it is only a matter
of what has been challenged. It is basically a situation of
relying upon the owners of the pipeline to challenge themselves
in order for that to be brought to bear in the manner described
by Co-Chair Johnson. What [DOR] is saying is that it is not
going to rely upon that situation.
10:55:32 AM
CO-CHAIR JOHNSON inquired whether it was thought that a taxpayer
would not challenge something that the taxpayer deemed to be in
its favor.
COMMISSIONER GALVIN stated that any determination as to what a
reasonable rate is would have to be defended from potential
challenge. The question is whether [DOR] is going to rely upon
a determination of what is reasonable or upon the rate filed by
the taxpayer.
CO-CHAIR JOHNSON contended that what would be relied upon if
Amendment 24 passed is [the state's] guess versus [the
taxpayer's] guess versus what some court comes up with.
10:56:41 AM
REPRESENTATIVE SEATON pointed out that there are two different
issues here. One issue is a settlement rate, a negotiated rate,
that was filed for royalty purposes and this rate is now being
applied as an expense against the net profits tax. This royalty
settlement rate was filed with FERC but never adjudicated. The
second issue is whether this negotiated royalty rate should be
considered a just and reasonable rate for lease expenditure
deductions from the petroleum profits tax (PPT), even if the
settlement rate continues for royalty oil. He said the RCA has
determined what a reasonable charge is [for royalty oil], but
such a determination has not been undertaken by FERC. There is
definitely nothing from FERC relating to PPT. He supported
Amendment 24.
10:58:41 AM
REPRESENTATIVE ROSES asked how far back this would have an
effect.
COMMISSIONER GALVIN said it would only affect the effective date
of the bill.
REPRESENTATIVE ROSES gave a hypothetical example of a January
2008 effective date and inquired whether any returns filed in
the past would be reviewed.
COMMISSIONER GALVIN responded that they would be based upon the
existing law that has the three-part test and [DOR] would be
primarily bound by the filed rate.
10:59:27 AM
REPRESENTATIVE ROSES asked whether it was correct that a
taxpayer would file an amended return for additional deductions
if the rate was re-determined.
COMMISSIONER GALVIN said correct.
REPRESENTATIVE ROSES understood that under the committee's
actions of yesterday, the statute of limitations would be
extended if a taxpayer filed an amended return. He inquired
whether Amendment 24, coupled with yesterday's actions, would
mean that returns could now be audited for up to six years after
a rate re-determination.
COMMISSIONER GALVIN said he did not see a link between the two
in terms of adding additional exposure. If a taxpayer was
required to file an amended return because of an agency
decision, [Amendment 24] would not add or subtract from past
years' exposure to the risk of having to file an amended return.
11:01:00 AM
CO-CHAIR GATTO interjected that he thought the question was when
did the clock start on an amended return.
COMMISSIONER GALVIN said the clock starts when the amended
return is filed for the purposes of what is in the amended
return.
CO-CHAIR GATTO interjected that it is just on the amended part
and the rest of the return is back dated to when it was filed.
COMMISSIONER GALVIN stated that if there is a decision now that
affects a past tax year, [Amendment 24] would not change the
effect of having to do the amended return for that past tax year
because it is a new rule that moves forward.
REPRESENTATIVE ROSES said this would depend on what is set as
the effective date.
COMMISSIONER GALVIN responded correct.
REPRESENTATIVE ROSES commented that he thought there was some
discrepancy over this and there would likely be considerable
debate about it.
11:01:59 AM
REPRESENTATIVE WILSON inquired whether an amended return filed
after the amendment's effective date would be subject to the
amendment's provisions.
COMMISSIONER GALVIN explained that the date of the tax return is
not controlling because the tax return reflects the taxes that
are due for a particular period of time. Thus, a tax return
filed in March [2008] for the calendar year 2007 tax will be
under the existing law.
REPRESENTATIVE WILSON understood this means that it depends on
what the laws were for the tax year that the paperwork is being
used for.
COMMISSIONER GALVIN said yes, it would be what the effective law
was during that tax year.
11:03:57 AM
REPRESENTATIVE FAIRCLOUGH noted that the question for her is the
uncertainty of litigation. She said that under the current
system there is a recouping mechanism that provides for the
state to receive interest. This legislation would result in the
state guessing at a number, she argued, and the state would be
exposed to liability for payment of penalties should the
taxpayer prevail in litigation. She hoped the state would use a
number estimated from the RCA document.
CO-CHAIR JOHNSON asked what the amount of credit would be.
COMMISSIONER GALVIN replied that the difference between the FERC
and RCA rates - relating just to the TAPS issue and not to any
other rate - is approximately $160 million.
CO-CHAIR JOHNSON submitted that passage of [Amendment 24] would
result in a $1.6 billion tax increase to the oil companies, at
today's rate.
COMMISSIONER GALVIN said his staff is working on the numbers for
the different changes being made to the bill.
11:06:37 AM
CO-CHAIR JOHNSON remarked that adding $100 million here and $1
billion there would quickly result in real taxes.
CO-CHAIR GATTO said he did not see [Amendment 24] as an
additional tax, but rather a truing up of the correct charges.
He guessed that the people paying those rates were aware that
the rates were being challenged and have stashed money away for
this purpose. Why should the rates be different for one drop of
oil in the pipeline that goes to a ship and one drop of oil in
the pipeline that goes someplace else, he asked.
REPRESENTATIVE GUTTENBERG understood that the state and the
producers are already under maximum exposure because it is going
through the state court system after having been already decided
by the RCA, and then FERC may or may not challenge it into
federal court. What this boils down to is who determines what
the calculation is on the tax - the state or the producers.
CO-CHAIR JOHNSON maintained his objection to Amendment 24.
A roll call vote was taken. Representatives Wilson, Seaton,
Guttenberg, Edgmon, Kawasaki, and Gatto voted in favor of
Amendment 24, as amended. Representatives Roses, Fairclough,
and Johnson voted against it. Therefore, Amendment 24, as
amended, was adopted by a vote of 6-3.
11:10:25 AM
REPRESENTATIVE GUTTENBERG moved that the committee adopt
Amendment 25, labeled 25-GH0014\L.34, Luckhaupt/Bullock,
11/3/07, which read [original punctuation provided]:
Page 25, line 15, following "e":
Insert "or (k)"
Page 29, following line 12:
Insert a new bill section to read:
"* Sec. 34. AS 43.55.165 is amended by adding a new
subsection to read:
(k) A producer's lease expenditures with respect
to oil and gas produced from each lease or property
within a unit from which 1,000,000,000 BTU equivalent
barrels of oil or gas have been cumulatively produced
by the close of the most recent calendar year and from
which the average daily oil and gas production during
the most recent calendar year exceeded 100,000 BTU
equivalent barrels shall be determined according to
this subsection. A producer's lease expenditures for
purposes of AS 43.55.160 shall be equal to the
quotient obtained by dividing the producer's lease
expenditures for each lease or property reported on
the producer's tax return for 2006 by the total
taxable production of each lease or property as
reported on the producer's tax return for 2006,
multiplied by the producer's total taxable production,
in BTU equivalent barrels, during the calendar year.
Commencing January 1, 2009, for calendar year 2009 the
quotient obtained in this subsection shall be
increased by three percent. For each calendar year
thereafter, the previous year's quotient shall be
increased by three percent."
Renumber the following bill sections accordingly.
Page 30, following line 15:
Insert a new bill section to read:
"* Sec. 36. AS 43.55.180(b) is amended to read:
(b) The department shall prepare a report on or
before the first day of the 2011 regular session of
the legislature on the results of the study made under
(a) of this section, including recommendations
concerning the amount of lease expenditures specified
under AS 43.55.165(k) and [AS TO] whether any other
changes should be made to this chapter. The department
shall notify the legislature that the report prepared
under this subsection is available."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "32 - 34, and 37"
Insert "32 - 36, and 39"
Page 31, line 27:
Delete "38"
Insert "40"
Page 32, line 31:
Delete "32 - 34, and 37"
Insert "32 - 36, and 39"
Page 33, line 2:
Delete "38"
Insert "40"
Page 33, line 20:
Delete "32 - 34, and 37"
Insert "32 - 36, and 39"
Page 33, line 21:
Delete "38"
Insert "40"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 46"
CO-CHAIR JOHNSON objected to Amendment 25.
REPRESENTATIVE SEATON objected to Amendment 25.
The committee took an at-ease from 11:11 a.m. to 11:12 a.m.
REPRESENTATIVE GUTTENBERG said Amendment 25 had been a work in
progress for several months and many of his colleagues had
collaborated on it.
11:12:47 AM
REPRESENTATIVE GUTTENBERG restated his earlier motion to adopt
Amendment 25.
CO-CHAIR JOHNSON restated his objection to Amendment 25.
REPRESENTATIVE GUTTENBERG said Amendment 25 would establish a
fixed deduction of expenditures that applies only to the legacy
fields. Unlike ACES [HB 2001, as introduced), CSHB 2001(O&G),
and PPT where everything is fluid all the time, Amendment 25
would establish a set number and everything would have a place
from which to build off of.
JOHN MESSENGER, Staff to Representative Beth Kerttula, Alaska
State Legislature, described the PPT as being a very complicated
and complex tax with a lot of ambiguity that results in
controversy. He said Amendment 25 would provide that the lease
expenditure deductions of a legacy field producer be a fixed
number based upon the amount reported on the producer's 2006 tax
return. Then, that amount would be adjusted annually by 3
percent. In 2011, the commissioner's report to the legislature
on PPT would be required to include a recommendation as to how
this deduction should be changed, if at all, going forward in
the future.
11:16:34 AM
CO-CHAIR JOHNSON called a point of order. The committee is not
dealing with PPT so there is no 2011 date, he stated.
CO-CHAIR GATTO inquired whether the annual 3 percent increase in
the deduction would be compounded each subsequent year.
MR. MESSENGER responded that it would be compounding.
REPRESENTATIVE ROSES surmised this would mean that the allowable
deductions for lease expenditures would be increased by 3
percent regardless of what the expenses actually were.
MR. MESSENGER said correct.
11:17:23 AM
REPRESENTATIVE ROSES related that in previous presentations the
administration, along with every expert, testified that the
reason the projected revenue stream under the current PPT fell
short was because costs doubled. Mathematically that is a 100
percent increase; thus, under this scenario for 2007, [the
producer] would be allowed to deduct 3 percent of that 100
percent increase. Does this mean that [the producer] would be
expected to absorb the other 97 percent of the expenses, he
asked.
MR. MESSENGER replied yes. Whatever was reported in 2006 could
be deducted on the taxpayer's next return. It is essentially a
standard deduction, a fixed number, that does not require
auditing and adjustment. The benefit would be that it is fixed
and both parties can go forward from there.
11:18:48 AM
REPRESENTATIVE ROSES requested that Mr. Porter be called forward
to discuss this issue. He was concerned that [Amendment 25]
takes the net process and turns it into a modified gross inside
that net process.
REPRESENTATIVE SEATON understood that [Amendment 25] would still
allow the capital to go forward; but lease expenditures are both
capital and operating. Is this supposed to be limited to
operating expenses, he asked.
MR. MESSENGER said it would affect the deduction which is a
fixed number. Credits for capital expenditures would be taken
on top of the deduction.
11:19:54 AM
REPRESENTATIVE SEATON asked where Representative Guttenberg
intended to go with this. Rather than promoting capital
expenditures to slow decline, he said, this would give a person
in harvesting mode with no expenditures the same 3 percent
deduction as a person having lots of expenditures. Therefore,
it would give more percentage deduction to a harvester than to
someone in a legacy field expending capital for infield
drilling.
REPRESENTATIVE GUTTENBERG answered that capital expenditures
would still be allowed on top of this. He said that there has
been a lot of discussion about the efficiencies in the legacy
fields and the way deductions are done and that he thought the 3
percent increase gave the producers a lot of wiggle room.
11:21:26 AM
CO-CHAIR GATTO inquired whether the intent is to give only a
standard deduction with no option to itemize deductions.
REPRESENTATIVE GUTTENBERG said yes. There would an escalator on
top of that so [the deduction] would be increasing. The [DOR]
commissioner would then make recommendations in 2011, the
reporting date in PPT that is in statute.
11:22:03 AM
CO-CHAIR GATTO requested Mr. Porter to speak to the effects of
Amendment 25.
STEVE PORTER, Consultant to the Legislative Budget and Audit
Committee, Alaska State Legislature, explained DOR's methodology
for calculating the PPT: value, minus capital and operating
costs, times the tax, equals the taxable value. He said he
thought that capital and operating costs are the deduction
piece. The credit piece, which is at 20 percent of capital
credits, is what [Representative Guttenberg and Mr. Messenger]
have said would not be affected. The deductible capital and
operating expenses would be fixed at a point in time by the
method in [Amendment 25] and then [increased] 3 percent per year
over the course of the future.
11:23:05 AM
CO-CHAIR GATTO surmised that this would be regardless of the
actual expenditures.
MR. PORTER replied correct. He said that on the issue of
operating expenses (opex) 3 percent per year is roughly what
would be expected to occur, all things being equal. He gestured
that oil prices are going up and stated that the problem is that
this would affect the opex piece so that it would not flow
smoothly within 3 percent. The capital expense (capex) issue
would be exacerbated substantially, he continued. When the
price of oil goes up, an individual taxpayer might spend $150
million a year; and when the price of oil goes down, that
taxpayer might reduce spending to $5-$10 million per year.
Thus, he advised, the 3 percent did not have as clean of an
effect on the capex side and a substantial deduction in the
capital would be lost - the piece that [the state] really wants
to encourage. The opex would not be quite as impacting,
although it would still rise and fall.
11:24:41 AM
REPRESENTATIVE ROSES reiterated that [Amendment 25] appears to
have the affect of taking a net system and modifying it so that
a portion of it behaves like a gross. He presented a scenario
in which a taxpayer's allowable deduction was $150 million in
expenses in 2010 and only $5 million in expenses in 2011. Thus,
in 2011, the taxpayer would receive a deduction of $150
[million] increased by 3 percent. "So," he said, "if expenses
actually went down we would basically be giving them the oil."
MR. PORTER pointed out that the 3 percent would be based on
whatever happened in 2006 and that the number would be fixed
whether or not [the taxpayer] was aggressive. If the taxpayer
did not spend any more than that over time the 3 percent would
probably be smooth; but, if expenditures decreased, then it is
correct that [the state] would be giving away value.
11:26:21 AM
REPRESENTATIVE FAIRCLOUGH asked whether legacy fields paid a
royalty.
COMMISSIONER GALVIN said yes. In further response to
Representative Fairclough, he stated that the rate is roughly
12.5 percent.
REPRESENTATIVE FAIRCLOUGH inquired whether this is a flat rate
such that it acts like a gross tax.
COMMISSIONER GALVIN responded yes, the only deduction is
transportation expenses.
REPRESENTATIVE FAIRCLOUGH asked whether the administration
supported Amendment 25.
COMMISSIONER GALVIN said no, not in its present form.
11:27:38 AM
CO-CHAIR JOHNSON asked how much more [Amendment 25] would bring
into the treasury.
COMMISSIONER GALVIN answered that it would be indeterminate at
this point for the reasons that were alluded to. If costs or
investment went down, this would cost the state more because the
deductions would be fixed at a higher rate than what was being
experienced. If expenditures or investment went up, then it
would result in bringing in more money because of the costs
being fixed at a rate lower than what was being experienced.
11:28:20 AM
CO-CHAIR JOHNSON inquired whether there was a chance that this
would encourage less production.
COMMISSIONER GALVIN replied that Amendment 25, as described,
encapsulated both operating expenditures and capital investment.
Therefore, it would cap the incentive for making capital
investment at the rates that the state experienced last year.
CO-CHAIR JOHNSON stated that he was hesitant to do anything that
could potentially reduce the amount of barrels going down the
pipeline.
REPRESENTATIVE GUTTENBERG pointed out that [Amendment 25] would
only affect the legacy fields. Explorers would still be covered
under ACES [HB 2001, as introduced]. This was not designed to
raise funds, he said, it was designed for the state to have a
view of the operating costs. He acknowledged that money might
be left on the table, but that until 2011 the state would be
trading the money for an understanding of its oil patch.
11:30:46 AM
REPRESENTATIVE ROSES understood that the legacy fields are where
75-85 percent of all the potential oil lays and incentivizing
that is essential because it is much more expensive to extract
due to the technology, heavier oil, and more production costs.
He further understood that at the current rate of costs, it is
estimated that it could cost nearly $50 per barrel to extract
that oil from the ground. He said if it was him he would not
invest a dime if he was limited to 2006 costs at a 3 percent
inflation rate and he knew that his costs would be far higher
than this allowable amount.
MR. PORTER responded that a standard deduction might distort
industry's decision making because industry might then choose to
spend its money on lower cost exploration like in-fill drilling
rather than higher cost exploration like the West Sak.
11:34:00 AM
REPRESENTATIVE ROSES asked what affect this would have on the
progressivity piece that had already passed.
COMMISSIONER GALVIN guessed the effect would be a fixing of the
cost portion of the margin calculation. A progressivity based
upon a net or marginal trigger would - through this mechanism -
fix the cost portion and result in the price becoming the
primary driver of that margin because it would not slide if
costs were going up or going down. The margin would not be
based upon actual margin; rather, it would be based on the 2006
number and whatever the price change is.
CO-CHAIR GATTO agreed with Representative Roses.
11:35:07 AM
REPRESENTATIVE ROSES inquired whether he was correct in
understanding that if actual deductions were disallowed and
deductions were instead based on a 3 percent increase each year
from 2006, the effect would be that the trigger point would
occur earlier and the progressivity would go much faster.
COMMISSIONER GALVIN said this would be correct "in the situation
where actual costs have gone up and we've fixed it low". [The
administration] does not support the way this is structured, he
advised, but is sympathetic to the ideal behind it - the ideal
being the issue of the state moving into a net tax, DOR trying
to get new auditors, and a sense of uncertainty with regard to
what the public's expectation is. This is trying to capture
some sense of seeing how things go for a couple of years before
taking the "training wheels off" and letting it run. He said
that from his perspective [Amendment 25] would limit investments
because it involves capital expenditures as well as operating
expenditures. It would also create some issues in regard to
valuation and if audits determined that the 2006 numbers were
inaccurate then that would end up replicating itself for a
number of years.
11:37:08 AM
CO-CHAIR GATTO surmised that this would decrease the requirement
for additional auditors.
COMMISSIONER GALVIN said, "Only to the extent that we are not
actually giving you a report in 2011 that reflects experience."
In further response to Co-Chair Gatto, he said that [DOR] would
still have to audit the capital expenditures because [the
taxpayers] are getting a credit on that above and beyond this.
Additionally, he assumed that the legislature would want to know
the actual expenditures when it considers DOR's recommendations
in 2011 and this would require auditing functions. Therefore,
this would not substantially diminish the auditing; it would
just eliminate the effect of it on the tax reviews.
11:38:14 AM
CO-CHAIR GATTO presumed that if this was put in place in
November 2007, then in 2011 it would be a way for determining
what the differences would have been in the tax collected.
COMMISSIONER GALVIN said sure.
CO-CHAIR GATTO commented that it would not be a difficult task
to pick several returns and run them through 2010 and then
generate a report.
REPRESENTATIVE ROSES said he hoped a decision was not being made
based on whether or not additional auditors would be needed. He
called the question.
CO-CHAIR GATTO responded that his auditor questions were
rhetorical.
The committee took a momentary at-ease.
11:39:51 AM
CO-CHAIR GATTO announced that the committee would vote on
whether to limit the debate on Amendment 25.
A roll call vote was taken. Representatives Roses, Fairclough,
and Johnson voted in favor of the motion to limit the debate on
Amendment 25. Representatives Seaton, Guttenberg, Edgmon,
Kawasaki, Wilson, and Gatto voted against it. Therefore, the
motion failed by a vote of 3-6.
REPRESENTATIVE GUTTENBERG stated that his reason for bringing
Amendment 25 forward was to expose members to this big issue and
have them develop an understanding of the topic through
discussion because it would be coming up in other committees and
on the floor. He said Amendment 25 had been drawn to CSHB
2001(O&G) prior to seeing the other amendments before the
committee.
REPRESENTATIVE GUTTENBERG withdrew Amendment 25.
CO-CHAIR GATTO held Amendment 26, the replacement for Amendment
1 from Representative Seaton, for later consideration.
REPRESENTATIVE GUTTENBERG withdrew Amendment 27.
11:47:36 AM
REPRESENTATIVE GUTTENBERG moved that the committee adopt
Amendment 28, labeled 25-GH0014\L.69, Cook/Bullock, 11/3/07,
which read [original punctuation provided]:
Page 17, line 11:
Delete "60"
Insert "120 [60]"
Page 17, lines 14 - 17:
Delete "if the applicant is required under
AS 43.55.030(a) to file a statement on or before
March 31 of the year following the calendar year in
which the qualified capital expenditures or carried-
forward annual loss for which the credit is claimed
was incurred,"
Insert "[IF THE APPLICANT IS REQUIRED UNDER
AS 43.55.030(a) TO FILE A STATEMENT ON OR BEFORE MARCH
31 OF THE YEAR FOLLOWING THE CALENDAR YEAR IN WHICH
THE QUALIFIED CAPITAL EXPENDITURES OR CARRIED-FORWARD
ANNUAL LOSS FOR WHICH THE CREDIT IS CLAIMED WAS
INCURRED,]"
Page 17, line 18, following "filed":
Insert "for the calendar year in which the
qualified capital expenditure or carried-forward
annual loss for which the credit is claimed was
incurred"
Page 21, line 21:
Delete "and"
Page 21, line 30, following "matters":
Insert "; and
(6) assess against a person required under
this section to file a report, statement, or other
document a penalty, as determined by the department
under standards adopted in regulation by the
department, of not more than $1,000 for each day the
person fails to file the report, statement, or other
document at the time required; the penalty is in
addition to the penalties in AS 43.05.220 and
43.05.290 and is assessed, collected, and paid in the
same manner as a tax deficiency under this title"
CO-CHAIR JOHNSON objected to Amendment 28 for purposes of
discussion.
REPRESENTATIVE ROSES objected to Amendment 28.
11:47:50 AM
REPRESENTATIVE ROSES said he thought Amendment 7 that passed
yesterday already accomplished the provision included on page 2
[paragraph (6)] of Amendment 28.
REPRESENTATIVE GUTTENBERG withdrew Amendment 28.
11:48:44 AM
REPRESENTATIVE GUTTENBERG moved that the committee adopt
Amendment 29, labeled 25-GH0014\L.51, Kurtz/Bullock, 11/3/07,
which read [original punctuation provided]:
Page 1, line 8, following "supervisors;":
Insert "establishing an oil and gas tax credit
fund and authorizing payment from that fund;"
Page 17, line 6, following "person":
Insert "or obtain a cash payment under
AS 43.55.028"
Page 17, following line 22:
Insert a new bill section to read:
"* Sec. 24. AS 43.55.023(g) is amended to read:
(g) The issuance of a transferable tax credit
certificate under (d) of this section or the purchase
of a certificate [ISSUANCE OF A CASH REFUND] under
AS 43.55.028 [(f) OF THIS SECTION] does not limit the
department's ability to later audit a tax credit claim
to which the certificate relates or to adjust the
claim if the department determines, as a result of the
audit, that the applicant was not entitled to the
amount of the credit for which the certificate was
issued. The tax liability of the applicant under
AS 43.55.011(e) and 43.55.017 - 43.55.180 is increased
by the amount of the credit that exceeds that to which
the applicant was entitled, or the applicant's
available valid outstanding credits applicable against
the tax levied by AS 43.55.011(e) are reduced by that
amount. If the applicant's tax liability is increased
under this subsection, the increase bears interest
under AS 43.05.225 from the date the transferable tax
credit certificate was issued. For purposes of this
subsection, an applicant that is an explorer is
considered a producer subject to the tax levied by
AS 43.55.011(e)."
Renumber the following bill sections accordingly.
Page 18, following line 25:
Insert a new bill section to read:
"* Sec. 27. AS 43.55 is amended by adding a new
section to read:
Sec. 43.55.028. Oil and gas tax credit fund
established; cash purchases of tax credit
certificates. (a) The oil and gas tax credit fund is
established as a separate fund of the state. The
purpose of the fund is to purchase certain
transferable tax credit certificates issued under
AS 43.55.023 and certain production tax credit
certificates issued under AS 43.55.025.
(b) The oil and gas tax credit fund consists of
(1) money appropriated to the fund,
including any appropriation of the percentage provided
under (c) of this section of all revenue from taxes
levied by AS 43.55.011 that is not required to be
deposited in the constitutional budget reserve fund
established in art. IX, sec. 17(a), Constitution of
the State of Alaska; and
(2) earnings on the fund.
(c) The applicable percentage for a fiscal year
under (b)(1) of this section is determined with
reference to the average price or value forecast by
the department for Alaska North Slope oil sold or
otherwise disposed of on the United States West Coast
during the fiscal year for which the appropriation of
revenue from taxes levied by AS 43.55.011 is made. If
that forecast is
(1) $60 a barrel or higher, the applicable
percentage is 10 percent;
(2) less than $60 a barrel, the applicable
percentage is 15 percent.
(d) The department shall manage the fund.
(e) The department may, on the written
application of the person to whom a transferable tax
credit certificate has been issued under
AS 43.55.023(d) or a production tax credit certificate
has been issued under AS 43.55.025(f), use available
money in the oil and gas tax credit fund to purchase,
in whole or in part, the certificate if the department
finds that
(1) the calendar year of the purchase is
not earlier than the first calendar year for which the
credit shown on the certificate would otherwise be
allowed to be applied against a tax;
(2) within 24 months after applying for the
transferable tax credit certificate or filing a claim
for the production tax credit certificate, the
applicant incurred a qualified capital expenditure or
was the successful bidder on a bid submitted for a
lease on state land under AS 38.05.180(f);
(3) the amount expended for the purchase
would not exceed the total of qualified capital
expenditures and successful bids described in (2) of
this subsection that have not been the subject of a
finding made under this paragraph for purposes of a
previous purchase of a certificate;
(4) the applicant does not have an
outstanding liability to the state for unpaid
delinquent taxes under this title;
(5) the applicant's total tax liability
under AS 43.55.011(e), after application of all
available tax credits, for the calendar year in which
the application is made is zero;
(6) the applicant's average amount of oil
and gas taxable under AS 43.55.011(e) and produced
each day during the calendar year preceding the
calendar year in which the application is made was not
more than 50,000 BTU equivalent barrels; and
(7) the purchase is consistent with this
section and regulations adopted under this section.
(f) Money in the fund remaining at the end of a
fiscal year does not lapse and remains available for
expenditure in successive fiscal years.
(g) The department may adopt regulations to
carry out the purposes of this section, including
standards and procedures to allocate available money
among applications for purchases the total amount of
which exceeds the amount of available money in the
fund.
(h) Nothing in this section creates a dedicated
fund.
(i) In this section, "qualified capital
expenditure" has the meaning given in AS 43.55.023."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 25, 26, 34 - 36, and 39"
Page 31, line 27:
Delete "31, and 38"
Insert "33, and 40"
Page 31, line 29:
Delete "Sections 26 and 27"
Insert "Sections 28 and 29"
Page 31, line 30:
Delete "sec. 26"
Insert "sec. 28"
Page 31, line 31:
Delete "sec. 27"
Insert "sec. 29"
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 31"
Page 32, line 3:
Delete "29"
Insert "31"
Page 32, following line 3:
Insert a new subsection to read:
"(e) Section 24 of this Act applies to
transferable tax credit certificates issued under
AS 43.55.023(d), as amended by sec. 23 of this Act,
and to transferable tax credit certificates issued
under AS 43.55.023(d), in effect before January 1,
2008, for which a cash refund has not been issued
under AS 43.55.023(f) before January 1, 2008."
Page 32, line 31:
Delete "secs. 24, 25, 32 - 34, and 37"
Insert "secs. 25, 26, 34 - 36, and 39"
Page 33, line 2:
Delete "26, 27, 31, and 38"
Insert "24, 27 - 29, 33, and 40"
Page 33, following line 10:
Insert a new bill section to read:
"* Sec. 43. The uncodified law of the State of
Alaska is amended by adding a new section to read:
TRANSITION: PENDING APPLICATIONS. If an
application made under AS 43.55.023(f) is received by
the Department of Revenue before January 1, 2008, and
is still outstanding on that date, the application is
considered to be an application under AS 43.55.028,
enacted by sec. 26 of this Act."
Renumber the following bill sections accordingly.
Page 33, lines 19 - 20:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 25, 26, 34 - 36, and 39"
Page 33, line 21:
Delete "26, 27, 31, and 38"
Insert "24, 27 - 29, 33, and 40"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 47"
CO-CHAIR JOHNSON objected to Amendment 29.
11:49:04 AM
REPRESENTATIVE GUTTENBERG requested Commissioner Galvin to
explain Amendment 29.
COMMISSIONER GALVIN explained that DOR drafted this language, at
Representative Guttenberg's request, to replace the [oil and gas
tax] credit fund that had been included in the original bill.
The language would ensure that the state had the ability to pay
explorers the full value of their transferable credits.
CO-CHAIR JOHNSON withdrew his objection to Amendment 29.
11:49:55 AM
REPRESENTATIVE SEATON objected to Amendment 29 and asked for an
explanation of lines 24-25 on page 2 of the amendment.
COMMISSIONER GALVIN said there needed to be a way to estimate
from the tax revenue the amount of credit being generated by
explorers. The amount will be different depending upon the
price of oil because when the price of oil is higher a larger
amount of tax is received than would be the case for a direct-
line percentage. There is not a direct relationship between the
price and the investment that results in the credit the
following year. Thus, to prevent generating more money than
needed, the percentage would be reduced when the price went
above $60.
11:51:37 AM
CO-CHAIR GATTO inquired whether this would be helpful, hurtful,
or of no consequence.
COMMISSIONER GALVIN stated that it should be of no consequence
because the money in the fund ends up being appropriated anyway.
It was only a matter of identifying it for the purpose of
putting it to the explorer credits.
11:51:53 AM
REPRESENTATIVE ROSES asked whether [Amendment 29] returned the
language to that of [HB 2001, as introduced,] rather than
CSHB 2001(O&G).
COMMISSIONER GALVIN answered yes.
REPRESENTATIVE ROSES said he supported the amendment with mixed
emotion because if it passed the Alaska Retirement Management
(ARM) Board would not have an opportunity to quickly recoup a
lot of money to help pay off the liability for the Public
Employees' Retirement System (PERS) and the Teachers' Retirement
System (TRS).
11:52:25 AM
CO-CHAIR GATTO inquired whether this would be detrimental to the
ARM Board even though Commissioner Galvin said it would be
inconsequential.
REPRESENTATIVE ROSES replied no. He related that there is a
bill [HB 48] currently moving through the legislature that would
allow the ARM Board to purchase tax credits at a rate of 92
percent of their value. For example, the ARM Board would be
able to purchase $100 million of credits for $92 million and
then gain an $8 million profit in one day by cashing the credits
into the state for full value. If this were done 24 times a
year for 3 years the liability for PERS and TRS would no longer
amount to much, he said. Under [Amendment 29] the state would
be setting up a fund and anyone wanting to sell credits would
sell them to the state at 100 percent, so there was no reason to
believe that an explorer would want to give up 8 percent just to
make the ARM Board happy.
11:53:47 AM
CO-CHAIR JOHNSON stated that the aforementioned was exactly why
he did not support the amendment even though he understood the
reason for the amendment. The state's outstanding liability is
huge, he said, and if the state is going to save the money then
it should do something with it.
REPRESENTATIVE ROSES responded that while he appreciated the
support for the ARM Board, he guessed that the state would be
better off by giving that 8 percent to the explorer to generate
more revenue so that the state could then take care of the PERS
and TRS liability. Therefore, he supported the amendment in
order to keep the pipeline full.
11:54:57 AM
REPRESENTATIVE SEATON moved Conceptual Amendment 1 to Amendment
29 that "would establish the fund, but would keep our $25
million limit that is existing in current law for direct
reimbursement". He said he was not opposed to establishing the
fund in order that DOR could have the appropriations without
having to ask for supplementals. In response to Co-Chair Gatto,
he said he believed the affected language would be on pages 2
and 3 of Amendment 29, but that he would like to leave it up to
Legal Services to put the language in the appropriate place.
11:56:45 AM
REPRESENTATIVE ROSES objected to Conceptual Amendment 1 to
Amendment 29 for discussion purposes. He inquired why the [$25
million] cap was removed from ACES [HB 2001, as introduced].
COMMISSIONER GALVIN answered that many of the explorers were
generating credits far in excess of the $25 million and the
issue was being brought forward because of the experience that
[DOR] was having in trying to transfer the amount in excess of
the $25 million. "That's the value that we're trying to ensure
is preserved to the explorer through this program," he said.
11:57:22 AM
REPRESENTATIVE ROSES asked whether Commissioner Galvin was
saying that this would hamper the ability for some explorers to
capitalize that credit and hopefully use that money to do more
exploration.
COMMISSIONER GALVIN said correct.
REPRESENTATIVE FAIRCLOUGH supported the cap in Conceptual
Amendment 1 because one of the small companies had previously
testified that the system was working well and the company had
been able to sell its credits. Therefore, this free market
scenario provided a cost savings for the state.
11:58:03 AM
REPRESENTATIVE GUTTENBERG inquired whether passage of Amendment
29 with Conceptual Amendment 1 would result in the companies
applying for the credits in increments of $25 million or less so
they could get reimbursed at a faster rate by not having to wait
for appropriations from the legislature.
COMMISSIONER GALVIN stated that the limit of $25 million is per
year, so it would not change how the companies come forward. A
company would get the $25 million and would have to find a buyer
for the rest.
11:58:56 AM
REPRESENTATIVE FAIRCLOUGH asked whether [DOR] had previously
requested supplemental appropriations from the legislature for
this account.
COMMISSIONER GALVIN replied that he thought DOR had estimated
enough last year and did not need to request a supplemental, but
that it was already looking like this year's estimate would be
exceeded.
The committee took an at-ease from 11:59 a.m. to 12:07 p.m.
12:07:45 PM
REPRESENTATIVE SEATON withdrew Amendment 26.
REPRESENTATIVE FAIRCLOUGH said she learned from Commissioner
Galvin during the at-ease that she had misspoken because under
Representative Seaton's proposal [the state] would still be on
the hook for exactly the same amount of credit as before.
Therefore, she opposed [Conceptual Amendment 1 to Amendment 29].
REPRESENTATIVE WILSON inquired whether passage of [Conceptual
Amendment 1] would allow for the ARM Board to still purchase
credits.
CO-CHAIR GATTO asked whether it reduced the amount of money.
REPRESENTATIVE ROSES understood that under a $25 million cap,
the question would be whether the ARM Board would be able sell
any purchased credits to the state. He said he did not know
whether the $25 million would trigger for the ARM Board or if it
only triggers for that individual explorer. Therefore, he
thought it was an area "we shouldn't go."
12:09:49 PM
REPRESENTATIVE SEATON noted that [Amendment 5] adopted by the
committee [on 11/3/07] excludes the ARM Board from the cap and
provides this exclusion under the oil statutes. However, he
pointed out, the legislature must first pass [HB 48] to enable
the ARM Board to become another vehicle for those transferable
credits. The rest of the transferable credits would go through
anyone that had a tax liability.
CO-CHAIR JOHNSON objected to Conceptual Amendment 1 to Amendment
29.
A roll call vote was taken. Representatives Guttenberg, Edgmon,
Kawasaki, Wilson, Seaton, and Gatto voted in favor of Conceptual
Amendment 1 to Amendment 29. Representatives Fairclough, Roses,
and Johnson voted against it. Therefore, Conceptual Amendment 1
to Amendment 29 passed by a vote of 6-3.
12:11:59 PM
COMMISSIONER GALVIN announced that with Conceptual Amendment 1
the administration was withdrawing its support of Amendment 29
because "we don't need the fund if the cap is there."
REPRESENTATIVE SEATON said he believed establishing the fund
would serve a definite purpose because it would provide a way to
refund the capital credits without having to estimate the amount
for the next year. This way the legislature could make an
appropriation to the fund or the fund could generate money. He
said that DOR still needed money to repurchase credits
regardless of whether the payment went to the person putting in
the certificates, the ARM Board, or producers that have a tax
liability.
12:13:58 PM
REPRESENTATIVE ROSES requested a clarification of the
administration's position.
COMMISSIONER GALVIN said he believed that the underlying
committee substitute [CSHB 2001(O&G)] "doesn't change the
existing law until the cap is in place regardless." [Amendment
29] would repeal the portion of existing law that has the cap
and Conceptual Amendment 1 would ensure the cap remained. Thus,
the cap would still be there regardless of whether this
amendment passes. Commissioner Galvin clarified that in regard
to the amount going into the fund, the percentages used in
Amendment 29 are based upon a fully creditable fund. If capped
at $25 million, not nearly as much money would be needed as
would be provided under these percentages.
12:15:34 PM
REPRESENTATIVE SEATON inquired how the state's liability would
be reduced for credits if the fund was capped at $25 million in
direct reimbursement, especially if the ARM Board was allowed to
purchase and refund an unlimited amount of credits and major
producers can reduce their tax liability 20 percent. That
amount in those different venues should be exactly the same
amount of credits as would be issued if they were sold to those
third parties and refunded through the state.
COMMISSIONER GALVIN explained that when [credit] is sold to a
third party the state does not issue any payment to the
producer, it just comes in as a smaller check from the producer.
The state only needs the fund when it is actually cutting a
check to another party. He said he did not know how an ARM
Board transfer would be done. There is no need for that much
money if there is a cap of $25 million per explorer per year, he
advised.
12:17:40 PM
REPRESENTATIVE SEATON related that there is a Legal Services
opinion stating that even though the refund amounts through the
ARM Board would be unlimited, there would still need to be an
appropriation; thus, it did not circumvent the appropriation
process.
CO-CHAIR JOHNSON objected to Amendment 29, as amended.
A roll call vote was taken. Representatives Edgmon, Kawasaki,
Wilson, Seaton, Roses, Guttenberg, and Gatto voted in favor of
Amendment 29, as amended. Representatives Fairclough and
Johnson voted against it. Therefore, Amendment 29, as amended,
was adopted by a vote of 7-2.
REPRESENTATIVE GUTTENBERG withdrew Amendment 30.
12:19:54 PM
REPRESENTATIVE GUTTENBERG moved that the committee adopt
Amendment 31, labeled 25-GH0014\L.60, Cook/Bullock, 11/3/07,
which read [original punctuation provided]:
Page 17, line 24, through page 18, line 22:
Delete all material and insert:
"(i) For the purposes of this section,
(1) a producer's or explorer's transitional
investment expenditures are the sum of the
expenditures the producer or explorer incurred after
March 31, 2001, and before April 1, 2006, that would
be qualified capital expenditures if they were
incurred after March 31, 2006, less the sum of the
payments or credits the producer or explorer received
before April 1, 2006, for the sale or other transfer
of assets, including geological, geophysical, or well
data or interpretations, acquired by the producer or
explorer as a result of expenditures the producer or
explorer incurred before April 1, 2006, that would be
qualified capital expenditures, if they were incurred
after March 31, 2006;
(2) a producer or explorer that did not
have commercial production of oil or gas from a lease
or property in the state before January 1, 2008, may
elect to take a tax credit against a tax levied by
[DUE UNDER] AS 43.55.011(e) in the amount of 20
percent of the producer's or explorer's transitional
investment expenditures, but only to the extent that
the amount does not exceed 1/10 of the producer's or
explorer's qualified capital expenditures that were
incurred after March 31, 2006, and before January 1,
2008 [ARE INCURRED DURING THE CALENDAR YEAR FOR WHICH
THE CREDIT IS TAKEN];
(3) a producer or explorer may not take a
tax credit for a transitional investment expenditure
(A) for any calendar year after [THE LATER
OF
(i)] 2013; [OR
(ii) THE SIXTH CALENDAR YEAR AFTER THE
CALENDAR YEAR FOR WHICH THE PRODUCER FIRST APPLIES A
CREDIT UNDER THIS SUBSECTION AGAINST A TAX DUE UNDER
AS 43.55.011(e), IF THE PRODUCER DID NOT HAVE
COMMERCIAL PRODUCTION OF OIL OR GAS FROM A LEASE OR
PROPERTY IN THE STATE BEFORE APRIL 1, 2006;]
(B) more than once; or
(C) if a credit for that expenditure was
taken under AS 38.05.180(i), AS 41.09.010,
AS 43.20.043, or AS 43.55.025;
(4) notwithstanding (d), (e), and (g) of
this section, a producer or explorer may not transfer
a tax credit or obtain a transferable tax credit
certificate for a transitional investment
expenditure."
Page 31, line 25:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 25, 32 - 34, and 37"
Page 31, line 27:
Delete "31"
Insert "24, 31"
Page 32, line 31:
Delete "secs. 24, 25, 32 - 34, and 37"
Insert "secs. 25, 32 - 34, and 37"
Page 33, line 2:
Delete "26, 27, 31, and 38"
Insert "24, 26, 27, 31, and 38"
Page 33, lines 19 and 20:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert " Sections 25, 32 - 34, and 37"
Page 33, line 21:
Delete "26, 27, 31, and 38"
Insert "24, 26, 27, 31, and 38
CO-CHAIR JOHNSON objected to Amendment 31.
REPRESENTATIVE ROSES objected to Amendment 31.
12:20:51 PM
COMMISSIONER GALVIN stated that [Amendment 31] would restore the
intent of [HB 2001, as introduced,] which was to eliminate
credits for transitional investment expenditures (TIE) from the
effective date of the bill forward. However, he noted, during
testimony it was pointed out that some explorers would not have
production until after the effective date, resulting in the
possibility that these explorers would be unable to take
advantage of the TIE credits during the effective time in which
TIE credits were being provided because they are non-
transferable. Amendment 31 would restore the elimination of TIE
credits moving forward, but would allow the folks who did not
have production during that effective time to retain their
credits for use when they do have production.
12:22:35 PM
COMMISSIONER GALVIN, in response to Co-Chair Johnson, said the
amount of money being talked about is $700 million over another
5 years, or about $180 million a year.
CO-CHAIR JOHNSON understood that this would be extracting
another $180 million a year from the oil companies.
COMMISSIONER GALVIN responded that that would be one way of
looking at it.
CO-CHAIR JOHNSON remarked that his math calculations now
indicate that "we're at $1.75 billion."
12:23:15 PM
COMMISSIONER GALVIN, in response to Co-Chair Gatto, said that
Amendment 31 would preserve the credits that Pioneer Natural
Resources Company ("Pioneer") had earned for the investments it
made after PPT passed until the effective date, so the company
would get the full value of those once it has production.
CO-CHAIR GATTO asked where the harm came from if this was
helpful to Pioneer.
COMMISSIONER GALVIN said the harm was that CSHB 2001(O&G) allows
the existing producers to continue to take TIE credits into the
future and Amendment 31 would cut those off.
12:23:58 PM
REPRESENTATIVE SEATON stated that the only cost associated with
progressivity is based on whether oil prices are above
industry's anticipated price and thus in the windfall profit
range. So, the caveat that needs to be made with TIE credits is
that they are non-price sensitive. This distinction needs to be
made, he said, because they are two different things. He agreed
with the three year restriction in CSHB 2001(O&G) and,
therefore, opposed Amendment 31.
CO-CHAIR JOHNSON maintained his objection to Amendment 31.
REPRESENTATIVE ROSES maintained his objection to Amendment 31.
A roll call vote was taken. Representatives Wilson, Edgmon,
Kawasaki, and Guttenberg voted in favor of Amendment 31.
Representatives Fairclough, Roses, Seaton, Johnson, and Gatto
voted against it. Therefore, Amendment 31 failed by a vote
of 4-5.
12:26:04 PM
REPRESENTATIVE EDGMON moved that the committee adopt Amendment
32, labeled 25-GH0014\L.44, Chenoweth/Bullock, 11/3/07, which
read [original punctuation provided]:
Page 1, line 7, following "surcharges;":
Insert "prohibiting a producer or explorer from
receiving tax credits if certain judgments are not
satisfied and requiring, as a condition of receiving
the tax credits, deposit of the amount of certain
unpaid judgments and certain interest on those
judgments in the registry of the court during an
appeal;"
Page 18, following line 25:
Insert a new bill section to read:
"* Sec. 26. AS 43.55 is amended by adding a new
section to read:
Sec. 43.55.028. Exceptions to tax credits. (a) A
producer or explorer may not take a tax credit under
AS 43.55.023, 43.55.024, or 43.55.025 if a state court
or a federal court that has subject matter
jurisdiction has entered a judgment in an amount
greater than $100,000 against the producer or
explorer, the producer or explorer has not satisfied
the judgment, and the judgment concerns a matter
having connections with this state that are sufficient
to satisfy constitutional jurisdictional requirements.
(b) Notwithstanding (a) of this section, the
producer or explorer may receive a tax credit
described in (a) of this section if
(1) the judgment is appealed but the appeal
has not been decided; and
(2) the producer or explorer deposits into
the registry of the court where the judgment was
entered or the appeal is pending, in the form of cash,
bond, or other security,
(A) the full amount of the judgment; and
(B) post-judgment interest on the judgment
amount described in (A) of this paragraph;
notwithstanding another provision of law, the post-
judgment interest rate on a judgment the amount of
which is deposited under (a) of this paragraph is
equal to the rate of return on the producer's or
explorer's capital as shown on the producer's or
explorer's quarterly earnings report."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "32 - 34, and 37"
Insert "26, 33 - 35, and 38"
Page 31, line 27:
Delete "31, and 38"
Insert "32, and 39"
Page 31, line 29:
Delete "Sections 26 and 27"
Insert "Sections 27 and 28"
Page 31, line 30:
Delete "sec. 26"
Insert "sec. 27"
Page 31, line 31:
Delete "sec. 27"
Insert "sec. 28"
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 30"
Page 32, line 3:
Delete "29"
Insert "30"
Page 32, line 31:
Delete "32 - 34, and 37"
Insert "26, 33 - 35, and 38"
Page 33, line 2:
Delete "26, 27, 31, and 38"
Insert "27, 28, 32, and 39"
Page 33, lines 19 - 20:
Delete "32 - 34, and 37"
Insert "26, 33 - 35, and 38"
Page 33, line 21:
Delete "26, 27, 31, and 38"
Insert "27, 28, 32, and 39"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 45"
CO-CHAIR JOHNSON objected to Amendment 32.
CO-CHAIR ROSES objected to Amendment 32.
12:26:15 PM
REPRESENTATIVE EDGMON explained that Amendment 32 would require
any producer or explorer against which a judgment had been
levied in an amount greater than $100,000, vis-à-vis an Alaskan
entity, to deposit the amount of that judgment into the court
registry in order to be eligible for the tax credit provisions
of HB 2001. He requested that Representative Gruenberg be
allowed to explain the amendment details.
CO-CHAIR GATTO inquired whether "certain" judgments included the
"biggest-of-the-biggest" judgments as well as little judgments.
REPRESENTATIVE EDGMON said that was his understanding.
12:27:24 PM
REPRESENTATIVE MAX GRUENBERG, Alaska State Legislature, stated
that Amendment 32 would require that to take advantage of the
tax credits in the bill, the judgment debtor, pending the
appeal, would have to put the money or a bond or other security
in the registry of the court. Secondly, the interest, the
amount that it would draw pending the outcome of the appeal,
would be the rate of return on the producer's or explorer's
capital as shown on the producer's or explorer's quarterly
earnings report. This would prevent a company from unjustly
enriching itself with the plaintiff's money and this is a well
recognized legal principle, he said. There is no reason that a
company should be able to use somebody else's money to go into
their own pockets. The reason is because the rate of interest
on pending appeal judgments is at prime plus three percent which
is about seven percent. This remedy is fashioned from a federal
district court case in Miami, he said. The name of the case is
[Allapattah Services, Inc. v. Exxon Mobil Corp. ("Exxon")], the
cite is 372 Federal Supplement 1344, pages 1374-1377, from the
southern district of Florida in 2005. According to the
documentation in the published opinion, Exxon's own published
reports showed it was earning 23.8 percent on the money at that
time. Under Florida law [Exxon] was only paying 8 percent and
on punitive damages under federal law only 3 percent, a spread
of about 16 percent. That spread would have been about 17
percent under Alaska law, Representative Gruenberg noted. Thus,
in four and one-half years, just from the use of that money, the
company would have completely paid for the judgment, so it would
not cost the defendant corporation one dime. "And after that,
they would be reimbursed for their attorney's fees and after
that just nothing but profit," he said. "This would prevent
that by sequestering the money and whoever gets the judgment
would get the earnings on that. And if it were reversed by the
appellate court, then the company would get to keep its
earnings. And if it were affirmed in part and reversed in part,
the amount of money would be divided, so it's perfectly fair."
12:31:40 PM
REPRESENTATIVE GRUENBERG summarized what Amendment 32 would do:
1) it would prevent unjust enrichment by the corporation; 2) it
would prevent the corporation from using the plaintiff's own
money to pay for the judgment and the costs of defense; and 3)
it would speed up the settlement and stop unnecessary
litigation. He pointed out that when Judge Gold came down with
the decision in the Allapattah case, Exxon immediately settled
the case.
CO-CHAIR GATTO asked whether [Amendment 32] would apply to
insurance companies.
REPRESENTATIVE GRUENBERG said it would only apply to companies
that are entitled to the credits under [HB 2001]. "This is an
area of the law that is logically unfair," he said. "Why should
a defendant be able to use the plaintiff's own money to pay not
only the cost of the judgment but the cost of their own defense,
and drag the thing out and tie up the costs for literally
decades," he asked.
12:33:21 PM
CO-CHAIR JOHNSON stated that while he understood what was trying
to be done, he had a problem with it. The court system in our
country allows for the due process to work through, even if it
is cumbersome and takes awhile, he opined. He said he did not
like what was happening with Exxon, but that he believed Exxon
had the same right to the court system as did every citizen and
that this was a form of execution prior to receiving due
process. As far as "using someone else's money" - when there is
a settlement that goes into an escrow account, whose money is
that, he asked.
12:35:12 PM
REPRESENTATIVE GRUENBERG responded that the purpose of Amendment
32 is to seek justice and fairness. It is fair because all it
does is put the money in the registry of the court, it does not
give it to the plaintiff's until the final court makes the
determination. The distinction is that the court did not decide
that the money was owed from that moment forward, it decided
that the money was owed from what happened before. The event
occurred before the lawsuit was ever filed and that is when the
wrong was committed. In this case, he said, the event occurred
on the day of the original judgment and this determined whose
money it was. It may have taken awhile to adjudicate it, but
all the while that money belonged to the plaintiff's. This just
says that it is unfair for the defendant to earn interest and
appreciation on that money because it was not the defendant's.
Thus, this amendment seeks fairness, he opined.
CO-CHAIR JOHNSON disagreed with Representative Gruenberg's
opinion.
The committee took an at-ease from 12:37 p.m. to 12:39 p.m.
12:39:20 PM
REPRESENTATIVE FAIRCLOUGH inquired whether the administration
supported Amendment 32.
COMMISSIONER GALVIN said not at this time because it is a
complex issue that could have unintended consequences. He
presented an example of a situation "where a non-operator
partner is facing not getting a credit for something, and they
withhold their funding for something that our operator wants to
do, it could put us in the situation where we don't get our
ultimate goal which is to get the investment." More thought is
needed before trying to fix a separate problem in this
particular way, he advised.
REPRESENTATIVE FAIRCLOUGH stated her concern that there may be
many unintended consequences by responding to one taxpayer's
wrongdoing with the passage of a law that is retroactive. Every
one of Alaska's taxpayers has judgments that are in dispute, she
said. Alaska would be moving into more of a dictator state if
it precluded litigation on particular points of law by
withholding credits that are supposed to be for incentivizing
more barrels of oil into the pipeline, she opined. The Exxon
litigation needs to be resolved, she said, but Amendment 32
could have unintended consequences.
12:42:34 PM
REPRESENTATIVE GUTTENBERG asked how much tax credit had been
taken over the past few years by anyone having an outstanding
judgment of over $100,000.
COMMISSIONER GALVIN responded that the question was difficult to
answer because DOR did not track judgments over $100,000.
REPRESENTATIVE GUTTENBERG inquired whether the names of the top
five applicants for tax credits were confidential.
COMMISSIONER GALVIN answered yes, this is the reason for
"aggregated among three". There are approximately $2 billion in
investments that are qualified for capital investment credits
and, thus, $400,000 million in the credit line. Take away the
explorers and the rest are primarily the incumbents, he said,
"and the math is there." A large number of credits are being
given under this system.
12:44:38 PM
REPRESENTATIVE EDGMON acknowledged the possibility of unintended
consequences, but maintained the importance of the issue. The
producer that is the root cause of this amendment is involved in
billions of dollars of potential money to Alaskan residents, he
said, some of whom are constituents of legislators sitting at
this table. He requested that there be discussion on whether to
move the $100,000 to a higher number.
REPRESENTATIVE GRUENBERG said he thought the $100,000 figure was
just right, but that the number was up to the committee because
the goal is to get these cases settled. He said it was
unfortunate the administration had taken a position so early
without looking at the result of the judge's actions - the
settlement of a huge case. "It is not taking anything away,
it's just putting it under the court's jurisdiction, it's just
not letting the company unjustly enrich itself," he said. "If
the only reason the company is willing to invest in Alaska is if
it can unjustly enrich itself at our citizen's expense, then
there is something really wrong." He said he was unsure whether
the commissioner really understood what the amendment did.
12:48:24 PM
REPRESENTATIVE ROSES asked whether raising the interest rate
from 7 percent to potentially 27 percent could be interpreted as
unjustly enriching the plaintiff. He further inquired whether
Alaska's usury laws were different than Florida's.
REPRESENTATIVE GRUENBERG replied that usury is when the interest
charged is in excess of that amount allowed by law. Thus,
because this is specifically allowed by law, it is not usurious.
He explained that when a person loans money, it belongs to the
person loaning the money on the date that it is due. Any money
earned on that also belongs to the person who loaned the money.
By the same token, if a person was damaged in a tort sense, the
damage as a matter of law is due from the date the injury
occurs, and the [defendant] would not have a right to the
earnings on that money after the injury had occurred. Amendment
32 does not go back that far, he said, it only goes back to the
date that the judgment was entered by the court.
12:50:52 PM
REPRESENTATIVE ROSES described a hypothetical example of a
person not being repaid a loan who goes to the legislative and
judicial systems to have a bill passed disallowing the borrower
from receiving his/her Permanent Fund Dividend (PFD) until the
loan was repaid. The person making the loan could then go to
court and have the PFD garnished. That is different, he said,
than saying an entity is not going to be entitled to something
that it is currently entitled to until it satisfies the
judgment.
REPRESENTATIVE GRUENBERG agreed that they are two different
things. One is a method of collecting the judgment or
garnishment, he said, and the other is about whose money it is.
In the case of the garnishment, the PFD belongs to the borrower
because he/she is the resident and applied for it, and the
person making the loan has a legal right to execute on that
money to satisfy the judgment. That is different than claiming
to have the right to keep the earnings on that money. Judge
Gold was the first person who really recognized that.
12:52:23 PM
REPRESENTATIVE ROSES noted that the reason for [Amendment 32]
was to expedite the judgment so that Alaskan citizens who were
damaged could receive the money they are entitled to, along with
the interest being referred to. However, he contended,
withholding the credits until the judgment was satisfied would
disincentivize more drilling and putting more oil into the
pipeline, thus turning things around and harming the very people
for whom the resolution was sought.
REPRESENTATIVE GRUENBERG answered no, because the money was not
being taken away from anyone; it was just putting it under the
jurisdiction of the court.
12:53:37 PM
REPRESENTATIVE ROSES argued that the reason credits are in the
bill is to incentivize exploration by producers that are also
exploring. Exploration leads, hopefully, to more production of
product. If withholding those credits caused one more well not
to be drilled, it could jeopardize future revenue to the state
and to the Permanent Fund and thereby harm in some smaller way
the very people the legislation was trying to make whole.
REPRESENTATIVE GRUENBERG responded no, because [legislators]
would not be making that decision, it would be the producers
deciding that they would rather not drill than give up the use
of money that does not belong to them. Making Alaskans whole
should be encouraged and then they can drill.
REPRESENTATIVE ROSES submitted that it does not matter whether
the decision not to drill is made by the [legislature] or the
producers, the fact of the matter is that if wells are not
drilled, it is a potential harm to the state's treasury and
every citizen in the state. He agreed that the situation trying
to be resolved is despicable, but he feared it would create
other problems in the process.
12:56:02 PM
REPRESENTATIVE GUTTENBERG moved Conceptual Amendment 1 to
Amendment 32 "to line 13, third word, delete $100,000 and add
$10 million."
CO-CHAIR JOHNSON objected to Conceptual Amendment 1 to Amendment
32.
REPRESENTATIVE SEATON objected to Conceptual Amendment 1 to
Amendment 32.
12:56:30 PM
REPRESENTATIVE GUTTENBERG stated that he was making Conceptual
Amendment 1 because there is no way to know where these levels
of judgment are, based upon who the producers are, because of
the confidentiality issues. He did not want to trap anybody in
unintended consequences.
REPRESENTATIVE ROSES appreciated what was trying to be done, but
remained apprehensive about possible unintended consequences.
12:58:27 PM
REPRESENTATIVE SEATON remarked that there are unintended
consequences of the system in place right now, those unintended
consequences being that it pays to keep appealing a judgment
when the internal rate of return is greater than the settlement
that would be paid. What has not been considered, he opined, is
that this would have a positive effect regarding the state's
numerous lawsuits against oil companies over TAPS and other
issues that have been dragging on for many years because the
internal rates of return are high enough to pay off the
judgments. He supported [Amendment 32] "for the Exxon Valdez
portion", but said it was more important to consider the
lawsuits that are going to be generated under the system of a
net profits tax. "When we win those lawsuits, we don't want
those to be appealed and appealed and appealed, we want them
settled," he declared. He said he supported [Amendment 32] in
order to expedite the legal process.
1:01:39 PM
CO-CHAIR GATTO said he firmly supported [Amendment 32] because
"it's easy for big people to push around little people." When
corporations out-earn the State of Alaska by ten to one, the
state becomes a "little person".
REPRESENTATIVE FAIRCLOUGH accepted the higher number in
Conceptual Amendment 1 as a way to mitigate the damage should
[Amendment 32] pass. She remained concerned, however, because
the higher number was just being pulled out of the air.
1:04:40 PM
CO-CHAIR JOHNSON expressed his concern about the disconnect
regarding investment brought up by Representative Roses. He
also feared that raising the number to $10 million would get
into the aspect of equal protection under the law because it was
so narrow. "How many $10 million lawsuits are out there," he
asked.
REPRESENTATIVE GRUENBERG responded that one of the reasons the
amendment was crafted like this was to avoid equal protection
problems. He agreed that raising the number really high could
run into that problem. He said he would feel better if it was
$1 million or less.
1:06:38 PM
REPRESENTATIVE FAIRCLOUGH warned that this issue had not gone
through the appropriate process to avoid unintended
consequences. If this bill were going through a regular session
process, she said, it would be assigned to the House Judiciary
Standing Committee where experts could address equal protection
under the law and unjust enrichment, and the public could
comment and be involved. She acknowledged the importance of
taking the opportunity to address the "Exxon litigation issue"
so that Alaskans know their legislature understands their
frustration. She said she would be voting for the highest
number she could get and then not vote for the amendment in its
entirety.
1:08:18 PM
REPRESENTATIVE GUTTENBERG withdrew Conceptual Amendment 1 to
Amendment 32. About 2500 Alaskans have been screaming pretty
loud, he said.
REPRESENTATIVE GUTTENBERG moved Conceptual Amendment 2 to
Amendment 32 "at $1 million in the same place, line 3, deleting
$100,000 and inserting $1 million."
REPRESENTATIVE ROSES objected to Conceptual Amendment 2 to
Amendment 32.
REPRESENTATIVE FAIRCLOUGH objected to Conceptual Amendment 2 to
Amendment 32.
1:08:48 PM
REPRESENTATIVE ROSES stated that his discomfort remained the
same regardless of the amount. There are many issues and many
overlaps that have not been considered and the impacts are
unknown. He said he supported the concept 100 percent, but
remained fearful that other problems would arise. He opposed
Conceptual Amendment 2 as well as Amendment 32.
CO-CHAIR GATTO offered his concern over the legality of either
$100,000 or $1 million.
CO-CHAIR JOHNSON called the question on Conceptual Amendment 2
to Amendment 32.
A roll call vote was taken. Representatives Fairclough,
Guttenberg, and Edgmon voted in favor of Conceptual Amendment 2
to Amendment 32. Representatives Wilson, Seaton, Roses,
Kawasaki, Gatto, and Johnson voted against it. Therefore,
Conceptual Amendment 2 to Amendment 32 failed by a vote of 3-6.
1:13:13 PM
REPRESENTATIVE SEATON commented that if this issue were to be
addressed during regular session, it would open up the tax
statute again. He therefore preferred to address it now.
CO-CHAIR GATTO said that in a regular session this would be
assigned to the House Resources Standing Committee and the House
Finance Committee. On the floor there are more than enough
attorneys and there is "a legal department" to give an opinion.
Although it has not run the realm, it does not make a
significant difference to dispense with it here, he opined.
1:14:10 PM
REPRESENTATIVE FAIRCLOUGH disagreed. She said she thought that
100 percent of Alaskans would support this, but maintained that
it was incumbent upon those elected to represent Alaskans to
fairly balance the issues. This was not brought into discussion
until after the House Resources Standing Committee's public
hearing was closed, she noted, nor have industry taxpayers been
able to comment on it.
REPRESENTATIVE EDGMON submitted that the entire exercise of
crafting any bill is fraught with uncertainties or unintended
consequences. There is no way to know for sure whether all the
incentives and other provisions in [HB 2001] will actually
result in inducing investment and increasing production, state
revenue, and employment opportunities, he opined. In said he
thought that Amendment 32 would be approved by the people of
Alaska if it was brought to them for a vote. While the Exxon
Valdez Oil Spill may be the underpinning of this amendment, it
is not the only case of protracted legal dispute and foot
dragging. Therefore, he said, Amendment 32 is appropriate.
1:17:16 PM
REPRESENTATIVE ROSES inquired whether there was a way to ensure
that the other partners in a project would not be harmed should
one company in that partnership be disallowed its credits. Was
there a way to disaggregate credits among each of the partners
in a particular exploration for which the credit would be
entitled, he asked.
REPRESENTATIVE EDGMON replied that such a scenario assumed the
oil company was not going to comply with this.
COMMISSIONER GALVIN responded that each company in a partnership
submits its tax returns separately from the other partners,
therefore each company's credits are based on what it reports.
Thus, there would be no direct affect on the other partners
except that a taxpayer's non-receipt of credits might affect its
investment decision which would then be a partnership issue.
1:19:19 PM
REPRESENTATIVE WILSON stated that zeroing in on one company
could result in devastating effects to other companies. She
therefore opposed Amendment 32.
CO-CHAIR JOHNSON said he was still concerned about equal
protection because this narrowed things down to a very specific
group of about half a dozen companies and half a dozen regions
of the state. Regardless of the amount, he continued, the line
was being crossed of not providing equal protection to all
lawsuits and settlements of $100,000. He said he was concerned
about the constitutionality and wanted to see a legal opinion.
A roll call vote was taken. Representatives Seaton, Gutenberg,
Edgmon, Kawasaki, and Gatto voted in favor of Amendment 32.
Representatives Wilson, Roses, Fairclough, and Johnson voted
against it. Therefore, Amendment 32 passed by a vote of 5-4.
The meeting was recessed at 1:22 p.m.
CO-CHAIR GATTO called the meeting back to order at 2:20:39 PM.
Present at the call back to order were Representatives
Guttenberg, Edgmon, Fairclough, Wilson, Seaton, Roses, Gatto,
and Johnson. Representative Kawasaki arrived as the meeting was
in progress.
REPRESENTATIVE GUTTENBERG withdrew Amendment 33.
REPRESENTATIVE GUTTENBERG requested Amendment 34 be considered
at a later time.
REPRESENTATIVE GUTTENBERG withdrew Amendment 35.
CO-CHAIR GATTO announced that he was skipping Amendments 36 and
37 at Representative Kawasaki's request because new documents
were being drafted.
2:22:36 PM
REPRESENTATIVE GUTTENBERG moved that the committee adopt
Amendment 38, labeled 25-GH0014\L.71, Cook/Bullock, 11/3/07,
which read [original punctuation provided]:
Page 1, following line 12:
Insert a new bill section to read:
"* Section 1. The uncodified law of the State of
Alaska is amended by adding a new section to read:
LEGISLATIVE INTENT. It is the intent of the
legislature that provisions of this Act
(1) ensure a fair and equitable means of
assessing and taxing Alaska's oil and gas resources;
(2) encourage the availability to Alaska's
citizens of affordable gas produced, transported, and
consumed within the state; and
(3) confirm by clarification the
longstanding interpretation of AS 43.05.260 by the
Department of Revenue through enactment of
AS 43.55.075(b) in sec. 30 of this Act, relating to
limitation of assessments for the production tax on
oil and gas and conservation surcharges on oil."
Page 2, line 1:
Delete "Section 1"
Insert "Sec. 2"
Renumber the following bill sections accordingly.
Page 14, following line 2:
Insert a new subsection to read:
"(q) Notwithstanding other provisions of this
section, for a calendar year before 2022, the tax
levied under this section for each 1,000 cubic feet of
gas for gas produced from a lease or property outside
the Cook Inlet sedimentary basin and used in the state
may not exceed the amount of tax for each 1,000 cubic
feet of gas that is determined under (j)(2) of this
section."
Page 23, line 24, following "AS 43.55.170;":
Insert "this subparagraph does not apply to gas
taxable under AS 43.55.011(q);"
Page 24, line 1, following "AS 43.55.170;":
Insert "this subparagraph does not apply to gas
taxable under AS 43.55.011(q);"
Page 24, following line 13:
Insert a new subparagraph to read:
"(E) gas produced during a calendar year
from a lease or property outside the Cook Inlet
sedimentary basin and used in the state is the gross
value at the point of production of that gas taxable
under AS 43.55.011(e) and produced by the producer
from that lease or property, less the producer's lease
expenditures under AS 43.55.165 for the calendar year
applicable to that gas produced by the producer from
that lease or property, as adjusted under
AS 43.55.170;"
Page 24, line 22, following "AS 43.55.170;":
Insert "this subparagraph does not apply to gas
subject to additional tax under AS 43.55.011(o);"
Page 24, line 30, following "AS 43.55.170;":
Insert "this subparagraph does not apply to gas
subject to additional tax under AS 43.55.011(o);"
Page 25, line 13, following "AS 43.55.170":
Insert ";
(E) gas produced during a month from a lease
or property outside the Cook Inlet sedimentary basin
and used in the state is the gross value at the point
of production of that gas taxable under
AS 43.55.011(e) and produced by the producer from that
lease or property, less 1/2 of the producer's lease
expenditures under AS 43.55.165 for the calendar year
applicable to that gas produced by the producer from
that lease or property, as adjusted under
AS 43.55.170"
Page 29, following line 12:
Insert a new bill section to read:
"* Sec. 35. AS 43.55.165(h) is amended to read:
"(h) The department shall adopt regulations that
provide for reasonable methods of allocating costs
between oil and gas, between gas subject to
AS 43.55.011(q) and other gas, and between leases or
properties in those circumstances where the
determination of the lease expenditures that are
applicable to oil or to gas, that are applicable to
gas subject to AS 43.55.011(q) or to other gas, or
that are applicable to oil and gas produced from
different leases or properties, requires an allocation
of costs."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 25, 26, 33, 34, 36, and 39"
Page 31, line 27:
Delete "Sections 14 - 20, 31, and 38"
Insert "Sections 15 - 21, 32, 35, and 40"
Page 31, line 29:
Delete "Sections 26 and 27"
Insert "Sections 27 and 28"
Page 31, line 30:
Delete "sec. 26"
Insert "sec. 27"
Page 31, line 31:
Delete "sec. 27"
Insert "sec. 28"
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 30"
Page 32, line 3:
Delete "secs. 13 and 29"
Insert "secs. 14 and 30"
Page 32, line 13:
Delete "sec. 9"
Insert "sec. 10"
Page 32, line 16:
Delete "sec. 9"
Insert "sec. 10"
Page 32, line 19:
Delete "sec. 9"
Insert "sec. 10"
Page 32, line 31:
Delete "secs. 24, 25, 32 - 34, and 37"
Insert "secs. 25, 26, 33, 34, 36, and 39"
Page 33, line 2:
Delete "secs. 14 - 20, 26, 27, 31, and 38"
Insert "secs. 15 - 21, 27, 28, 32, 35, and 40"
Page 33, lines 19 - 20:
Delete "Sections 24, 25, 32 - 34, and 37"
Insert "Sections 25, 26, 33, 34, 36, and 38"
Page 33, line 21:
Delete "Sections 14 - 20, 26, 27, 31, and 38"
Insert "Sections 15 - 21, 27, 28, 32, 35, and 40"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 46"
CO-CHAIR JOHNSON objected to Amendment 38.
2:23:30 PM
COMMISSIONER GALVIN stated, "We are the drafters of this in
response to a request to deal with the in-state use issue."
There is a desire to provide the same tax treatment to other in-
state projects that is provided for gas that is produced within
Cook Inlet, he explained. This amendment would provide Cook
Inlet tax treatment for gas projects taking place for in-state
use.
REPRESENTATIVE SEATON moved Amendment 1 to Amendment 38 which
read as follows [original punctuation provided]:
Page 1, line 21:
Insert "Page 13, line 23, through page 14,
line 2:
Delete all material"
Page 2, line 7:
Insert "For purposes of this section, "used in
the state" means delivered for consumption as fuel in
the state, including as fuel consumed to generate
electricity."
CO-CHAIR JOHNSON objected to Amendment 1 to Amendment 38.
2:24:36 PM
REPRESENTATIVE SEATON said that Amendment 1 to Amendment 38
delineates that gas produced in-state for use in-state as fuel,
including fuel to generate electricity, shall receive the
preferential treatment no matter where it is from.
COMMISSIONER GALVIN, in response to Representative Fairclough,
explained that Amendment 1 to Amendment 38 would delete the
language in CSHB 2001(O&G) that provides the Cook Inlet
treatment to only a certain segment of the state. Thus, it
would broaden the application of that special treatment. In
further response to Representative Fairclough, he said that on
page 1, line 21, of Amendment 38, the following words would be
added by Amendment 1: "Page 13, line 23, through page 14, line
2: Delete all material". The language currently on line 21,
page 1, of Amendment 38 would then slide down.
2:28:16 PM
REPRESENTATIVE SEATON added that the language of Amendment 1
could [instead] be inserted on line 20 [on page 1].
REPRESENTATIVE FAIRCLOUGH responded that she did not understand
where the words [in Amendment 1] "Delete all material" tie into
the amendment.
REPRESENTATIVE SEATON explained that the wording "Page 13, line
23..." would be inserted into Amendment 38, which would delete
[subsection] (p) on page 13, line 23, through page 14, line 2,
of CSHB 2001(O&G).
2:29:22 PM
COMMISSIONER GALVIN stated that all the material between the
quotation marks in Amendment 1 would be added to Amendment 38.
In response to Representative Fairclough and Co-Chair Gatto,
Commissioner Galvin added that these words were being inserted
so that when Amendment 38 passed those words would be executed
and result in changing CSHB 2001(O&G). He specified that the
second portion of Amendment 1 was intended to become part of
subsection (q) at the top of page 2 of Amendment 38. Thus, the
following words in Amendment 1 would become a part of subsection
(q) of Amendment 38: "For the purposes of this section, 'used
in the state' means delivered for consumption as fuel in the
state, including as fuel consumed to generate electricity."
This language, Commissioner Galvin continued, would provide the
clarification that Representative Seaton wanted to ensure the
inclusion of certain things while excluding liquefied natural
gas (LNG) that was exported out of the state or a gas-to-liquids
that was exported out of the state.
2:31:20 PM
CO-CHAIR JOHNSON inquired whether this would affect exports from
the Kenai LNG Plant.
COMMISSIONER GALVIN responded no. In response to Representative
Wilson, he stated that [the second portion of Amendment 1] would
be inserted on page 2, line 7, of Amendment 38 before the words
Page 23. He said it would be more accurate to say to insert
this portion on line 5 after the word section; or, it could be
inserted on line 6.
REPRESENTATIVE SEATON offered that Amendment 1 be conceptual so
the drafters would know that the exact placement was not being
dictated.
CO-CHAIR JOHNSON withdrew his objection to [Conceptual]
Amendment 1 to Amendment 38.
2:33:09 PM
REPRESENTATIVE KAWASAKI objected to [Conceptual] Amendment 1 to
Amendment 38. He said the legislative intent on page 1 of
Amendment 38 might not match the second portion of the
conceptual amendment. He inquired whether the purpose was to
allow an electric producing company that built on top of a gas
field to use the credits within the bill.
REPRESENTATIVE SEATON replied that when something was sold off
of a lease it became taxable, so it was not the intent of this
to allow a manufacturing or some other kind of facility to move
[on top of a gas field]. Electricity being used on the lease
falls under conditions of the lease terms and this would be the
same for a diesel topping plant that is providing the diesel
consumed on the leasehold. The purpose of this is for in-state
use for non-industrial purposes, he said, but specifically
excluding so that everyone knows that electric generation for
use in the state is considered for this treatment for the gas.
2:34:59 PM
REPRESENTATIVE KAWASAKI asked whether a gas field owner could
build an [electric producing] plant nearby and then use the
credits from the gas producing field.
COMMISSIONER GALVIN answered that the credits allowed under the
production tax are only those that are directly related to the
production of the gas. Therefore, the credits would not be
deductible under the production tax for gas used to power a
nearby electric producing plant.
REPRESENTATIVE KAWASAKI withdrew his objection to [Conceptual]
Amendment 1 to Amendment 38.
There being no further objection, [Conceptual] Amendment 1 to
Amendment 38 was passed.
2:35:56 PM
REPRESENTATIVE SEATON moved Amendment 2 to Amendment 38 which
read as follows [original punctuation provided]:
Page 2, line 2:
Delete, "under"
Insert, "by (e) and (o) of"
CO-CHAIR JOHNSON objected to Amendment 2 to Amendment 38.
REPRESENTATIVE SEATON explained that subsection (i) of this
section addresses a separate tax on landowner royalties that
does not apply to what is being done here. Therefore, the
purpose of Amendment 2 to Amendment 38 is to look only at
subsections (e) and (o) instead of all of the subsections of
this section.
CO-CHAIR JOHNSON withdrew his objection to Amendment 2 to
Amendment 38.
There being no further objection, Amendment 2 to Amendment 38
was passed.
2:38:03 PM
CO-CHAIR JOHNSON objected to Amendment 38, as amended, for
purposes of discussion.
REPRESENTATIVE FAIRCLOUGH inquired how [Amendment 38, as
amended,] would guarantee Alaskans a price sensitive structure.
The rest of the state would need to be brought under the RCA to
make sure this credit actually happens for the people of Alaska,
she opined. The amendment would provide a credit or incentive
for producers, explorers, and transporters, but it does not
ensure that the public would see the actual benefit.
MS. HOULE stated that Kevin Banks could probably address this
issue for DNR.
COMMISSIONER GALVIN responded that Representative Fairclough is
exactly right because [Amendment 38, as amended,] would lower
the production tax that a producer would pay, but the question
would become whether or not that tax savings would get passed
along the chain to the consumer. In the end it would be up to
the utility regulators to ensure that this occurred. He said he
believed that there are different levels of regulation taking
place with utilities that may be affected by this in terms of
the amount of regulation that covers them, but that this is a
separate issue that his department does not deal with. "What we
can do," he said, "is ... ensure that there isn't a higher
production tax that is being paid by the producer that will
result in the risk of that higher tax being passed along to the
consumer." What is being done here is to ensure that the
playing field is level at the start, but whether or not it
remains there would be up to the regulations of the utilities.
2:40:46 PM
REPRESENTATIVE GUTTENBERG suggested that Dan Britton, President
of Fairbanks Natural Gas (FNG), be brought forward to answer the
question since a lot of this is built around FNG.
REPRESENTATIVE FAIRCLOUGH contended that it was inappropriate
for Mr. Britton to answer because it was an unbalanced equation.
Under the Cook Inlet "ring fencing" in Anchorage, the state
ensures there is a balance for consumers by requiring rate
studies, she said. The RCA needs to control a utility to ensure
that any allowed credits are passed along to consumers.
2:42:20 PM
CO-CHAIR GATTO asked whether FNG is regulated by the RCA.
DAN BRITTON, President, Fairbanks Natural Gas, replied that FNG
is a regulated gas utility that currently has an exemption from
rate regulation that allows it some flexibility for adjusting
rates that do not require specific [RCA] approval. He said he
had a letter from FNG's legal counsel clarifying FNG's
regulation status if the committee would like to enter that.
CO-CHAIR GATTO declined the offer. There is no way to ascertain
or deliver a question [to the RCA], he said.
2:42:55 PM
REPRESENTATIVE WILSON surmised that [Amendment 38, as amended,]
would allow one part of the state something that is not allowed
to other parts of the state.
COMMISSIONER GALVIN replied that it is the opposite. Right now,
one part of the state - Cook Inlet - enjoys a particular tax
benefit that is not allowed in other parts of the state. Within
Cook Inlet, he explained, not only are the gas consumers paying
a lower passed-along rate, so are the electrical utilities.
Additionally, half of the gas is being exported out of Alaska at
a lower production tax rate. "What we are doing is recognizing
that there is that favorable tax treatment being provided within
Cook Inlet," he said, "and we're trying to ensure that that same
treatment is available to other uses within the state outside of
Cook Inlet."
2:43:58 PM
REPRESENTATIVE WILSON inquired whether this would assist western
villages that pay much higher rates than do other places in
Alaska.
COMMISSIONER GALVIN responded yes, to the extent that [the
villages] used gas that is produced within the state that is the
subject of the production tax being dealt with today. If it is
imported gas or diesel, then this would have nothing to do with
[the villages] because it would have nothing to do with the
issue.
REPRESENTATIVE SEATON explained that basically there is a 5
percent tax cap for the Cook Inlet sedimentary basin, but that
there is no 5 percent tax cap for gas produced in places like
Nenana, or the North Slope, or western Alaska. This would
provide the same state production tax rate for gas produced in
other areas, but only if that gas is used in the state, he
opined. So, it is equity for everyone across the state as far
as state tax treatment. This does not modify the Cook Inlet
provisions in statute; therefore, it would have no affect on
anything in Cook Inlet.
2:46:10 PM
REPRESENTATIVE WILSON understood that since that was not
happening in southeast or western Alaska, this was then making
sure that people in the "Railbelt" got cheaper energy rates.
COMMISSIONER GALVIN pointed out that the tax code only provided
the lower production tax treatment, it did not guarantee that
this value would be enjoyed by the consumer because that was
beyond the scope of this legislation. He said that if
[Amendment 38, as amended,] did not pass, the higher tax would
be applied to the production and would likely result in higher
consumer costs because it would be passed along. Passing the
amendment would reduce that production tax burden, he continued,
but other means would be necessary to guarantee that this got
passed along to the consumer. The starting point is to ensure
that the production tax is not higher than what is being charged
in other parts of the state. In further response to
Representative Wilson, Commissioner Galvin reiterated that
[Amendment 38, as amended,] would provide that the lower tax
treatment be applied statewide. If the amendment did not pass,
then the higher production tax would be assessed in areas
outside the Railbelt.
2:48:54 PM
REPRESENTATIVE FAIRCLOUGH warned that this is creating a two-
legged stool rather than a balanced three-legged stool because
it opens up the rest of the state for lower costs, but does not
guarantee it. She said that when the credit was allowed for the
Railbelt area, the RCA was created to ensure compliance through
rate studies. She agreed that the benefit should be applied
statewide, but that because it is being done in special session
there is no ability to put it under the RCA to guarantee that
the benefit would be passed on to consumers. Therefore, she was
struggling with whether to support it.
REPRESENTATIVE GUTTENBERG requested Ms. Thompson to address this
issue.
MS. THOMPSON stated that if it is a regulated utility it is up
to the RCA as to whether a tax credit would be passed on to the
consumer. How often the RCA resets rates varies depending on a
number of factors, she said. The commission itself can decide
to go back and revisit rates and reset them based on a
significant change in tax treatment, or the utility can apply to
have rates reset. It is not something that would happen
automatically, but could be initiated by any number of parties.
The RCA considers the total taxes paid by a utility when
determining the appropriate rate that consumers should pay.
2:51:35 PM
REPRESENTATIVE WILSON asked whether Amendment 38, as amended,
would require the entity providing the electricity to pass on
the savings to its customers.
MS. THOMPSON replied that it is up to the RCA to require a rate
reduction. This would not happen automatically, she said,
somebody would have to request the RCA to initiate a proceeding.
After passage of the bill the legislature could request the RCA
to review the rates of any utility that would receive a tax
benefit as a result of the legislation. In further response to
Representative Wilson, Ms. Thompson said it is not necessarily a
hole that needs to be plugged in the amendment because plugging
the hole could be as simple as sending a request to the chairman
of the RCA after the legislation was passed asking for a review
of the rates of any utility whose tax treatment might be
affected.
2:53:51 PM
REPRESENTATIVE WILSON stated that she would be voting against
Amendment 38, as amended, because it gave credits to a company
that did not have to pass the savings on to its customers.
COMMISSIONER GALVIN noted that the whole function of the RCA is
to provide fair rates and that there must be trust that the RCA
will fulfill its obligations. The tax benefit being provided
here could provide benefit in multiple ways, he said. For
developments like the Red Dog Mine or the Donlin Creek gold
project, it is not a rate-making issue but rather a way to
provide lower cost fuel to make the project more economic or to
move the project forward. When talking about the issues with
these other projects, he advised, keep in mind that nothing is
being changed for any existing rate payers or any existing
consumers because there are not any projects going on right now
that would be affected by this and, therefore, there is time to
deal with that and fix it. If this is not done, then there is
only one leg of the three-legged stool and providing low cost
energy for Alaskans is that much further away, he opined.
REPRESENTATIVE WILSON commented that due to her past experience
with the RCA, she did not trust the commission to address the
issue automatically or in a timely manner. Therefore, she
remained against [Amendment 38, as amended].
2:56:52 PM
REPRESENTATIVE FAIRCLOUGH inquired whether the exemption for
[FNG] is under state statute or RCA regulations.
MS. THOMPSON said she is unsure, but that she believes the
exemption for [FNG] is under statute.
REPRESENTATIVE FAIRCLOUGH responded that this is her point. If
it is state statute, then everything Representative Wilson said
is absolutely true. If it is state statute that allows the
exemption, then everything has been exempted out except
Anchorage. Thus, it requires the legislature to change state
statute and is not something that RCA can just be asked to do a
rate study on. She offered a conceptual amendment to Amendment
38, "that this particular amendment goes into effect when RCA
has jurisdiction" because "the whole point is we're trying to
ensure consumers have lower costs." The rest of the state needs
to be included in the same framework as that of Anchorage and
the Railbelt. "Conceptually, if it's contingent on that, then
we ensure that the producers have to provide the consumer the
benefit," she said.
3:00:04 PM
REPRESENTATIVE ROSES understood that FNG is currently buying
Cook Inlet gas, thus it is receiving some of that benefit now.
He asked whether there is a way - under legislative intent - to
specify that the intent is for this to come under the
jurisdiction of the RCA.
REPRESENTATIVE GUTTENBERG said he would receive no personal
economic benefit from this, except for the price structure and
competitive nature of the market, because LNG would never get to
the outskirts of Fairbanks where he lives. He said his name is
on Amendment 38 because he thought it would be more competitive
in the long run for the consumers of Fairbanks. There are
subsets of benefits around the state such as that mentioned for
Red Dog Mine. The mine has gas deposits that it is trying to
develop and this would benefit the people of western Alaska, he
opined. Because there is no provider or regulator out there
yet, an entity would be established at the time that the mine
developed the gas. Others in the state have not had the same
benefit that Southcentral has enjoyed for many years and gas
found anywhere in the state would also benefit Southcentral.
They are regulated under the RCA, but not economically
regulated, and a distinction between these things must be made.
The RCA could not be added to the bill during a special session,
he contended, but he supported addressing it in January in
regular session.
3:04:18 PM
REPRESENTATIVE ROSES disagreed because many other additions had
already been made to the bill, such as the "Supreme Court", all
types of litigation, and the ARM Board. He said he believes in
the equity and wants to ensure that citizens would capture the
intended credit. The intent of his suggestion, he continued,
was to move the amendment along in Representative Guttenberg's
favor, not to have the representative speak against it.
REPRESENTATIVE GUTTENBERG said thank you.
REPRESENTATIVE SEATON stated that failure to pass Amendment 38
would assure that taxes of 22.5 percent, instead of 5 percent,
would be passed along to consumers. The original amendment was
for the Nenana Basin, he noted, but it did not make much
equitable sense to restrict it to only that area. He said his
amendment to the amendment is to ensure maximum flexibility for
developing gas in other areas of the state in addition to
Anchorage and the Railbelt. However, he argued, this is not the
control mechanism to ensure that those costs are absolutely
passed on to consumers.
3:06:51 PM
REPRESENTATIVE WILSON moved Amendment 3 to Amendment 38 on "page
1, line 14, ... add [paragraph] (4) if the company gets the
credit they must pass the cost savings on to their customers in
the state."
CO-CHAIR JOHNSON objected to Amendment 3 to Amendment 38.
CO-CHAIR GATTO objected to Amendment 3 to Amendment 38.
REPRESENTATIVE WILSON explained that if it is the committee's
intent to pass the savings on to customers, then the section
related to legislative intent is the appropriate place to say
this.
CO-CHAIR GATTO said more focus is needed in regard to "if they
get the credit then they pass the savings" and that he "wanted
to join that the savings come from at least a large part of the
credit."
COMMISSIONER GALVIN suggested the wording be something like "the
tax benefit provided by this exception".
3:08:39 PM
CO-CHAIR GATTO asked whether [the savings] would be all of [the
credit]. He said he was unsure how it was done with regard to
Cook Inlet.
REPRESENTATIVE WILSON specified that Amendment 3 to Amendment 38
be conceptual so the drafters could make the wording correct.
3:09:25 PM
CO-CHAIR JOHNSON suggested including the words "if it is resold
must fall under the Regulatory Commission [of Alaska]" or
somehow specifying that if it is a utility that it must be a
regulated utility. He said he supported the concept, but that
he did not know how to get there and therefore might not vote
for such an amendment.
COMMISSIONER GALVIN pointed out that the issue is a three-step
process: first, the gas producer is charged a certain tax;
second, the producer will recover the value of that tax when it
sells the gas to a utility at a cost that is higher because of
the treatment; and third, the rates charged by the utility will
take into account the price that the utility pays to the
producer. Thus, it is most likely that the entity getting this
tax benefit would not be the company providing the gas to the
consumer. He said he is therefore unsure how to accomplish the
intent.
REPRESENTATIVE GUTTENBERG supported Conceptual Amendment 3 to
Amendment 38 in the interest of moving things along.
3:12:05 PM
CO-CHAIR JOHNSON said he is uncomfortable with assuming that the
savings will be passed on. He said he supports fair prices and
access to the gas by everyone in Alaska, but that it needs to be
tightened up because nothing is guaranteed when it comes to
utilities and consumers and, therefore, a regulatory agency
should be included.
REPRESENTATIVE FAIRCLOUGH said she would support [Conceptual
Amendment 3] and urged that the objections be withdrawn so
things could move on and return to Amendment 38. The conceptual
amendment has no teeth, she said, because it is under
legislative intent.
CO-CHAIR JOHNSON withdrew his objection to Conceptual Amendment
3 to Amendment 38.
There being no further objections, Conceptual Amendment 3 to
Amendment 38 was passed.
3:14:51 PM
REPRESENTATIVE FAIRCLOUGH said she would like to offer a
conceptual amendment.
CO-CHAIR JOHNSON objected.
REPRESENTATIVE FAIRCLOUGH offered [Conceptual Amendment 4 to
Amendment 38] that "this section does not go into effect until
there is a regulated utility, until it falls under RCA." She
said it would be unfair to Anchorage if it became the only one
under regulatory jurisdiction because everyone else was
exempted. She said she wants everyone to receive the benefit
and does not understand the hesitation by the members from
Fairbanks to support the regulatory component that everyone else
is supposed to be under.
CO-CHAIR GATTO commented that the Railbelt up to a certain level
receives the same "ENSTAR" gas and that Fairbanks receives gas
that is trucked up from the Matanuska-Susitna Valley where it is
liquefied and bottled, and Southeast Alaska receives hydropower.
There are lots of places getting a unique benefit, he said.
3:17:18 PM
REPRESENTATIVE SEATON noted that Anchorage is a huge market with
a big utility that serves many things. Putting a small village
under the RCA process would result in no gas being developed, he
opined, because the RCA process requires lawyers and such. A
lower production tax treatment might not be passed along to
consumers because instead the lower tax is what is necessary
just to get marginally economic gas produced for a small western
village that does not have hundreds of commercial buildings to
use the gas. The lower tax may be just the thing to encourage
development throughout state and bring gas to villages, he
submitted.
3:19:39 PM
REPRESENTATIVE MIKE KELLY, Alaska State Legislature, recalled
his many years spent in private business under regulation. He
said FNG is a regulated utility and that the RCA did not come
into existence to take care of the Cook Inlet situation. All
utilities, whether garbage or others, are regulated by statute
if they are of a certain size, unless the utility's consumers
vote to take them out or if the utility is not regulated
relative to rates. The RCA gave FNG the rate exemption because
RCA only regulates rates in a monopoly situation; competition
replaces the need for regulation. He said FNG faces stiff
competition from Usibelli Coal Mine, Inc. and others. If RCA
observes that FNG is overcharging, it will immediately regulate
the utility, he said.
3:23:31 PM
REPRESENTATIVE FAIRCLOUGH pointed out that two answers had been
given to her question regarding whether a statute change would
be required. One answer was that a letter would need to be
submitted and the other was that state statute would have to be
changed. She asked Representative Kelly's perspective on what
would be required.
REPRESENTATIVE KELLY said he is not an expert witness, but that
he understood FNG petitioned for, and received, the permission
not to be regulated and that there was an RCA proceeding wherein
that occurred.
3:24:26 PM
REPRESENTATIVE FAIRCLOUGH reiterated her question on whether it
would requires a state statute change or generation of a letter
and asked for the attorney's opinion.
COMMISSIONER GALVIN explained that Nan Thompson is a unit
manager [not an attorney] within DNR's Division of Oil & Gas,
and that she was formerly the chair of RCA. He agreed that
advice from the Department of Law (DOL) should be sought in
order to decide what is regulatory jurisdiction.
3:25:02 PM
REPRESENTATIVE FAIRCLOUGH inquired why Anchorage is under RCA
regulation since it has competition.
REPRESENTATIVE KELLY said Anchorage has no competition in its
electric.
COMMISSIONER GALVIN stated that the purpose of bringing forth
[Amendment 38] was as a solution to individual projects - some
that would result in the gas going to a utility and some that
would result in the gas being consumed by the producer for other
purposes. If a statement is made that this only comes into
account when the gas goes to a regulated utility serving
consumers, then it would cut off a lot of folks that this was
intended to affect.
3:27:04 PM
REPRESENTATIVE FAIRCLOUGH stated that she wanted to "vote on the
amendment." She said, "RCA has criteria that would protect
people not to be under their jurisdiction if they didn't qualify
if Fairbanks came on because there is not a competitor."
Putting it under RCA would still take care of Representative
Seaton's issue about small people receiving those savings. She
was "unconvinced that RCA is the bad guy if you are already
exempted out for all of those other reasons that are
applicable."
CO-CHAIR JOHNSON withdrew his objection to [Conceptual Amendment
4 to Amendment 38].
REPRESENTATIVE SEATON objected to [Conceptual Amendment 4 to
Amendment 38].
3:28:15 PM
REPRESENTATIVE GUTTENBERG spoke to the objection. He said that
FNG is covered by RCA and is regulated, but that it is not
economically regulated. The amendment is moot, he argued,
because it is already done.
REPRESENTATIVE FAIRCLOUGH responded, "If you'd like me to vote
yes on this bill and it's moot, then pass the conceptual
amendment."
REPRESENTATIVE SEATON disagreed that it is moot. It might be
moot for Fairbanks, he said, but it is not moot for any of the
individual entities or the small folks. He understood the
conceptual amendment to mean that the same break given to Cook
Inlet would only be given to other gas developments if they are
regulated by RCA. If that is the case, he said, a development
could not go forward with the 5 percent tax unless regulated by
the RCA and would instead be subject to the full PPT.
3:30:12 PM
REPRESENTATIVE FAIRCLOUGH submitted that:
RCA has current jurisdiction under x, y and z
communities in the state of Alaska, and they have
criteria as was laid out by Representative Kelly.
That criteria says whether they are regulated or not
by the utility. My point is if they fall under the
criteria that is in existence to have to have an
economic dialogue with the RCA and they don't meet the
criteria, then they fall under it.
REPRESENTATIVE SEATON asked if he was correct in understanding
that:
[Conceptual Amendment 4 to Amendment 38] says that if
the RCA regulates them, then if they fall under the
RCA criteria the RCA will have jurisdiction and the
tax will be at the Cook Inlet rate. If they do not
fall under the criteria for RCA they can still get the
Cook Inlet tax rate for that development.
The committee took an at-ease from 3:31 p.m. to 3:55 p.m.
3:55:04 PM
The committee discussed procedures for dealing with complex
amendments.
3:56:21 PM
REPRESENTATIVE FAIRCLOUGH distributed written copies of
Conceptual Amendment 4 to Amendment 38 which read [original
punctuation provided]:
The RCA shall determine if an entity that receives gas
that is taxed, for production tax purposes, under the
provisions of 43.55.011(p) falls under their
jurisdiction.
REPRESENTATIVE FAIRCLOUGH proffered that the committee's intent
is to pass along the savings to those who fall under the
jurisdiction of RCA. Fairbanks currently has an economic
exemption that cannot be changed without the legislature going
back into the statutes, she said. She supported distributing
this type of resource state-wide. If RCA determined the credit,
the issue could then be raised to the legislature. This would
ensure that any economic benefits would be passed on to the
consumer, she opined.
3:58:07 PM
COMMISSIONER GALVIN pointed out that "credit" is a misstatement
because it is a "tax benefit" - the rate is what is being
changed, it is not a new credit. It is important to recognize
that the entity receiving the tax benefit would be the producer,
not FNG or the utility or regulated entity. He said he is
therefore unsure how to tie it together.
REPRESENTATIVE FAIRCLOUGH requested that Conceptual Amendment 4
to Amendment 38 be set aside so she could work with the
administration.
REPRESENTATIVE GUTTENBERG withdrew Amendment 39.
REPRESENTATIVE GUTTENBERG withdrew Amendment 40.
4:01:11 PM
REPRESENTATIVE GUTTENBERG moved that the committee adopt
Amendment 41, labeled 25-GH0014\L.55, Kane/Bullock, 11/3/07,
which read [original punctuation provided]:
Page 17, following line 3:
Insert a new bill section to read:
"* Sec. 23. AS 43.55.023(b) is amended to read:
(b) A producer or explorer may elect to take a
tax credit in the amount of 25 [20] percent of a
carried-forward annual loss. A credit under this
subsection may be applied against a tax levied by [DUE
UNDER] AS 43.55.011(e). For purposes of this
subsection, except as limited by AS 43.55.160(h), a
carried-forward annual loss is the amount of a
producer's or explorer's adjusted lease expenditures
under AS 43.55.165 and 43.55.170 for a previous
calendar year that was not deductible in calculating
production tax values for that calendar year under
AS 43.55.160. However, a carried-forward annual loss
may not include an adjusted lease expenditure to
explore for, develop, or produce oil or gas deposits
located within a unit or nonunitized reservoir subject
to AS 43.55.011(f) [AS 43.55.160(b) AND (e)]."
Renumber the following bill sections accordingly.
Page 25, following line 13:
Insert new bill sections to read:
"* Sec. 33. AS 43.55.160(e) is repealed and
reenacted to read:
(e) Any adjusted lease expenditures under
AS 43.55.165 and 43.55.170 that (1) would otherwise be
deductible by a producer under (a)(1)(A) of this
section in calculating a production tax value under
(a)(1) of this section of oil and gas produced from a
lease or property for a calendar year but whose
deduction would cause the production tax value to be
less than zero; (2) are the producer's costs incurred
during the calendar year of exploring for, developing,
or producing oil or gas deposits located within the
producer's leases or properties in the state outside
the Cook Inlet sedimentary basin that do not produce
oil or gas during the calendar year; or (3) are the
producer's costs incurred during the calendar year of
exploring for oil or gas deposits located within land
in the state outside the Cook Inlet sedimentary basin
in which the producer does not own an operating right,
operating interest, or working interest must be
allocated to, and deducted in calculating the
producer's production tax value of the oil and gas
produced during the calendar year from, the producer's
other leases or properties, in accordance with the
provisions of (f) and (g) of this section, to the
extent consistent with (b) of this section. Other than
for a lease or property subject to AS 43.55.011(f) and
except as otherwise provided under (h) of this
section, any remaining adjusted lease expenditures in
excess of what may be deducted consistent with (b) of
this section may be used to establish a carried-
forward annual loss under AS 43.55.023(b).
* Sec. 34. AS 43.55.160 is amended by adding new
subsections to read:
(f) This subsection applies to adjusted lease
expenditures required to be allocated under (e) of
this section that are the producer's costs of
exploring for, developing, or producing oil or gas
deposits located within the producer's leases or
properties that include land north of 68 degrees North
latitude or are the producer's costs of exploring for
oil or gas deposits located within land in the state
north of 68 degrees North latitude in which the
producer does not own an operating right, operating
interest, or working interest. To the extent
consistent with (b) of this section, adjusted lease
expenditures under this subsection that are
(1) not costs of exploring for, developing,
or producing oil or gas deposits located within a
lease or property subject to AS 43.55.011(f) must be
allocated to one or more leases or properties from
which the producer produces oil or gas during the
calendar year that include land north of 68 degrees
North latitude;
(2) costs of exploring for, developing, or
producing oil or gas deposits located within a lease
or property subject to AS 43.55.011(f) must be
allocated to one or more other leases or properties
from which the producer produces oil or gas during the
calendar year that are within the same unit or overlie
the same nonunitized reservoir.
(g) This subsection applies to adjusted lease
expenditures required to be allocated under (e) of
this section that are the producer's costs of
exploring for, developing, or producing oil or gas
deposits located within the producer's leases or
properties outside the Cook Inlet sedimentary basin
and no part of which is north of 68 degrees North
latitude or are the producer's costs of exploring for
oil or gas deposits located within land in the state
outside the Cook Inlet sedimentary basin and not north
of 68 degrees North latitude in which the producer
does not own an operating right, operating interest,
or working interest. To the extent consistent with (b)
of this section, adjusted lease expenditures under
this subsection must be allocated to one or more
leases or properties that are outside the Cook Inlet
sedimentary basin and no part of which is north of 68
degrees North latitude from which the producer
produces oil or gas during the calendar year.
(h) For purposes of this section, Cook Inlet
excess adjusted lease expenditures for a calendar year
are determined by adding (1) the adjusted lease
expenditures that would otherwise be deductible by a
producer in calculating production tax values under
(a)(2) or (3) of this section for the calendar year
but whose deduction would cause a production tax value
to be less than zero; (2) the adjusted lease
expenditures that are the producer's costs incurred
during the calendar year of exploring for, developing,
or producing oil or gas deposits located within the
producer's leases or properties in the Cook Inlet
sedimentary basin from which no oil or gas is produced
during the calendar year; and (3) the adjusted lease
expenditures that are the producer's costs incurred
during the calendar year of exploring for oil or gas
deposits located within land in the Cook Inlet
sedimentary basin in which the producer does not own
an operating right, operating interest, or working
interest. For a calendar year for which a limitation
under AS 43.55.011(j) or (k) on the tax levied by
AS 43.55.011(e) would have the effect of reducing the
producer's tax for oil or gas produced from one or
more leases or properties in the Cook Inlet
sedimentary basin below the amount of the tax that
would be levied in the absence of that limitation, the
producer shall perform the calculations set out in (i)
of this section. The amount, if any, calculated under
(i)(6) of this section is the only amount of Cook
Inlet excess adjusted lease expenditures that may be
used to establish a carried-forward annual loss under
AS 43.55.023(b).
(i) A producer subject to (h) of this section
shall perform the following calculations:
(1) calculate the total amount of Cook
Inlet excess adjusted lease expenditures;
(2) multiply that total amount by 25
percent;
(3) calculate for each lease or property
the amount by which a limitation under AS 43.55.011(j)
or (k) would reduce the amount of the producer's tax
levied by AS 43.55.011(e);
(4) calculate the total of the reductions
calculated under (3) of this subsection for all
affected leases or properties;
(5) if the amount calculated under (2) of
this subsection is greater than the amount calculated
under (4) of this subsection, subtract the latter from
the former; and
(6) multiply the amount, if any, calculated
under (5) of this subsection by four."
Renumber the following bill sections accordingly.
Renumber internal references to bill sections in
accordance with this amendment in a way that makes
secs. 23, 33, and 34 effective January 1, 2008.
Insert references to secs. 33 and 34 in (b) of the
applicability section. Insert references to secs. 23,
33, and 34 in (1)(B) of the retroactivity of
regulations section (sec. 41). Below are all internal
bill section references in this bill:
Page 31, lines 25, 27, 29, 30, and 31
Page 32, lines 1, 3, 13, 16, 19, and 31
Page 33, lines 2, 19 - 20, 21, and 22
4:01:21 PM
CO-CHAIR JOHNSON objected to Amendment 41.
COMMISSIONER GALVIN explained that Amendment 41 would replace
language that is in the original ACES bill [HB 2001, as
introduced]. There are two different "clean ups", he said. One
is creating equivalent value for entities with net operating
losses (NOLs) due to having exploration expenses but no
production revenue against which to charge those expenses.
Under PPT, a 20 percent rate is provided for a credit carry
forward for those explorers experiencing net operating losses.
However, a producer having these same expenditures is able to
deduct them from its tax base at the rate of 22.5 percent. The
amendment would replace that 20 percent with 25 percent. While
the use of a 25 percent rate might be premature and could be the
subject of an amendment, he said, the idea is to make the rates
equivalent.
4:03:29 PM
REPRESENTATIVE ROSES said he thought this issue had been taken
care of yesterday by [adoption of] Amendment 3 that set [the NOL
credit rate] at the base tax rate so that it was self adjusting.
In response to Co-Chair Gatto, he said it is correct that the
NOL credit would be the same as the base [tax] rate.
REPRESENTATIVE SEATON agreed that Amendment 3 took care of this
[through the addition] of Section 23. He did not know whether
Sections 33 and 34 in Amendment 41 had also been addressed by
Amendment 3.
REPRESENTATIVE GUTTENBERG requested that Amendment 41 be set
aside so this could be double-checked.
4:05:11 PM
REPRESENTATIVE GUTTENBERG moved that the committee adopt
Amendment 42, labeled 25-GH0014\L.50, Bullard/Bullock, 11/3/07,
which read [original punctuation provided]:
Page 18, following line 25:
Insert new bill sections to read:
"* Sec. 26. AS 43.55.025(a) is amended to read:
(a) Subject to the terms and conditions of this
section, a credit against the production tax levied by
[DUE UNDER] AS 43.55.011(e) [OR (f)] is allowed for
exploration expenditures that qualify under (b) of
this section in an amount equal to one of the
following:
(1) 20 percent of the total exploration
expenditures that qualify only under (b) and (c) of
this section;
(2) 20 percent of the total exploration
expenditures [FOR WORK PERFORMED BEFORE JULY 1, 2007,
AND] that qualify only under (b) and (d) of this
section;
(3) 40 percent of the total exploration
expenditures that qualify under (b), (c), and (d) of
this section; or
(4) 40 percent of the total exploration
expenditures that qualify only under (b) and (e) of
this section.
* Sec. 27. AS 43.55.025(b) is amended to read:
(b) To qualify for the production tax credit
under (a) of this section, an exploration expenditure
must be incurred for work performed [ON OR] after
December 31, 2007 [JULY 1, 2003], and before July 1,
2016, [EXCEPT THAT AN EXPLORATION EXPENDITURE FOR A
COOK INLET PROSPECT MUST BE INCURRED FOR WORK
PERFORMED ON OR AFTER JULY 1, 2005,] and
(1) may be for seismic or other geophysical
exploration costs not connected with a specific well;
(2) if for an exploration well,
(A) must be incurred by an explorer that
holds an interest in the exploration well for which
the production tax credit is claimed;
(B) may be for either a [AN OIL OR GAS
DISCOVERY] well that encounters an oil or gas deposit
or a dry hole; [AND]
(C) must be for a well that has been
completed or abandoned at the time the explorer claims
the tax credit under (f) of this section; and
(D) must be for goods, services, or rentals
of personal property reasonably required for the
surface preparation, drilling, casing, cementing, and
logging of an exploration well, and, in the case of a
dry hole, for the expenses required for abandonment if
the well is abandoned within 18 months after the date
the well was spudded;
(3) may not be for testing, stimulation, or
completion costs; administration, supervision,
engineering, or lease operating costs; geological or
management costs; community relations or environmental
costs; bonuses, taxes, or other payments to
governments related to the well; costs arising from
gross negligence or violation of health, safety, or
environmental statutes or regulations; or other costs
that are generally recognized as indirect costs or
financing costs; and
(4) may not be incurred for an exploration
well or seismic exploration that is included in a plan
of exploration or a plan of development for any unit
on May 13, 2003.
* Sec. 28. AS 43.55.025(c) is repealed and
reenacted to read:
(c) To be eligible for the 20 percent production
tax credit authorized by (a)(1) of this section or the
40 percent production tax credit authorized by (a)(3)
of this section, exploration expenditures must
(1) qualify under (b) of this section; and
(2) be for an exploration well, subject to
the following:
(A) before spudding the well, (i) the
explorer shall submit to the commissioner of natural
resources the information necessary to determine
whether the geological objective of the well is a
potential oil or gas trap that is distinctly separate
from any trap that has been tested by a preexisting
well; and (ii) the commissioner of natural resources
must make an affirmative determination on that
question; the commissioner of natural resources shall
decide whether to make that determination within 60
days after receiving all the necessary information
from the explorer and based on the information
received and on other information the commissioner of
natural resources may consider relevant;
(B) for an exploration well other than a
well to explore a Cook Inlet prospect, the well must
be located and drilled in such a manner that the
bottom hole is located not less than three miles away
from the bottom hole of a preexisting well drilled for
oil or gas, irrespective of whether the preexisting
well has been completed, suspended, or abandoned;
(C) after completion or abandonment of the
exploration well, the commissioner of natural
resources must determine that the well adequately
achieved the explorer's stated geological objective.
* Sec. 29. AS 43.55.025(f) is amended to read:
(f) For a production tax credit under this
section,
(1) an explorer shall, in a form prescribed
by the department and, except for a credit under (l)
of this section, within six months of the completion
of the exploration activity, claim the credit and
submit information sufficient to demonstrate to the
department's satisfaction that the claimed exploration
expenditures qualify under this section;
(2) an explorer shall agree, in writing,
(A) to notify the Department of Natural
Resources, within 30 days after completion of seismic
or geophysical data processing, completion of [A] well
drilling, or filing of a claim for credit, whichever
is the latest, for which exploration costs are
claimed, of the date of completion and submit a report
to that department describing the processing sequence
and providing a list of data sets available; [IF,
UNDER (c)(2)(B) OF THIS SECTION, AN EXPLORER SUBMITS A
CLAIM FOR A CREDIT FOR EXPENDITURES FOR AN EXPLORATION
WELL THAT IS LOCATED WITHIN THREE MILES OF A WELL
ALREADY DRILLED FOR OIL AND GAS, IN ADDITION TO THE
SUBMISSIONS REQUIRED UNDER (1) OF THIS SUBSECTION, THE
EXPLORER SHALL SUBMIT THE INFORMATION NECESSARY FOR
THE COMMISSIONER OF NATURAL RESOURCES TO EVALUATE THE
VALIDITY OF THE EXPLORER'S CLAIM THAT THE WELL IS
DIRECTED AT A DISTINCTLY SEPARATE EXPLORATION TARGET,
AND THE COMMISSIONER OF NATURAL RESOURCES SHALL, UPON
RECEIPT OF ALL EVIDENCE SUFFICIENT FOR THE
COMMISSIONER TO EVALUATE THE EXPLORER'S CLAIM, MAKE
THAT DETERMINATION WITHIN 60 DAYS;]
(B) to provide to the Department of Natural
Resources, within 30 days after the date of a request,
unless a longer period is provided by the Department
of Natural Resources, specific data sets, ancillary
data, and reports identified in (A) of this paragraph;
in this subparagraph,
(i) a seismic or geophysical data set
includes the data for an entire seismic survey,
irrespective of whether the survey area covers
nonstate land in addition to state land or land in a
unit in addition to land outside a unit;
(ii) well data include all derivative
products, results, and copies of data collected and
data analyses for the well; well logs; sample
analyses; geophysical and velocity data including
vertical seismic profiles and check shot surveys; and
tangible material including, for each whole core
collected, a lengthwise cut slab that is at least 1/3
of the whole core volume, and representative samples,
as specified by the Department of Natural Resources,
of other gaseous, liquid, or solid material collected
from drilling or testing the well;
(C) that, notwithstanding any provision of
AS 38, information provided under this paragraph will
be held confidential by the Department of Natural
Resources
(i) in the case of well data, until the
expiration of the 24-month period of confidentiality
described in AS 31.05.035(c), without extension, after
which the Department of Natural Resources [FOR 10
YEARS FOLLOWING THE COMPLETION DATE, AT WHICH TIME
THAT DEPARTMENT] will release the information after 30
days' public notice;
(ii) in the case of seismic or other
geophysical data, other than seismic data acquired by
seismic exploration subject to (l) of this section,
for 10 years following the completion date, at which
time the Department of Natural Resources will release
the information after 30 days' public notice;
(iii) in the case of seismic data obtained
by seismic exploration subject to (l) of this section,
only until the expiration of 30 days' public notice
issued on or after the date the production tax credit
certificates are issued under (5) of this subsection;
and
(D) that, in the case of well data, the
explorer will not make a request under AS 31.05.035(c)
that the commissioner of natural resources keep the
data confidential for longer than the 24-month period
of confidentiality described in AS 31.05.035(c);
(3) if more than one explorer holds an
interest in a well or seismic exploration,
(A) each explorer may claim an amount of
credit that is proportional to the explorer's cost
incurred;
(B) in the case of a well, each explorer
holding an interest in the well shall agree, in
writing, that the explorer will not make the request
described in (2)(D) of this subsection;
(4) the department may exercise the full
extent of its powers as though the explorer were a
taxpayer under this title, in order to verify that the
claimed expenditures are qualified exploration
expenditures under this section; and
(5) if the department is satisfied that the
explorer's claimed expenditures are qualified under
this section and that all data required to be
submitted under this section have been submitted, the
department shall issue to the explorer two [A]
production tax credit certificates, each [CERTIFICATE]
for half of the amount of the credit to be allowed
against production taxes levied by AS 43.55.011(e);
the credit shown on one of the two certificates is
available for immediate use; the credit shown on the
second of the two certificates may not be applied
against a tax for a calendar year earlier than the
calendar year following the calendar year in which the
certificate is issued, and the certificate must
contain a conspicuous statement to that effect;
notwithstanding any contrary provision of AS 38,
AS 40.25.100, or AS 43.05.230, the following
information is not confidential:
(A) the explorer's name;
(B) the date of the application;
(C) the location of the well or seismic
exploration;
(D) the date of the department's issuance
of the certificate; and
(E) the date on which the information
required to be submitted under this section will be
released [DUE UNDER AS 43.55.011(e) OR (f)].
* Sec. 30. AS 43.55.025(g) is amended to read:
(g) An explorer, other than an entity that is
exempt from taxation under this chapter, may transfer,
convey, or sell its production tax credit certificate
to any person, and any person who receives a
production tax credit certificate may also transfer,
convey, or sell the certificate.
* Sec. 31. AS 43.55.025(h) is amended to read:
(h) A producer that purchases a production tax
credit certificate may apply the credits against its
production tax liability under AS 43.55.011(e) [OR
(f)]. Regardless of the price the producer paid for
the certificate, the producer may receive a credit
against its production tax liability for the full
amount of the credit, but for not more than the amount
for which the certificate is issued. A production tax
credit allowed under this section may not be applied
more than once.
* Sec. 32. AS 43.55.025(i) is repealed and
reenacted to read:
(i) For a production tax credit under this
section,
(1) a credit may not be applied to reduce a
taxpayer's tax liability under AS 43.55.011(e) below
zero for a calendar year; and
(2) an amount of the production tax credit
in excess of the amount that may be applied for a
calendar year under this subsection may be carried
forward and applied against the taxpayer's tax
liability under AS 43.55.011(e) in one or more later
calendar years.
* Sec. 33. AS 43.55.025(k) is amended by adding a
new paragraph to read:
(4) "preexisting well" means a well that
was spudded more than 540 days but less than 35 years
before the date on which the exploration well to which
it is compared is spudded.
* Sec. 34. AS 43.55.025 is amended by adding a new
subsection to read:
(l) Subject to the terms and conditions of this
section, if a claim is filed under (f)(1) of this
section before January 1, 2016, a credit against the
production tax levied by AS 43.55.011(e) is allowed in
an amount equal to five percent of an eligible
expenditure under this subsection incurred for seismic
exploration performed before July 1, 2003. To be
eligible under this subsection, an expenditure must
(1) have been for seismic exploration that
(A) obtained data that the commissioner of
natural resources considers to be in the best interest
of the state to acquire for public distribution; and
(B) was conducted outside the boundaries of
a production unit; however, the amount of the
expenditure that is otherwise eligible under this
section is reduced proportionately by the portion of
the seismic exploration activity that crossed into a
production unit; and
(2) qualify under (b)(3) of this section."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "32 - 34, and 37"
Insert "41 - 43, and 46"
Page 31, line 27:
Delete "31, and 38"
Insert "31, 32, 34, 40, and 47"
Page 31, line 29:
Delete "Sections 26 and 27"
Insert "Sections 35 and 36"
Page 31, line 30:
Delete "sec. 26"
Insert "sec. 35"
Page 31, line 31:
Delete "sec. 27"
Insert "sec. 36"
Page 31, following line 31:
Insert a new subsection to read:
"(d) Sections 26 - 29 and 33 of this Act apply
to exploration expenditures incurred for work
performed after December 31, 2007, that are the basis
of tax credits that may be claimed against taxes
levied for oil and gas produced after December 31,
2007."
Reletter the following subsection accordingly.
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 38"
Page 32, line 3:
Delete "29"
Insert "38"
Page 32, line 31:
Delete "32 - 34, and 37"
Insert "41 - 43, and 46"
Page 33, line 2:
Delete "26, 27, 31, and 38"
Insert "26 - 29, 31 - 34, 35, 36, 40, and 47"
Page 33, line 19, following ".":
Insert "(a) Section 30 of this Act is
retroactive to July 1, 2003.
(b)"
Page 33, line 20:
Delete "32 - 34, and 37"
Insert "41 - 43, and 46"
Page 33, line 21:
Delete "26, 27, 31, and 38"
Insert "26 - 29, 31 - 34, 35, 36, 40, and 47"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 53"
CO-CHAIR JOHNSON objected to Amendment 42.
REPRESENTATIVE GUTTENBERG said the subject of Amendment 42 is
exploration tax credits.
4:05:23 PM
REPRESENTATIVE SEATON pointed out that both Amendment 6 and
Amendment 42 deal with the same thing, although they may be
slightly different.
The committee discussed which of the two amendments should be
considered.
REPRESENTATIVE GUTTENBERG withdrew Amendment 42.
4:07:15 PM
REPRESENTATIVE WILSON moved that the committee adopt Amendment
6, labeled 25-GH0014\L.76, Bullard/Bullock, 11/4/07, which read
[original punctuation provided]:
Page 18, following line 25:
Insert new bill sections to read:
"* Sec. 26. AS 43.55.025(a) is amended to read:
(a) Subject to the terms and conditions of this
section, a credit against the production tax levied by
[DUE UNDER] AS 43.55.011(e) [OR (f)] is allowed for
exploration expenditures that qualify under (b) of
this section in an amount equal to one of the
following:
(1) 30 [20] percent of the total
exploration expenditures that qualify only under (b)
and (c) of this section;
(2) 30 [20] PERCENT of the total
exploration expenditures [FOR WORK PERFORMED BEFORE
JULY 1, 2007, AND] that qualify only under (b) and (d)
of this section;
(3) 40 percent of the total exploration
expenditures that qualify under (b), (c), and (d) of
this section; or
(4) 40 percent of the total exploration
expenditures that qualify only under (b) and (e) of
this section.
* Sec. 27. AS 43.55.025(b) is amended to read:
(b) To qualify for the production tax credit
under (a) of this section, an exploration expenditure
must be incurred for work performed [ON OR] after
December 31, 2007 [JULY 1, 2003], and before July 1,
2016, [EXCEPT THAT AN EXPLORATION EXPENDITURE FOR A
COOK INLET PROSPECT MUST BE INCURRED FOR WORK
PERFORMED ON OR AFTER JULY 1, 2005,] and
(1) may be for seismic or other geophysical
exploration costs not connected with a specific well;
(2) if for an exploration well,
(A) must be incurred by an explorer that
holds an interest in the exploration well for which
the production tax credit is claimed;
(B) may be for either a [AN OIL OR GAS
DISCOVERY] well that encounters an oil or gas deposit
or a dry hole; [AND]
(C) must be for a well that has been
completed, suspended, or abandoned under AS 31.05.030
at the time the explorer claims the tax credit under
(f) of this section; and
(D) must be for goods, services, or rentals
of personal property reasonably required for the
surface preparation, drilling, casing, cementing, and
logging of an exploration well, and, in the case of a
dry hole, for the expenses required for abandonment if
the well is abandoned within 18 months after the date
the well was spudded;
(3) may not be for [TESTING, STIMULATION,
OR COMPLETION COSTS;] administration, supervision,
engineering, or lease operating costs; geological or
management costs; community relations or environmental
costs; bonuses, taxes, or other payments to
governments related to the well; costs arising from
gross negligence or violation of health, safety, or
environmental statutes or regulations; or other costs
that are generally recognized as indirect costs or
financing costs; and
(4) may not be incurred for an exploration
well or seismic exploration that is included in a plan
of exploration or a plan of development for any unit
on May 13, 2003.
* Sec. 28. AS 43.55.025(c) is repealed and
reenacted to read:
(c) To be eligible for the 30 percent production
tax credit authorized by (a)(1) of this section or the
40 percent production tax credit authorized by (a)(3)
of this section, exploration expenditures must
(1) qualify under (b) of this section; and
(2) be for an exploration well, subject to
the following:
(A) before spudding the well, (i) the
explorer shall submit to the commissioner of natural
resources the information necessary to determine
whether the geological objective of the well is a
potential oil or gas trap that is distinctly separate
from any trap that has been tested by a preexisting
well; and (ii) the commissioner of natural resources
must make an affirmative determination on that
question; the commissioner of natural resources shall
decide whether to make that determination within 60
days after receiving all the necessary information
from the explorer and based on the information
received and on other information the commissioner of
natural resources may consider relevant;
(B) for an exploration well other than a
well to explore a Cook Inlet prospect, the well must
be located and drilled in such a manner that the
bottom hole is located not less than three miles away
from the bottom hole of a preexisting well drilled for
oil or gas, irrespective of whether the preexisting
well has been completed, suspended, or abandoned;
(C) after completion, abandonment, or
suspension under AS 31.05.030 of the exploration well,
the commissioner of natural resources must determine
that the well adequately achieved the explorer's
stated geological objective.
* Sec. 29. AS 43.55.025(f) is amended to read:
(f) For a production tax credit under this
section,
(1) an explorer shall, in a form prescribed
by the department and, except for a credit under (l)
of this section, within six months of the completion
of the exploration activity, claim the credit and
submit information sufficient to demonstrate to the
department's satisfaction that the claimed exploration
expenditures qualify under this section;
(2) an explorer shall agree, in writing,
(A) to notify the Department of Natural
Resources, within 30 days after completion of seismic
or geophysical data processing, completion of [A] well
drilling, or filing of a claim for credit, whichever
is the latest, for which exploration costs are
claimed, of the date of completion and submit a report
to that department describing the processing sequence
and providing a list of data sets available; [IF,
UNDER (c)(2)(B) OF THIS SECTION, AN EXPLORER SUBMITS A
CLAIM FOR A CREDIT FOR EXPENDITURES FOR AN EXPLORATION
WELL THAT IS LOCATED WITHIN THREE MILES OF A WELL
ALREADY DRILLED FOR OIL AND GAS, IN ADDITION TO THE
SUBMISSIONS REQUIRED UNDER (1) OF THIS SUBSECTION, THE
EXPLORER SHALL SUBMIT THE INFORMATION NECESSARY FOR
THE COMMISSIONER OF NATURAL RESOURCES TO EVALUATE THE
VALIDITY OF THE EXPLORER'S CLAIM THAT THE WELL IS
DIRECTED AT A DISTINCTLY SEPARATE EXPLORATION TARGET,
AND THE COMMISSIONER OF NATURAL RESOURCES SHALL, UPON
RECEIPT OF ALL EVIDENCE SUFFICIENT FOR THE
COMMISSIONER TO EVALUATE THE EXPLORER'S CLAIM, MAKE
THAT DETERMINATION WITHIN 60 DAYS;]
(B) to provide to the Department of Natural
Resources, within 30 days after the date of a request,
unless a longer period is provided by the Department
of Natural Resources, specific data sets, ancillary
data, and reports identified in (A) of this paragraph;
in this subparagraph,
(i) a seismic or geophysical data set
includes the data for an entire seismic survey,
irrespective of whether the survey area covers
nonstate land in addition to state land or land in a
unit in addition to land outside a unit;
(ii) well data include all derivative
products, results, and copies of data collected and
data analyses for the well, including well logs;
sample analyses; geophysical and velocity data
including vertical seismic profiles and check shot
surveys; and tangible material including, for each
whole core collected, a lengthwise cut slab that is at
least 1/3 of the whole core volume, and representative
samples, as specified by the Department of Natural
Resources, of other gaseous, liquid, or solid material
collected from drilling or testing the well;
(C) that, notwithstanding any provision of
AS 38, information provided under this paragraph will
be held confidential by the Department of Natural
Resources
(i) in the case of well data, until the
expiration of the 24-month period of confidentiality
described in AS 31.05.035(c), the Department of
Natural Resources [FOR 10 YEARS FOLLOWING THE
COMPLETION DATE, AT WHICH TIME THAT DEPARTMENT] will
release the information after 30 days' public notice,
unless in the discretion of the commissioner of
natural resources, it is necessary to protect
information relating to the valuation of unleased
acreage in the same vicinity;
(ii) in the case of seismic or other
geophysical data, other than seismic data acquired by
seismic exploration subject to (l) of this section,
for 10 years following the completion date, at which
time the Department of Natural Resources will release
the information after 30 days' public notice;
(iii) in the case of seismic data obtained
by seismic exploration subject to (l) of this section,
only until the expiration of 30 days' public notice
issued on or after the date the production tax credit
certificates are issued under (5) of this subsection;
and
(D) that, in the case of well data, the
explorer will not make a request under AS 31.05.035(c)
that the commissioner of natural resources keep the
data confidential for longer than the 24-month period
of confidentiality described in AS 31.05.035(c);
(3) if more than one explorer holds an
interest in a well or seismic exploration,
(A) each explorer may claim an amount of
credit that is proportional to the explorer's cost
incurred;
(B) in the case of a well, each explorer
holding an interest in the well shall agree, in
writing, that the explorer will not make the request
described in (2)(D) of this subsection;
(4) the department may exercise the full
extent of its powers as though the explorer were a
taxpayer under this title, in order to verify that the
claimed expenditures are qualified exploration
expenditures under this section; and
(5) if the department is satisfied that the
explorer's claimed expenditures are qualified under
this section and that all data required to be
submitted under this section have been submitted, the
department shall issue to the explorer a production
tax credit certificate for the amount of credit to be
allowed against production taxes levied by
AS 43.55.011(e); the credit is available for immediate
use; notwithstanding any contrary provision of AS 38,
AS 40.25.100, or AS 43.05.230, the following
information is not confidential:
(A) the explorer's name;
(B) the date of the application;
(C) the location of the well or seismic
exploration;
(D) the date of the department's issuance
of the certificate; and
(E) the date on which the information
required to be submitted under this section will be
released [DUE UNDER AS 43.55.011(e) OR (f)].
* Sec. 30. AS 43.55.025(g) is amended to read:
(g) An explorer, other than an entity that is
exempt from taxation under this chapter, may transfer,
convey, or sell its production tax credit certificate
to any person, and any person who receives a
production tax credit certificate may also transfer,
convey, or sell the certificate.
* Sec. 31. AS 43.55.025(h) is amended to read:
(h) A producer that purchases a production tax
credit certificate may apply the credits against its
production tax liability under AS 43.55.011(e) [OR
(f)]. Regardless of the price the producer paid for
the certificate, the producer may receive a credit
against its production tax liability for the full
amount of the credit, but for not more than the amount
for which the certificate is issued. A production tax
credit allowed under this section may not be applied
more than once.
* Sec. 32. AS 43.55.025(i) is repealed and
reenacted to read:
(i) For a production tax credit under this
section,
(1) a credit may not be applied to reduce a
taxpayer's tax liability under AS 43.55.011(e) below
zero for a calendar year; and
(2) an amount of the production tax credit
in excess of the amount that may be applied for a
calendar year under this subsection may be carried
forward and applied against the taxpayer's tax
liability under AS 43.55.011(e) in one or more later
calendar years.
* Sec. 33. AS 43.55.025(k) is amended by adding a
new paragraph to read:
(4) "preexisting well" means a well that
was spudded more than 540 days but less than 35 years
before the date on which the exploration well to which
it is compared is spudded.
* Sec. 34. AS 43.55.025 is amended by adding a new
subsection to read:
(l) Subject to the terms and conditions of this
section, if a claim is filed under (f)(1) of this
section before January 1, 2016, a credit against the
production tax levied by AS 43.55.011(e) is allowed in
an amount equal to five percent of an eligible
expenditure under this subsection incurred for seismic
exploration performed before July 1, 2003. To be
eligible under this subsection, an expenditure must
(1) have been for seismic exploration that
(A) obtained data that the commissioner of
natural resources considers to be in the best interest
of the state to acquire for public distribution; and
(B) was conducted outside the boundaries of
a production unit; however, the amount of the
expenditure that is otherwise eligible under this
section is reduced proportionately by the portion of
the seismic exploration activity that crossed into a
production unit; and
(2) qualify under (b)(3) of this section."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "32 - 34, and 37"
Insert "41 - 43, and 46"
Page 31, line 27:
Delete "31, and 38"
Insert "31, 32, 34, 40, and 47"
Page 31, line 29:
Delete "Sections 26 and 27"
Insert "Sections 35 and 36"
Page 31, line 30:
Delete "sec. 26"
Insert "sec. 35"
Page 31, line 31:
Delete "sec. 27"
Insert "sec. 36"
Page 31, following line 31:
Insert a new subsection to read:
"(d) Sections 26 - 29 and 33 of this Act apply
to exploration expenditures incurred for work
performed after December 31, 2007, that are the basis
of tax credits that may be claimed against taxes
levied for oil and gas produced after December 31,
2007."
Reletter the following subsection accordingly.
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 38"
Page 32, line 3:
Delete "29"
Insert "38"
Page 32, line 31:
Delete "32 - 34, and 37"
Insert "41 - 43, and 46"
Page 33, line 2:
Delete "26, 27, 31, and 38"
Insert "26 - 29, 31 - 34, 35, 36, 40, and 47"
Page 33, line 19, following ".":
Insert "(a) Section 30 of this Act is
retroactive to July 1, 2003.
(b)"
Page 33, line 20:
Delete "32 - 34, and 37"
Insert "41 - 43, and 46"
Page 33, line 21:
Delete "26, 27, 31, and 38"
Insert "26 - 29, 31 - 34, 35, 36, 40, and 47"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 53"
CO-CHAIR JOHNSON objected to Amendment 6.
4:07:25 PM
REPRESENTATIVE WILSON advised that Amendment 6 would put the
Exploratory Incentive Credits (EIC) back in the way they were,
along with several other housekeeping items. She deferred to
Kevin Banks to explain the amendment.
KEVIN BANKS, Director, Central Office, Division of Oil & Gas,
Department of Natural Resources (DNR), stated that Amendment 6
would preserve the EIC's established under 43.55.025, a statute
predating the PPT. He explained that EIC's provide tax credits
for exploration activities in which wells are drilled more than
3 miles from a pre-existing well. A larger credit is offered
for wells drilled more than 25 miles away from a pre-existing
unit. Several housekeeping matters must be taken up as a result
of reinserting the "025 credits" into the ACES bill [HB 2001],
he continued. Under the existing program, a company first
drills the well, then it submits an application for a credit,
and then it waits to see whether the credit will be received.
Determination for the credit is made by DOR with advice from
DNR. Amendment 6 would provide for pre-approval so that an
applicant would be assured of receiving the credit prior to
spending any money.
MR. BANKS noted that Amendment 6 would establish a new class of
credits for seismic surveys conducted prior to July 1, 2003.
The commissioner of DNR would be able to essentially buy the
seismic information for five percent of its original cost and
then make that information available for others to use. A
public disclosure of information would be required so that DNR
and DOR could then create a database of credits that have been
offered and for what kinds of activities for which wells that
have had seismic surveys done. Subsequently, those interested
in investing in Alaska could anticipate the kind of information
that might become available to them after awhile. Requirements
would be expanded for information to be handed over to the state
under this particular set of circumstances, Mr. Banks continued.
At the moment, when a well is drilled, some well logs and chunks
of core are submitted for safekeeping to the Alaska Oil and Gas
Conservation Commission (AOGCC). [Amendment 6] would require
that the state receive an actual piece of any core taken from a
well, along with any fluids produced by the well in the course
of the exploration activity. This would be valuable in
providing the state with greater information. He said the
expansion of these requirements is because the state is, in a
sense, participating in the exploration as would another
working-interest owner that would have access to that
information. [Amendment 6 would require] that for all wells
receiving credits, the information be made public after 24
months, plus a 30-day notice, or approximately 25 months. Under
the current situation, he explained, the information for a well
drilled in the state of Alaska is submitted to the AOGCC. The
DNR gets access to any information for wells drilled on state
land. After 24 months, that information could be kept
confidential if there is unleased acreage nearby and the DNR
commissioner wished to preserve the value of the well drilling
for the applicant or the lessee or the explorer, or it could be
kept confidential if the DNR commissioner determined it is in
the state's interest because a lease sale was underway and the
state expected it could do better if the information remained
secret.
4:14:10 PM
MR. BANKS explained that DNR did not currently get access to
information on wells drilled outside of state land. For
example, the AOGCC has access to the information from wells
drilled on the National Petroleum Reserve-Alaska (NPR-A), but
DNR does not. By the same token, the DNR commissioner may also
rule on whether or not extended confidentiality can be offered
to wells drilled in the NPR-A. [Amendment 6] would require an
applicant for an EIC under the "025 program" to agree that the
[DNR] commissioner has the discretion to reveal that information
after 24 months plus 30 days notice. Other jurisdictions are
more liberal on how information is shared within their
jurisdiction, he noted, and it is DNR's view that the more
information available to other explorers, the better the state's
interests are served for encouraging new development. Mr. Banks
advised that the last [housekeeping] piece would provide that in
return for receiving [EIC] credit, the seismic information would
be made public after 10 years. There is currently no provision
for revealing seismic data to anyone and it remains confidential
forever. He said DNR acquires seismic information for its own
land, but not on land belonging to someone else.
MR. BANKS described an economic feature [in Amendment 6] related
to the credits. For wells drilled more than three miles from an
existing well, the current 20 percent credit would be increased
to 30 percent. The proposed increase is because the allowable
deductions for which the credit is received are somewhat more
limited than in PPT. This strikes a balance, he said, between
the newcomer explorer having no tax liability and the incumbent
that has the ability to cash in its qualified lease expenditures
"under the '023' or the standard PPT ACES tax credit."
4:17:30 PM
MR. BANKS detailed a second economic feature that would change
the definition of a pre-existing well. [Currently], an entity
drilling a well can receive the credit only for the first well
in its exploration program because the definition of a pre-
existing well falls into place - a second "stepout" or
"delineation" well drilled on the same prospect or near the well
just drilled falls within the three mile limit and is
disqualified from receiving a credit. To alleviate this
problem, [Amendment 6] would change the definition of a pre-
existing well from a well drilled within 150 days to a well
drilled within 540 days, he said. This would give the applicant
for the credit the opportunity to return to the exploration
prospect in the following drilling season and drill a second and
perhaps a third well depending upon the length of the winter
drilling season. Thus, the credit would be extended to more
than just one well when an applicant is proving up a prospect.
4:19:11 PM
REPRESENTATIVE FAIRCLOUGH understood that the administration's
changes from the original ACES bill [HB 2001] are as follows:
"on page 1 [lines 8 and 10 of Amendment 6], 20 percent is
changed to 30 percent; on page 2, lines 7 and 8, the word
suspended is added and a specific statute [AS 31.05.030] is
inserted." Regarding the gross negligence language added on
page 2, lines 18 and 19, she suggested that an amendment to
Amendment 6 might be made to incorporate the criminal negligence
language that Representative Seaton had come up with in previous
discussions.
MR. BANKS stated that the term suspended was added to the terms
abandoned and completed, and that the statutory reference there
is related to the definitions that are applied by the AOGCC when
information is taken on a well. These terms are needed, he
said, because a well can be drilled and then left in stasis so
that the 24 month clock does not begin. Thus, this would assure
that the clock on confidentiality is triggered when the credit
is awarded. He skipped addressing the issue of negligence
saying it should be addressed by a lawyer, but he noted
additional changes to that same paragraph on line 15, page 2.
He explained that under the existing "025 credit" an applicant
cannot deduct or include in the calculation of its credit, the
costs for testing, stimulation, or completion which are down-
hole activities in an exploration well. These costs were
excluded from the "025 credit" when it was created, he said,
even though they are part and parcel of any kind of exploration
activity. Leaving them out was inappropriate.
4:23:24 PM
MS. HOULE explained that AS 31.05.030 "is the authority for the
AOGCC to go to their regulations with our 20 AAC that talk about
the different cases of wells being suspended, completed, or
abandoned." She said the word suspended needs to be included
because it sometimes takes two seasons to drill a well and then
come back to test it, especially with NPR-A drilling.
Additionally, testing, stimulation, and completion costs should
be included because they are part of appraising an exploration
well. She said she thought that gross negligence is included
for clean air, as mentioned yesterday, but that it is mostly
included for acts in which physical injury occur because of
failure to follow safety procedures.
MR. BANKS pointed out that on page 5, line 2, language was added
that referred to the 24-month period of confidentiality governed
by [AS 31.05.035(c)], along with new language that gives the
commissioner of DNR the discretion to withhold the information
if it serves the interest of the state.
4:26:07 PM
REPRESENTATIVE GUTTENBERG inquired whether there are other
categories of wells in addition to completed, suspended, or
abandoned. For example, he had earlier heard the term
"spudded".
MS. HOULE explained that when the process of drilling begins,
the well is called "spudded".
MR. BANKS added that the expression "to spud a well" means to
begin drilling.
4:27:01 PM
REPRESENTATIVE GUTTENBERG asked whether a well drilled only 10
or 20 feet and then walked away from would be a spudded well or
an abandoned well.
MS. HOULE responded that, technically, such a well would be
spudded. To spud a well, a large diameter of pipe is used in
the first 20-80 feet, she explained. The well is then drilled
from there using smaller and smaller pipe as the drilling goes
down. In further response to Representative Guttenberg, Ms.
Houle said that what is being looked here is the three
categories that are on an AOGCC completion report. Operational
suspension is a different order and is not on the completion
report.
4:28:36 PM
MS. HOULE, in response to Representative Wilson, stated that the
language on page 2, lines 22 and 23, of Amendment 6 should say
"before or on" May 13, 2003, rather than just "on" because this
has been causing administration problems for DOR.
MR. BANKS noted that when the state of play was looked at on May
13, 2003, there were units, and there were lands that were not
in units, therefore it must go back to that point. Several
units no longer exist; drilling back into or doing seismic
across those areas that had been units would not qualify for an
"025 credit".
REPRESENTATIVE WILSON moved Amendment 1 to Amendment 6 that "on
page 2, line 22, before the word 'on', insert 'before or'".
There being no objection, Amendment 1 to Amendment 6 was passed.
4:30:46 PM
CO-CHAIR GATTO inquired how to deal with criminal negligence.
MR. BANKS said he did not know. He referred to the concept
pointed out by Ms. Houle that the kind of environmental
regulations being talked about are typically air quality and
there is an umbrella air quality standard that is imposed in the
drilling program. There are discharge permits that are made for
a drilling program and if those standards are exceeded, then
those costs could not be included in the credit.
4:32:23 PM
REPRESENTATIVE FAIRCLOUGH objected to Amendment 6, as amended.
She asked how this affected, on a cost line, the fiscal note for
this bill.
MR. BANKS responded that in the original fiscal note for ACES
[HB 2001, as introduced] in which this language appeared, it was
stated that it was indeterminate. It depends on the industry's
response to these kinds of credits and whether or not future
exploration is successful and leads to development, he said.
MS. HOULE interjected that the Division of Oil & Gas had
determined it had enough people on the "rock side" in Resource
Evaluation to help DOR with the statute.
MR. BANKS added that [DNR] has managed this program for several
years and has not had to hire an extra person.
4:33:16 PM
CO-CHAIR JOHNSON asked what the economic impact is on the
producers.
COMMISSIONER GALVIN answered that this would benefit the
industry because it would provide a greater credit than is
currently provided in statute.
CO-CHAIR JOHNSON withdrew his objection to Amendment 6.
4:33:55 PM
REPRESENTATIVE ROSES requested further clarification from Mr.
Porter.
MR. PORTER stated that DOR's projection models assumed about a
$50 million credit under "025". Because the 20 percent matches
the capex benefit, there is actually less going into that from
an effective standpoint and it is really just captured in the
capex benefit. He guessed that the total exposure of going from
20 percent to 30 percent would cause a slight shift and that his
rough guess is that the 10 percent would still be in the $10-20
million range.
4:35:00 PM
MR. PORTER, in response to Co-Chair Johnson, agreed that this
would reduce taxes on industry by $10 million.
CO-CHAIR JOHNSON remarked that this is moving in the right
direction.
4:35:13 PM
REPRESENTATIVE FAIRCLOUGH reminded the committee that taxpayers
eligible for this credit had previously testified that they did
not think the credit would be beneficial to the state in the way
that the state is presenting it. She said she did not believe
that any of the taxpayers had stated that they wanted this
language to be included.
CO-CHAIR GATTO inquired whether the credit is optional.
MR. PORTER confirmed that the credit is optional and a taxpayer
could choose not to take it. He said he had been concerned
about the requirement for giving up data in two years because it
is very harsh for an explorer in a extremely remote area.
However, he commented, it is now better than before because the
current amendment would allow DNR to keep the information
confidential in those circumstances where an explorer's
surrounding acreage is not fully protected.
4:37:11 PM
MR. BANKS pointed out that Mr. Porter is describing the
provisions on page 5, line 7, of Amendment 6. He disagreed that
the requirement is "harsh". Perhaps it is harsh compared to the
existing system in Alaska for wells that do not receive credits
because extended confidentiality is offered for wells that are
drilled where there is vacant acreage nearby. However, he
contended, it is not harsh compared to other capitalistic
jurisdictions like Canada where this kind of information is
routinely made available to the public fairly quickly after the
wells are drilled. Regarding what is in the state's interest,
he reiterated that the state is, in a sense, participating in
the well as would any other participant. The benefit to the
state is, in part, not only a successful drilling program but
the ability to leverage that information for further exploration
and potential development by others. The state is also ponying
up part of the expense to drill the well in the first place, he
argued.
MS. HOULE related that explorers drilling primarily in the NPR-A
have told [the division] that this credit makes a difference in
whether or not they drill a well. Most of these credits have
been given for NPR-A, she said, and looking at who has drilled
there will indicate who has most likely been applying for the
credits.
4:38:54 PM
REPRESENTATIVE FAIRCLOUGH advised that she had just wanted the
committee to be aware of the past testimony and the concern for
confidentiality in starting a time clock. Because of it being
optional on the credit side, she removed her objection.
CO-CHAIR JOHNSON removed his objection to Amendment 6.
There being no further objection, Amendment 6, as amended, was
adopted.
4:40:11 PM
REPRESENTATIVE KAWASAKI moved that the committee adopt Amendment
22, labeled 25-GH0014\L.20, Bullard/Bullock, 11/3/07, which read
[original punctuation provided]:
Page 21, following line 30:
Insert a new bill section to read:
"* Sec. 29. AS 43.55 is amended by adding a new
section to read:
Sec. 43.55.055. Penalty for understatement of
tax. (a) If there is a substantial understatement of
tax required to be shown on a return under this
chapter, there shall be added to the tax an amount
equal to 20 percent of the substantial understatement
of tax.
(b) If there is a gross understatement of tax
required to be shown on a return under this chapter,
there shall be added to the tax an amount equal to 40
percent of the gross understatement of tax.
(c) If there is a substantial or gross
understatement of tax required to be shown on a return
under this chapter, the department's reasonable costs
of establishing the understatement shall be added to
the amount of the penalty established under (a) or (b)
of this section.
(d) A penalty imposed under this section is in
addition to any other penalty, remedy, or amount of
interest provided by law.
(e) For purposes of this section,
(1) a substantial understatement of tax for
any taxable year exists if the amount of the
understatement for the taxable year exceeds the lesser
of 10 percent of the tax required to be shown on the
return for the taxable year or $10,000,000;
(2) a gross understatement of tax for any
taxable year exists if the amount of the
understatement for the taxable year exceeds the lesser
of 20 percent of the tax required to be shown on the
return for the taxable year or $20,000,000;
(3) "understatement" means the amount by
which the tax required to be shown on the return for
the taxable year exceeds the amount of the tax
reported as due by the taxpayer as shown on the
return."
Renumber the following bill sections accordingly.
Page 31, line 25:
Delete "32 - 34, and 37"
Insert "33 - 35, and 38"
Page 31, line 27:
Delete "31, and 38"
Insert "32, and 39"
Page 32, line 1:
Delete "sec. 29"
Insert "sec. 30"
Page 32, line 3:
Delete "29"
Insert "30"
Page 32, line 31:
Delete "32 - 34, and 37"
Insert "33 - 35, and 38"
Page 33, line 2:
Delete "31, and 38"
Insert "32, and 39"
Page 33, line 20:
Delete "32 - 34, and 37"
Insert "33 - 35, and 38"
Page 33, line 21:
Delete "31, and 38"
Insert "32, and 39"
Page 33, line 22:
Delete "sec. 44"
Insert "sec. 45"
CO-CHAIR JOHNSON objected to Amendment 22.
REPRESENTATIVE KAWASAKI noted that Amendment 4 by Representative
Seaton assesses a penalty for paying less than is required under
the entity's tax liability and Amendment 7 by Representative
Roses deals with failure by a company to report. Amendment 22
is also a penalty issue, he said. It would impose a penalty
when a company files on time, but files either a gross or large
understatement of the taxes due as required by law. He said the
understatement would have to be a pretty large amount - 10
percent and 20 percent - as shown on page 1, lines 19 and 22.
Page 2, he explained, consists of conforming amendments and the
definition of understatement.
4:41:37 PM
CO-CHAIR JOHNSON expressed his fear that the state had already
closed itself to business and, therefore, he did not want to add
any more penalties. He said he understood the intent, but that
he is concerned this would be stepping even further across the
line to the state being closed to business.
REPRESENTATIVE ROSES said he did not oppose Amendment 22, but
that he opposed assessing penalties in cases where underpayment
is not deliberate. For example, internal audits between joint
interest partners could later result in the filing of an amended
return that is quite different from the original return.
Another example would be an audit that results in disallowance
of credits. He supported penalties for deliberate
understatements, but wanted to ensure that penalties would not
be assessed when understatements were inadvertent.
4:44:04 PM
REPRESENTATIVE SEATON shared the sponsor's desire to ensure that
taxes are reported properly. He also shared Representative
Roses' fear that a company could get penalized through no fault
of its own. He requested Commissioner Galvin to address the
issue.
COMMISSIONER GALVIN said his understanding is that the
imposition of a penalty is discretionary on the part of the
agency. In taking into account the imposition of that penalty,
the culpability of the taxpayer would be considered. He said he
thought that Amendment 22 would basically establish the maximum
penalty that would be allotted by the department in that
circumstance.
4:46:25 PM
CO-CHAIR GATTO asked whether this would be handled in the same
manner as the Internal Revenue Service (IRS) which is that an
error receives a penalty.
COMMISSIONER GALVIN responded that a level of care can be
established, such as willful, fraudulent, negligent, and so
forth. Amendment 22 would substitute a quantitative measurement
for that standard of care and would base it upon the magnitude
of the understatement.
4:47:07 PM
REPRESENTATIVE SEATON inquired whether incorrect joint interest
billings or other non-deliberate circumstances could result in
understatements of [10 and 20 percent].
COMMISSIONER GALVIN replied that DOR does not yet have the
experience on which to base a response regarding how likely an
understatement could be due to a disagreement over a
characterization as opposed to an attempt to add a cost that is
clearly inappropriate. He clarified that the 20 and 40 percent
figures represent the penalty, and the 10 and 20 percent figures
represent the understatement amount for reaching those various
thresholds. Given the magnitude of many of the tax returns and
the relative inexperience that we all have in the implementation
of this, he said, this could be a threshold that is met often.
4:49:27 PM
CO-CHAIR GATTO inquired whether the error would be calculated on
a line-by-line basis or on the total of the entire return.
COMMISSIONER GALVIN said he would interpret the substantial
understatement of tax as being on the return. In further
response to Co-Chair Gatto, Commissioner Galvin confirmed that
this would then result in just one assessment.
CO-CHAIR GATTO asked if the procedure for overstatements is to
send the taxpayer a check.
COMMISSIONER GALVIN stated, "Generally, yes."
4:50:06 PM
REPRESENTATIVE KAWASAKI inquired whether a delayed effective
date would be appropriate given the lack of experience in this
regard. He also requested Commissioner Galvin's overall opinion
on whether penalties should be in place.
COMMISSIONER GALVIN answered that there are already penalties in
place, but that it is a matter of whether they are substantial
enough to affect behavior. Everyone, including DOR, is
struggling with moving to a system where the state is reliant
upon taxpayer self-reporting and then the state catching up and
identifying what the actual amount should be. The concern from
the public is that that is going to represent a large amount and
there will be a financial value in under-reporting in order to
retain the money and then pay an insignificant penalty. The
transition from a gross-based tax to a net-based tax is going to
be filled with a period of learning what the vulnerability is,
Commissioner Galvin noted. He said that [DOR] wants to ensure
that the system does not incentivize under reporting, but that
[DOR] is also sensitive as to whether it will be perceived as
being punitive in moving to the new system. The totality of the
whole structure must be considered and because amendments are
being made one at a time it is difficult to see the whole scheme
and whether there has been an over-stepping. "In that context,"
he continued, "... we don't have a strong feeling on this
particular amendment or this particular area in either
direction, but we do want to ensure that there is proper
incentive for full compliance."
4:52:48 PM
CO-CHAIR GATTO asked whether there is authority to forgive a
penalty or are the rules hard and fast and the penalties exact.
COMMISSIONER GALVIN said that as the commissioner he would have
the authority to waive a penalty if the circumstances warranted.
REPRESENTATIVE FAIRCLOUGH pointed out that some of the power to
negotiate down was removed by an amendment that had already
passed that precluded negotiation down under 50 percent,
including interest. She also noted that an amendment had passed
that provided for the state to start estimating the reasonable
cost of transportation. She expressed her concern that the
state might cause a gross underestimate as a result of changing
the mix of what is required. We are asking taxpayers for new
auditing compliance records and now we are going to penalize
them if they do not get it right, she opined. She therefore
appreciated the suggestion for delaying the implementation date.
4:54:52 PM
REPRESENTATIVE ROSES requested Mr. Porter's opinion in this
regard.
MR. PORTER advised that given the amount of tax that would now
be paid, a mistake of 1-2 percent would be subject to a penalty,
and this seemed harsh, especially in the current environment
where companies do not know what they are supposed to pay. He
suggested that imposition of penalties be deferred until after
either the first taxable year in which regulations are in place
or after a certain number of years. This would allow the
taxpayers and DOR the time to fine-tune what should be paid.
4:56:46 PM
REPRESENTATIVE ROSES said he would be more comfortable if the
implementation date was after the calendar year following
completion of the first set of audits, which would take about
six years. This would help determine whether or not the state
was being "gamed". He asked if this kind of effective date
would accomplish the objective mentioned by Mr. Porter.
MR. PORTER replied it that would address the concern.
4:57:47 PM
REPRESENTATIVE WILSON inquired whether the check-back date of
[2011] is still in the bill.
COMMISSIONER GALVIN said the date of 2011 had not been changed.
REPRESENTATIVE WILSON stated that perhaps 2011 would be the time
to determine if this is needed.
4:58:38 PM
REPRESENTATIVE ROSES moved [Conceptual] Amendment 1 to Amendment
22 to "set the effective date ... at the calendar year
immediately following the first set of completed audits, or the
taxable year following the first set of completed audits."
REPRESENTATIVE FAIRCLOUGH objected to [Conceptual] Amendment 1
to Amendment 22.
COMMISSIONER GALVIN asked for a definition of "set of completed
audits".
REPRESENTATIVE ROSES said the intent of his [conceptual]
amendment is to ensure that a penalty would not be assessed
until audits had been done and it was known whether
understatements were deliberate or a result of regulations or
the changes that were made. An audit would reveal facts and
test the regulations and until then, he said, a penalty would be
unfair.
5:00:28 PM
CO-CHAIR JOHNSON commented that there are Enron Corporation
executives in jail today for falsifying and presenting
misleading reports on returns.
COMMISSIONER GALVIN said that this was not for tax returns, it
was for fraud for falsifying to their investors.
5:01:15 PM
CO-CHAIR JOHNSON inquired whether there are substantial
penalties in state or federal law for intentionally falsifying
reports.
COMMISSIONER GALVIN responded yes, there are substantial
penalties for willful fraud on tax returns. In further response
to Co-Chair Johnson, Commissioner Galvin said it would be
criminal for purposely providing willful, fraudulent tax returns
with wrong information. In response to Co-Chair Gatto regarding
statutes of limitations, Commissioner Galvin stated that each
criminal thing would have a different statute of limitations.
The committee took an at-ease from 5:02 P.M. to 5:03 P.M.
5:04:03 PM
REPRESENTATIVE ROSES clarified that the conceptual intent of
Amendment 1 to Amendment 22 is that it would be only for those
taxpayers to which this penalty would apply and not for all
taxpayers. A penalty would not be imposed until after the
taxpayer had gone through an audit process that is based upon
the new regulations.
CO-CHAIR GATTO asked whether a mistake on the first tax return
could cause penalties to be applied to returns filed in
subsequent years.
COMMISSIONER GALVIN answered that it would depend on how it is
written, but that he thought the intent is that penalty would
not be assessed unless the taxpayer was filing a tax return
after the previous tax return had been fully audited.
REPRESENTATIVE ROSES said correct. For example, if returns are
filed in 2006, 2007, and 2008, and an audit did not occur until
the year 2009, then the penalty would not apply for 2006, 2007,
or 2008. It would only apply to those returns filed after an
audit had been done.
5:06:48 PM
COMMISSIONER GALVIN explained that there is already a 5 percent
penalty in place for understatement, so that is the base
regardless of whether [Amendment 22] went into effect or not.
In a case of willful fraudulent reporting, it is an additional
50 percent on top of the other penalties.
MR. PORTER read the statute which states that the 5 percent
shall be added to a tax for each 30-day period or fraction of
the period during which the taxpayer fails to file at the time
or times required by the law of regulation a report or pay the
full amount of the tax or a portion of the deficiency of the tax
that is finally determined by the department and is required by
this title, unless there is showing that the failure is due to
reasonable cause and not willful neglect. The penalty may not
exceed 25 percent in the aggregate. "If it is negligence," he
continued, "an additional penalty is added on top of that, and
if it is fraud it is 50 percent on top of that."
5:08:02 PM
CO-CHAIR GATTO presumed that one tax return did not need to be
audited before any of the aforementioned would apply.
COMMISSIONER GALVIN clarified that the penalty applies to all
tax, not just production taxes.
REPRESENTATIVE ROSES inquired whether the penalties under
Amendment 22 could be less than under existing penalties.
COMMISSIONER GALVIN replied that subsection (d) of Amendment 22
provided that it would be additive to any other penalty.
REPRESENTATIVE ROSES said he would not withdraw his amendment.
5:09:36 PM
REPRESENTATIVE FAIRCLOUGH surmised that Conceptual Amendment 1
to Amendment 22 applied to the new law that would be imposed if
passed under this special session, not to some past auditing
procedure.
REPRESENTATIVE ROSES said correct.
There being no objection, Conceptual Amendment 1 to Amendment 22
was passed.
The committee took an at-ease from 5:11 P.M. to 5:13 P.M.
5:13:00 PM
REPRESENTATIVE KAWASAKI moved [Conceptual] Amendment 2 to
Amendment to 22 to "strike the words in line 19 [page 1] 'the
lesser of', in line 20 'or $10,000,000', [in] line 22 'the
lesser of', and [in] line 23 'or $20,000,000'".
CO-CHAIR JOHNSON objected to [Conceptual] Amendment 2 to
Amendment 22.
REPRESENTATIVE KAWASAKI explained that as mentioned by Mr.
Porter, $10 million is a very small percent of a liability that
is over $1 billion. He said that 10 percent still seemed
substantial and 20 percent still seemed gross to him. He said
he believed that the 10 percent or 20 percent margin was high
enough and therefore fair for any company that understates its
taxes by mistake or otherwise, so for this reason he left the
percentages and struck the dollar amounts.
5:13:48 PM
REPRESENTATIVE FAIRCLOUGH said she did not support [Amendment
22], but she encouraged all members to support [Conceptual
Amendment 2 to Amendment 22].
CO-CHAIR JOHNSON withdrew his objection to [Conceptual]
Amendment 2 to Amendment 22.
There being no further objection, [Conceptual] Amendment 2 to
Amendment 22 was passed.
REPRESENTATIVE FAIRCLOUGH called the question for Amendment 22,
as amended.
A roll call vote was taken. Representatives Edgmon, Kawasaki,
and Guttenberg voted in favor of Amendment 22, as amended.
Representatives Fairclough, Wilson, Seaton, Roses, Johnson, and
Gatto voted against it. Therefore, Amendment 22, as amended,
failed adoption by a vote of 3-6.
The committee took an at-ease from 5:16 P.M. to 5:18 P.M.
5:18:34 PM
CO-CHAIR GATTO announced that Amendment 26 had been previously
withdrawn and that the committee was now on Amendment 4 to
Amendment 38.
REPRESENTATIVE SEATON inquired whether Amendment 4 to Amendment
38 would be on line 14 of page 1.
5:18:55 PM
REPRESENTATIVE FAIRCLOUGH said that the subsection referenced in
Amendment 4 to Amendment 38 needed to be amended.
COMMISSIONER GALVIN noted that the language is intended for the
statute and that it could go in as a new subsection on page 2
below what is currently (q).
REPRESENTATIVE FAIRCLOUGH interjected that it would fit in on
line 6 of page 2, and that Legal Services could work out where
the exact location should be.
COMMISSIONER GALVIN recommended that it be inserted on page 2,
line 6, as a new subsection (r), and that "(p)" in the written
amendment be changed to "(q)". Thus under a new subsection (r),
Amendment 4 to Amendment 38 would read: "[The RCA shall
determine if an entity that receives gas that is taxed, for
production purposes,] under the provisions of 43.55.011 (q)
falls under their jurisdiction."
5:21:07 PM
REPRESENTATIVE GUTTENBERG objected. He argued that intent
language is one thing, but that non-intent language expanding
the authority of RCA would require a language change and
consideration of whether it falls under the call of the special
session. He said he thought every regulated utility in the
state would know that RCA did not need to expand its authority
in order to ask questions of a utility.
REPRESENTATIVE FAIRCLOUGH contended that it did not expand RCA's
authority. If a producer or a developer taking the tax supplies
a utility that is under the RCA's jurisdiction as it stands
today under the criteria given by Representative Kelly, then the
utility must pass on the credit to the consumer. So, it is
asking RCA to look at a rate case in this type of situation.
5:23:08 PM
REPRESENTATIVE GUTTENBERG said his point is that RCA already has
the authority as it is their role to examine these things.
Expanding RCA's authority would necessitate changing the title
of this bill, he contended.
REPRESENTATIVE FAIRCLOUGH asked whether Commissioner Galvin
supported this amendment.
COMMISSIONER GALVIN responded no. The purpose of the statute is
to provide the tax benefit for the production of the gas. It
would not change RCA's jurisdiction, whether or not they had it
over the entity. He said he thought it would merely make [the
utility] come to [RCA's] attention because the consumers would
demand it.
REPRESENTATIVE FAIRCLOUGH reiterated that she supports a
guarantee that the benefit will be offered to all Alaskans.
A roll call vote was taken. Representatives Wilson, Fairclough,
Roses, and Johnson voted in favor of Amendment 4 to Amendment
38. Representatives Seaton, Edgmon, Kawasaki, Guttenberg, and
Gatto voted against it. Therefore, Amendment 4 to Amendment 38
failed to pass by a vote of 4-5.
5:25:29 PM
REPRESENTATIVE FAIRCLOUGH called the question for Amendment 38,
as amended. In response to Co-Chair Johnson, she withdrew her
call of the question.
CO-CHAIR JOHNSON expressed his support for equal treatment for
all Alaskans. He said he is concerned that North Slope gas is
being monetized. [Gas] contracts may or may not be presented at
the end of the month and there will be an open season in 12-18
months. He could see a scenario where the oil industry would
not show up to open season because: a) the gas is being
monetized, b) industry was told it could not have the Murkowski
Administration's [gas] contract, and c) industry was prohibited
from going over the top. Therefore, any grounds for a state
lawsuit against the industry are unfounded, he opined. This is
one more opportunity for the oil companies to say they will not
monetize their gas because they are meeting certain criteria.
He said he has grave concerns that this will be a problem.
COMMISSIONER GALVIN noted that the purpose of Amendment 38, as
stated in its legislative intent section, is to have the tax
benefit provide lower cost energy for Alaskans; not because it
is economically necessary for North Slope production.
5:28:47 PM
A roll call vote was taken. Representatives Kawasaki, Seaton,
Guttenberg, Edgmon, and Gatto voted in favor of Amendment 38, as
amended. Representatives Fairclough, Wilson, Roses, and Johnson
voted against it. Therefore, Amendment 38, as amended was
adopted by a vote of 5-4.
CO-CHAIR GATTO announced that Amendments 39 and 40 were
withdrawn.
The meeting was recessed at 5:30 p.m.
CO-CHAIR GATTO called the meeting back to order at 6:58 P.M.
Present at the call back to order were Representatives
Guttenberg, Edgmon, Fairclough, Wilson, Seaton, Roses, Gatto,
Kawasaki, and Johnson.
6:59:04 PM
CO-CHAIR GATTO moved for reconsideration of his vote on passing
Amendment 32. There being no objection, the vote on Amendment
32 was rescinded, and the amendment was back before the
committee.
REPRESENTATIVE ROSES inquired why Co-Chair Gatto decided to
rescind his vote.
CO-CHAIR GATTO replied that he had spoken with House leadership
and learned that Amendment 32 would give the committee bill an
additional referral which would delay the bill one more week.
He said he did not think this was in the best interest of the
state, so he would now be voting against it.
7:00:49 PM
REPRESENTATIVE ROSES agreed. He said that during the initial
debate on Amendment 32, Representative Fairclough had warned
that it could cause referral to the House Judiciary Standing
Committee (HJUD). He said he is disappointed, however, that
decisions on policy this large are being based on whether or not
to extend the special session a week or have it be carried over
into the regular session. If it is important enough to pass in
the first place, it ought to be important enough to discuss, he
opined.
CO-CHAIR JOHNSON remarked that there had been many votes on
amendments for which he would have liked to have seen legal
opinions regarding the impact. He said he appreciated Co-Chair
Gatto rescinding his vote, but that he is not necessarily afraid
of exposing this legislation to as many committees and as much
time as it takes.
7:02:59 PM
REPRESENTATIVE FAIRCLOUGH stated that she also appreciated Co-
Chair Gatto's reconsideration of Amendment 32. Because of the
seriousness of the topic, she said she would not "game" this by
voting yes in order to send it to HJUD. Rather, she would again
be voting no because she did not think it was legal.
REPRESENTATIVE GUTTENBERG said there are two large and
inseparably related issues on the same table: passing or
killing ACES [HB 2001] and whether or not to set aside for
another day the Exxon Valdez and the interests of Alaskans. "It
is troubling for me to even not have objected to this motion to
rescind," he said. The ExxonMobil Corporation has the right to
its day in court and the right to appeal which might take five
more years. Many aspects of this bill, he opined, are related
to whether the state is going to act in its own best interest or
allow corporations to dictate how the state does business.
Living to fight another day is what this means to me.
7:06:14 PM
REPRESENTATIVE ROSES advised that he would be voting against
Amendment 32 for the same reasons that he voiced during the
first vote and that he was not voting against the amendment to
prevent the bill from going to HJUD.
REPRESENTATIVE WILSON specified that she would also be voting
against Amendment 32 for the same reasons as the first time, and
that her vote had nothing to do with extending the special
session for another week. If it is true that it would extend
the special session by a week, then it should be extended in
order to take the necessary time, she opined.
A roll call vote was taken. Representatives Edgmon and Kawasaki
voted in favor of Amendment 32. Representatives Wilson, Seaton,
Guttenberg, Fairclough, Roses, Gatto, and Johnson voted against
it. Therefore, Amendment 32 failed to pass by a vote of 2-7.
7:09:24 PM
REPRESENTATIVE KAWASAKI moved that the committee adopt Amendment
36, labeled 25-GH0014\L.77, Cook/Bullock, 11/4/07, which read
[original punctuation provided]:
Page 1, following line 12:
Insert a new bill section to read:
"* Section 1. The uncodified law of the State of
Alaska is amended by adding a new section to read:
LEGISLATIVE INTENT. It is the intent of the
legislature that not less than half of the amount of
money received by the state as a result of the
retroactivity of certain provisions under sec. 45 of
this Act that exceeds the amount the state would have
received if those provisions had not been made
retroactive will be appropriated to the budget reserve
fund (art. IX, sec. 17, Constitution of the State of
Alaska)."
Page 2, line 1:
Delete "Section 1"
Insert "Sec. 2"
Renumber the following bill sections accordingly.
Page 31, line 28:
Delete "2007"
Insert "2006"
Page 33, line 3:
Delete "2008"
Insert "2007"
Page 33, line 19, following "ACT.":
Insert "(a)"
Page 33, following line 20:
Insert a new subsection to read:
"(b) Sections 15 - 21, 27, 28, 32, and 39 of
this Act are retroactive to January 1, 2007."
Page 33, line 21:
Delete all material.
Renumber the following bill section accordingly.
Page 33, line 22:
Delete "Except as provided in sec. 44 of this
Act, this"
Insert "This"
Renumber internal references to bill sections in
accordance with this amendment so that the LEGISLATIVE
INTENT section, added as bill section 1, is given an
immediate effective date. Below are all internal bill
section references in this bill:
Page 31, lines 25, 27, 29, 30, and 31
Page 32, lines 1, 3, 13, 16, 19, and 31
Page 33, lines 2, 19 - 20, 21, and 22
CO-CHAIR JOHNSON objected to Amendment 36 for discussion
purposes.
REPRESENTATIVE KAWASAKI explained that Amendment 36 would save
for the future by making some of the tax regulation and
progressivity provisions retroactive to January 1, 2007, and
putting that money into the Constitutional Budget Reserve Fund
(CBRF). The state's debt to the CBRF is $5 billion, he noted.
7:10:37 PM
CO-CHAIR GATTO asked what the current balance of the CBRF is.
COMMISSIONER GALVIN said approximately $2.65 billion.
7:11:15 PM
CO-CHAIR GATTO surmised that Amendment 36 is an attempt to repay
the amount of money that has been taken from the CBRF.
REPRESENTATIVE KAWASAKI responded that not less than half [of
the amount of money received by the state as a result of the
retroactivity] would be placed in the CBRF. His intent, he
said, is that a larger portion than one-half be put in. So far
$5 billion has been spent and the balance is roughly $2.65
billion. The best part, he opined, is that it takes a three-
quarters vote of the legislature to tap the CBRF.
7:12:50 PM
CO-CHAIR JOHNSON moved Amendment 1 to Amendment 36 to "on line
8, after 'appropriated to' strike 'budget reserve fund' and
insert 'permanent fund'". The problem, he said is that the
state needs a long-term fiscal plan to save for a rainy day.
The three-quarter vote required to withdraw from the CBRF
inflates the capital budget, he contended, because at the end of
the session people want to get home and will give away projects
in order to get out of here. The only way to assure that money
is saved is when, as a body, it takes a 50 percent vote and a
legislator must defend his/her vote to constituents.
CO-CHAIR JOHNSON withdrew Amendment 1 to Amendment 36.
7:14:50 PM
REPRESENTATIVE WILSON applauded the state having to save money.
She said she was there when money was taken from the CBRF and
that despite the three-quarter vote requirement, legislators
were able to demand and get something in return for their yes
vote. Thus, in order to garner the votes, more money was taken
out than was necessary. It is a double-edged sword, she argued,
and she would therefore be voting no even though she supported
the state having a savings account.
7:16:20 PM
CO-CHAIR GATTO inquired whether the CBRF is invested in interest
bearing notes or in investments.
COMMISSIONER GALVIN replied that part of the CBRF is longer-
term, higher return, but that the bulk is shorter-term, lower
return. In further response to Co-Chair Gatto, Commissioner
Galvin said he thought the return is in the 5-6 percent range as
opposed to the 10 percent range for the state's other funds.
7:16:59 PM
REPRESENTATIVE ROSES stated that he had supported the amendment
passed earlier by the committee to create the savings account.
He understood that it took a simple majority to move money out
of that account to somewhere else, thus 21 members could decide
to take half of that savings account and put it into the CBRF.
He said he would therefore vote no on Amendment 36 because it
takes a three-quarters vote to move money out of the CBRF, but
only a simple majority to move money in.
REPRESENTATIVE SEATON said changing the retroactivity for a year
under Amendment 36 troubles him because there is so little
experience with PPT regulations. Re-writing the regulations and
making other changes in a retroactive fashion would be
problematic.
REPRESENTATIVE KAWASAKI requested Commissioner Galvin to speak
to the point of retroactivity.
COMMISSIONER GALVIN agreed that the retroactive effective date
would be a complication. He recommended that the committee
consider amending Amendment 36 to include transitional
provisions similar to what was done for the PPT when it passed
to allow for a period where taxpayers can continue to make
payments under the current system and then have a true-up on
March 31.
7:19:49 PM
REPRESENTATIVE FAIRCLOUGH reiterated her support from the
previous day for the money rolling into the Permanent Fund, the
CBRF, or an account in the general fund (GF). She cautioned
that having a CBRF designation would require the bill to go to
the House Special Committee on Ways and Means (HW&M) and that
the leadership is looking at how loaded the bill is with
additional things needing to be looked at. She supported the
money going to CBRF but suggested calling an at-ease to
determine if this would send the bill to HW&M. She asked why
the amendment was not made yesterday to go into the CBRF. She
said the committee could choose to: rescind someone else's vote
and go back and replace it in a single item fund so that the
full body had an opportunity on that specificity of change; or
reroute to another fund in the GF; or vote for the amendment and
take an at-ease.
7:21:35 PM
CO-CHAIR JOHNSON moved Amendment 2 to Amendment 36 on [line 8 on
page 1] "at the end of 'appropriated to' pay down the
(PERS)/(TRS) obligation of the state." Fixing the problem of
the Public Employees' Retirement System (PERS) and the Teachers'
Retirement System (TRS) is both a legal and moral obligation.
The state has billions of dollars in obligation to retirees, he
said, and he would not withdraw his amendment because he wanted
it on the record. The other side of savings is to pay down
debt.
7:23:14 PM
REPRESENTATIVE ROSES objected to Amendment 2 to Amendment 36 for
discussion purposes. He inquired if this conceptual amendment
was worded to pay down the PERS and TRS unfunded liability.
CO-CHAIR JOHNSON answered yes.
REPRESENTATIVE ROSES asked whether Co-Chair Johnson's intention
was to pay the money to the savings account created by the past
amendment once PERS and TRS is no longer a liability.
CO-CHAIR JOHNSON said that would be appropriate.
REPRESENTATIVE ROSES supported Amendment 2 to Amendment 36.
7:23:37 PM
REPRESENTATIVE GUTTENBERG said that GF monies or some other
source would be used to pay the obligation down, but that he did
not believe a specific account had been set aside. He did not
know whether the administration had a larger fiscal plan in
order to get there, but advised that it be addressed in the next
day or two.
The committee took an at-ease from 7:24 P.M. to 7:35 P.M.
7:35:13 PM
CO-CHAIR JOHNSON withdrew Amendment 2 to Amendment 36. He moved
Conceptual Amendment 3 to Amendment 36 "that 25 percent of the
50 percent goes to pay down the unfunded liability and the other
25 percent goes into the ... educational fund". In response to
Representative Roses and Co-Chair Johnson, he clarified that of
the half of the money received by the state, it would be split
equally so that half of the 50 percent would go to PERS/TRS and
half of the 50 percent would go to education.
CO-CHAIR GATTO restated that Conceptual Amendment 3 to Amendment
36 would use 50 percent of the retroactivity money and divide
that in half between education and PERS/TRS refunding.
7:37:45 PM
REPRESENTATIVE SEATON said he wanted to make sure that Co-Chair
Johnson's intent is what is stated in the bill - that the
increase in tax rate and progressivity is retroactive for the
past year, and that half of the retroactive increase on
everything that is retroactive is to be deposited to PERS/TRS
and the other half is to be deposited in the education fund. He
reminded the committee of Commissioner Galvin's recommendation
to include transition language. He also noted that this
amendment deals with exclusively making this bill retroactive
for the past tax year.
7:39:37 PM
REPRESENTATIVE GUTTENBERG pointed out that the CBRF had some
parameters around it like a three-quarters vote, but that the
committee would be taking that away. "We're putting them into
two funds, but they are not there," he said. Neither of these
two funds is putting it at arms reach like with the CBRF, and
the only farther thing is the Permanent Fund. He submitted that
the money is not really being put into a savings, rather in some
ways it is being put into operating.
CO-CHAIR JOHNSON answered that it takes the same simple majority
to withdraw money out of the Earnings Reserve Account of the
Permanent Fund, as well. However, that comes with political
consequences because each legislator must explain why to his/her
constituents. He said he is comfortable with that and welcomes
that.
7:42:11 PM
REPRESENTATIVE FAIRCLOUGH asked what would happen to the money
once the PERS/TRS obligation was fulfilled. She pointed out
that the committee had still not addressed the regressiveness of
going back on the 2006, but that she realized this could not be
done by Conceptual Amendment 3 to Amendment 36.
CO-CHAIR JOHNSON understood that any unspent and unobligated
money left in the GF at the end of the year is automatically
swept into the CBRF. Thus, when the PERS/TRS liability is paid
off, that money will be automatically swept into the CBRF unless
some future body determines otherwise.
7:43:43 PM
REPRESENTATIVE ROSES requested clarification from Commissioner
Galvin as to whether unspent money would be swept into the CBRF.
COMMISSIONER GALVIN said this is not under his normal purview,
but that he understood the unspent money from last year's
appropriation went into the capital account, not the CBRF. It
is a matter of identifying where the excess goes each
appropriation year, he said.
CO-CHAIR JOHNSON responded that the [capital account] is a need
of the state and that because he has been harking on jobs he did
not have a problem with the money going into that account at
that time.
7:44:38 PM
REPRESENTATIVE WILSON praised the Conceptual Amendment 3 to
Amendment 36 because it addressed the burden of PERS/TRS and
provided forward funding for education. She said she would be
voting for it.
REPRESENTATIVE EDGMON appreciated Co-Chair Johnson's idea and
urged support for it.
A roll call vote was taken. Representatives Edgmon, Kawasaki,
Fairclough, Wilson, Seaton, Roses, Guttenberg, Johnson, and
Gatto voted in favor of Conceptual Amendment 3 to Amendment 36.
No members voted against it. Therefore, Conceptual Amendment 3
to Amendment 36 passed by a vote of 9-0.
7:47:28 PM
REPRESENTATIVE ROSES moved Conceptual Amendment 4 to Amendment
36 "to remove the retroactivity language and that it just take
effect with the effective date of this bill."
REPRESENTATIVE KAWASAKI objected to Conceptual Amendment 4 to
Amendment 36.
REPRESENTATIVE SEATON objected to Conceptual Amendment 4 to
Amendment 36. He noted that Amendment 36 only deals with the
difference between the amount of money generated retroactively
and what would be collected under PPT. Thus, deleting the
retroactivity would result in there being no money to distribute
to the two funds. This is not a going forward bill, he
explained, it is a bill that only deals with one year and that
is a retroactivity between changing 2007 to 2006 and applying
the tax rates that are incorporated in this bill.
7:49:35 PM
REPRESENTATIVE ROSES said he brought up the amendment because
concern was voiced by Commissioner Galvin and others about the
retroactivity.
COMMISSIONER GALVIN, in response to Representative Kawasaki and
Co-Chair Gatto, stated that [Conceptual Amendment 4] would
eliminate the purpose of [Amendment 36] as explained by
Representative Seaton. He clarified that his recommendation to
include transition language if there was retroactivity did not
mean he was opposed to the amendment. He said he thought that
from a parliamentary standpoint an amendment could not be taken
that would eliminate the purpose of the standing amendment.
REPRESENTATIVE ROSES withdrew Conceptual Amendment 4 to
Amendment 36.
7:51:40 PM
CO-CHAIR JOHNSON removed his objection to Amendment 36.
REPRESENTATIVE SEATON objected to Amendment 36, as amended. In
response to Co-Chair Gatto, he declined to speak further to the
amendment.
REPRESENTATIVE FAIRCLOUGH appreciated the committee's support
for the state to save money, but cautioned that there are more
implications in what has been done. She said she would vote yes
because she supported saving the money, but she hoped that
Amendment 36 would not cause further delay in getting the
governor's bill [HB 2001] completed inside the 30-day session.
CO-CHAIR JOHNSON stated that [Amendment 36, as amended] is not
enough, but it is a beginning to sound footing for the future.
A roll call vote was taken. Representatives Fairclough, Roses,
Guttenberg, Edgmon, Kawasaki, and Johnson voted in favor of
Amendment 36, as amended. Representatives Wilson, Seaton, and
Gatto voted against it. Therefore, Amendment 36, as amended,
passed by a vote of 6-3.
7:54:18 PM
REPRESENTATIVE KAWASAKI withdrew Amendment 37.
REPRESENTATIVE GUTTENBERG withdrew Amendment 41.
CO-CHAIR GATTO announced that Amendment 42 was withdrawn.
7:56:19 PM
REPRESENTATIVE EDGMON moved that the committee adopt Amendment
43, labeled 25-GH0014\L.68, Wayne/Bullock, 11/3/07, which read
[original punctuation provided]:
Page 26, lines 17 - 19:
Delete
"(8) costs of arbitration, litigation, or
other dispute resolution activities that involve the
state or concern the rights or obligations among
owners of interests in, or rights to production from,
one or more leases or properties or a unit;"
Insert
"(8) costs of arbitration, litigation, [OR
OTHER] dispute resolution, lobbying, public relations,
advertising, or policy advocacy [ACTIVITIES THAT
INVOLVE THE STATE OR CONCERN THE RIGHTS OR OBLIGATIONS
AMONG OWNERS OF INTERESTS IN, OR RIGHTS TO PRODUCTION
FROM, ONE OR MORE LEASES OR PROPERTIES OR A UNIT];"
Page 29, line 12, following "processed":
Insert ";
(21) costs relating to office buildings,
fixtures and equipment, and real property that is not
located on an oil or gas exploration, production, or
development lease or property in the state; and
(22) overhead, office, or administrative
expenses and all other indirect costs of oil or gas
exploration, development, or production"
CO-CHAIR JOHNSON objected to Amendment 43.
7:56:33 PM
REPRESENTATIVE EDGMON explained that Amendment 43 would expand
the exemptions from lease expenditures to include the following
costs: lobbying, public relations, advertising, and public
advocacy; costs relating to office buildings, fixtures and
equipment, and real property that is not located on an oil or
gas exploration, production, or development lease or property in
the state; and overhead, office, or administrative expenses and
all other indirect costs of oil or gas exploration, development,
or production. In response to Co-Chair Gatto, Representative
Edgmon requested Commissioner Galvin to comment on the
differences between Amendment 43 and a similar amendment that
went through the Senate Judiciary Standing Committee.
The committee took an at-ease from 7:58 p.m. to 8:14 p.m.
8:14:22 PM
COMMISSIONER GALVIN described the differences between Amendment
43 and a similar amendment in the senate. [Paragraph] (8) makes
it explicitly clear that lobbying, public relations, and
advertising are excluded expenditures because they are not
direct costs associated with production. Additional explicit
exclusions from lease expenditures are included by adding
[paragraphs] (21) and (22). He noted that [paragraph] (21) in
Amendment 43 was modified [in the senate] to delete the words on
line 16 "on an oil or gas exploration, production, or
development lease or property" so that it reads "costs relating
to office buildings, fixtures and equipment, and real property
that is not located in the state". [Paragraph] (22) references
"overhead, office, or administrative expenses and all other
indirect costs". He explained that, separately, in the
description of direct costs of lease expenditures, specific
reference is made to allowances for overhead that is directly
related to production. Current regulations allow up to 3
percent of capital expenditures and 9 percent of operating
expenditures as separate allowances on top of those costs. The
reference here, he pointed out, does not eliminate that
inclusion of overhead directly related to production. He said
he did not know if the purpose of having him explain the
differences is because the committee intended to amend
[Amendment 43] to delete that language.
8:17:44 PM
REPRESENTATIVE ROSES recommended identifying the specific kind
of disallowed advertising because Amendment 43 could exclude
advertising expenses for jobs in the classifieds and
professional journals.
REPRESENTATIVE GUTTENBERG said that taking out a comma might
address Representative Roses' concern. Industry has a right to
conduct advocacy, it is just whether or not they can write it
off against state taxes.
CO-CHAIR JOHNSON voiced his concern about excluding public
relations as well as advertising. He said industry's donations
to arts, parks, and education fall under public relations and
that he does not have a problem with allowing industry to write
off community involvement. It would affect not only the
industry but also advertising outlets, he argued. In the
interest of disclosure, he noted that his wife works for an
advertising company and that his background is in advertising.
The list of people and projects that fall under the category of
public relations is enormous, he continued, and there would be a
major impact if corporate donations were to stop.
8:21:43 PM
REPRESENTATIVE SEATON pointed out that Amendment 43 would not
disallow deductions against corporate taxes; it only says that
it cannot be considered a direct lease expense. He said he had
a question about lines 9, 10, and 11 where the following
language is eliminated: "obligations among owners of interests
in, or rights to production from, one or more leases or
properties or a unit".
COMMISSIONER GALVIN responded that Amendment 43 would apply a
blanket disallowance for any costs of litigation, arbitration,
or dispute regardless of whether or not they involve the state
or owners.
8:23:45 PM
REPRESENTATIVE GUTTENBERG stated that it would be a concern if
corporations are making charitable contributions just so they
can advertise to the public that they have done so. But if
corporations are making a deduction and writing it off their
lease expenditures, they are probably also writing it off as a
charitable deduction on their federal taxes and on their state
corporate taxes. So, he said, maybe the state is making those
donations.
COMMISSIONER GALVIN replied that if corporations are making
charitable donations, they are not lease expenditures, and they
are not deductible under production tax.
8:24:56 PM
REPRESENTATIVE EDGMON said that the intent of Amendment 43 was
to take it back to what are ordinary and necessary expenses in
exploring or developing and all the activities it takes to
actually conduct business on the North Slope. Why would the
state want to allow lobbying as a write-off, he asked.
COMMISSIONER GALVIN said he appreciated that the purpose of
Amendment 43 is to explicitly state that, but that his point is
that the overarching inclusion is costs that are directly
attributable to production of oil and gas. Under any
definition, he continued, lobbying, public relations, and
donations are not considered direct costs associated with
production of oil and gas. This makes it clear that these are
not deductible from PPT.
8:26:05 PM
REPRESENTATIVE WILSON inquired whether Amendment 43 did what DOR
was already doing anyway.
COMMISSIONER GALVIN answered yes, with regard to the change in
[paragraph] (8).
REPRESENTATIVE ROSES remained concerned about advertising. He
said that Representative Guttenberg's statement regarding
corporations making charitable donations just so they can
advertise that they have done so is a personal affront. He
related that he was a proud recipient of BP's "Teacher of the
Year Award" and that it meant a lot to him and his family.
8:27:51 PM
CO-CHAIR JOHNSON asked what the cost of Amendment 43 would be.
COMMISSIONER GALVIN responded that he thought there would be no
fiscal impact given that none of the costs listed in the
amendment would have been deducted otherwise. However, he said,
if the amendment is left as stated without making the same
modification that was made in the Senate, then the cost related
to office buildings, fixtures, equipment, and real property not
located on the lease itself will not be deductible. Thus, any
office buildings in Anchorage or other locations in the state
would no longer be deductible even though they may be directly
related to the production of oil and gas given that they house
the personnel needed for that activity. He did not know how
much the potential fiscal impact would be, but that it would
"not be in the nature of millions".
8:29:18 PM
REPRESENTATIVE FAIRCLOUGH submitted that this encouraged the
exportation of jobs from Alaska to other cities and countries.
There are many oil industry buildings in Anchorage, but the
industry could do business cheaper in their home cities like
Houston, she said. This jeopardizes a significant portion of
the economics of Alaska's cities where people are working. She
could not support Amendment 43 in its current form, although she
supported [paragraph] (8) because she did not think lobbying
should be an allowable deduction. She is unhappy to hear
statements that the industry panders their good deeds to the
public, she said, but did not think that industry's charitable
contributions are at risk. Many of these businesses are
wonderful corporate partners with numerous non-profit
organizations, she opined, including a nonprofit for which she
had been executive director. She related that an economist
speaking before the House Special Committee on Economic
Development, International Trade and Tourism testified that
industry contributed 88-90 percent of the bottom line into the
GF and that oil and gas jobs were the first or second best
paying in the state.
8:33:02 PM
REPRESENTATIVE SEATON moved [Amendment 1] to Amendment 43 to
delete the following language on lines 16 and 17: "on an oil or
gas exploration, production, or development lease or property".
Thus, the language beginning on line 16 would read, "real
property that is not located in the state;".
CO-CHAIR JOHNSON objected to Amendment 1 because he objected to
Amendment 43 in its entirety. He requested that his silence not
be misconstrued as endorsement of removing this deduction. With
that, he removed his objection.
REPRESENTATIVE ROSES stated that if Amendment 1 to Amendment 43
does not pass, he may want to go back to [Amendment 36] to
rescind the education and PERS/TRS funds and replace them with a
down payment fund for the BP Exploration (Alaska) Inc. building
[in Anchorage] so that it could be used for the capitol building
after BP moved its headquarters.
There being no further objection, Amendment 1 to Amendment 43
was passed.
8:35:47 PM
REPRESENTATIVE EDGMON maintained that a line needed to be drawn
in the sand somewhere. We all file taxes with the IRS and are
familiar with what can and cannot be deducted, he said, and this
same logic should apply here. He supported providing incentives
for further exploration development and doing that by attempting
to influence behavior. Regulations for the terms in Amendment
43 can be developed to provide the intent described by
Representative Roses, he argued, which is very laudable.
REPRESENTATIVE FAIRCLOUGH supported lines 1-12 of Amendment 43,
but remained opposed to the language below those lines. The
State of Alaska has an office in Washington, DC, and if the
state were to file a federal tax return it would likely consider
the building an allow expense for deduction, she conjectured.
The companies in Alaska are global and their offices in other
locations should be an allowable expense, although not 100
percent. The more the ability is eroded for companies to
receive exploration credits, the more further investment is put
at risk, she opined. She said she thought that the increase in
tax burden is higher than Co-Chair Johnson's current estimate of
$1.7 billion and that she could not support it how it stands.
8:38:59 PM
REPRESENTATIVE ROSES shared Representative Fairclough's
concerns. He noted that the word equipment on line 15 of
Amendment 43 could be construed to mean that drilling rigs being
built outside for transport to Alaska could not be deducted. He
understood the intent, but questioned the wisdom of making
amendments to order to craft a bill that conforms to what is
happening in the other body.
REPRESENTATIVE EDGMON responded that it was not his intent to
come up with language conforming to the other body. He said he
knew from his past work developing regulations with an agency
that this language would be subservient to the language that
deals with ordinary and necessary costs attributable to
developing and drilling in the North Slope.
COMMISSIONER GALVIN advised that statutory construction would
require giving full value to all aspects and interpreting them
to be consistent if there is another area that says that costs
associated with the construction of equipment elsewhere is a
direct cost. Interpreting this to be consistent with that would
probably require a more narrow interpretation of this, and
regulations would need to hammer that out.
8:41:27 PM
REPRESENTATIVE ROSES inquired whether DOR would disallow as a
deduction a not-yet-shipped drilling rig sitting in Seattle if
Amendment 43 passed as currently written.
COMMISSIONER GALVIN stated that, absent legal advice, it would
be a matter of having the equipment arrive in Alaska before
attributing the cost associated with it to production in Alaska.
REPRESENTATIVE ROSES said he believed there was an amendment
passed yesterday that included this language, therefore that
problem had been taken care of. He said it made him just as
sick as he felt before.
REPRESENTATIVE FAIRCLOUGH said that she appreciated Commissioner
Galvin's interpretation and that she believed she was on the
failing side of the amendment being spoken to by Representative
Roses. She warned that regardless of how the administration
interpreted the legislation in regard to the building of rigs, a
private citizen could interpret it differently and bring forth a
challenge.
8:43:35 PM
REPRESENTATIVE SEATON moved [Amendment 2] to Amendment 43 to
remove the comma after public relations on line 8 so that line 8
would read as follows:
lobbying, public relations advertising, or public
advocacy;
CO-CHAIR JOHNSON objected to Amendment 2 to Amendment 43 so that
he could think about it.
REPRESENTATIVE FAIRCLOUGH added that Amendment 2 would allow
advertising expenses for personnel which is what Representative
Roses had spoken to before.
CO-CHAIR JOHNSON withdrew his objection to Amendment 2 to
Amendment 43.
CO-CHAIR GATTO stated that removing the comma to say "public
relations advertising" clarified the issue quite well.
[There being no further objections, Amendment 2 to Amendment 43
was considered as passed.]
8:46:37 PM
CO-CHAIR JOHNSON moved Amendment 3 to Amendment 43 to delete
everything below line 12 up to and including line 19.
REPRESENTATIVE EDGMON objected to Amendment 3 to Amendment 43.
CO-CHAIR JOHNSON stated that he still had serious doubts about
[paragraphs] (21) and (22) in Amendment 43 because he believed
they ran a serious risk of exporting jobs. He did not think
lobbying and policy advocacy should be paid for and, after
giving it some thought, nor should public relations advertising.
8:48:10 PM
REPRESENTATIVE KAWASAKI said it appears clear to him that this
only includes office buildings, fixtures and equipment.
However, it could be clarified by adding the word office before
the word fixtures and before the word equipment.
REPRESENTATIVE EDGMON supported Representative Kawasaki's
comments. He said he believes that the way the sentence now
reads is clear. He said it clearly differs with the language in
the bill now under Title 43 that talks about all direct and
necessary costs for exploring, developing, producing oil and gas
deposits located within the producer's leases. He reiterated
that his fundamental point is that a line needs to be drawn
somewhere.
A roll call vote was taken. Representatives Roses, Fairclough,
Wilson, and Johnson voted in favor of Amendment 3 to Amendment
43. Representatives Seaton, Guttenberg, Edgmon, Kawasaki, and
Gatto voted against it. Therefore, Amendment 3 to Amendment 43
failed to pass by a vote of 4-5.
CO-CHAIR GATTO clarified that the previous amendment, Amendment
2 to Amendment 43, had passed.
8:52:51 PM
REPRESENTATIVE SEATON moved Amendment 4 to Amendment 43 "to
delete lines 18 and 19".
CO-CHAIR GATTO clarified that this is [paragraph] (22).
There being no objection, Amendment 4 to Amendment 43 was
passed.
CO-CHAIR JOHNSON sustained his objection to Amendment 43, as
amended.
A roll call vote was taken. Representatives Roses, Guttenberg,
Edgmon, Kawasaki, Seaton, and Gatto voted in favor of Amendment
43, as amended. Representatives Fairclough, Wilson, and Johnson
voted against it. Therefore, Amendment 43, as amended, was
adopted by a vote of 6-3.
8:54:19 PM
CO-CHAIR GATTO announced that he would skip Amendment 44.
REPRESENTATIVE SEATON withdrew Amendment 45.
REPRESENTATIVE GUTTENBERG withdrew Amendment 46.
8:54:28 PM
CO-CHAIR GATTO moved that the committee adopt Amendment 44,
labeled 25-GH0014\L.72, Cook/Bullock, 11/3/07, which read
[original punctuation provided]:
Page 10, following line 25:
Insert a new bill section to read:
"* Sec. 14. AS 43.55.011(e) is amended to read:
(e) There is levied on the producer of oil or
gas a tax for all oil and gas produced each month from
each lease or property in the state, less any oil and
gas the ownership or right to which is exempt from
taxation or constitutes a landowner's royalty
interest. Except as otherwise provided under (j) and
(k) of this section, the tax is equal to the greater
of 25 [22.5] percent of the production tax value of
the taxable oil and gas as calculated under
AS 43.55.160, or the minimum tax determined under (f)
of this section."
Renumber the following bill sections accordingly.
Page 14, line 21:
Delete "22.5"
Insert "25 [22.5]"
Renumber internal references to bill sections in
accordance with this amendment in a way that makes
sec. 14 effective January 1, 2008, and adds sec. 14 to
(b) of the APPLICABILITY section and to (1)(B) of the
TRANSITION: RETROACTIVITY OF REGULATIONS section.
Below are all internal bill section reference in this
bill:
Page 31, lines 25, 27, 29, 30, and 31
Page 32, lines 1, 3, 13, 16, 19, and 31
Page 33, lines 2, 19 - 20, 21, and 22
CO-CHAIR JOHNSON objected to Amendment 44.
8:54:48 PM
CO-CHAIR GATTO moved Amendment 1 to Amendment 44 which read as
follows [original punctuation provided]:
Page 1, line 5, following "produced each":
Delete "month"
Insert "calendar year"
Page 1, line 8, following "percent of the"
Insert "annual
REPRESENTATIVE WILSON inquired whether this is the issue in
which the desire is to have it done on a monthly basis.
COMMISSIONER GALVIN responded that that is for progressivity.
REPRESENTATIVE WILSON removed her objection to Amendment 1 to
Amendment 44.
There being no further objection, Amendment 1 to Amendment 44
was passed.
8:56:04 PM
CO-CHAIR GATTO explained that Amendment 44 would change the
percent [of the production tax value of the taxable oil and gas]
from 22.5 to 25.
CO-CHAIR JOHNSON sustained his objection to Amendment 44, as
amended.
REPRESENTATIVE WILSON objected to Amendment 44, as amended.
The committee took an at-ease from 8:57 P.M. to 9:24 P.M.
9:25:02 PM
CO-CHAIR JOHNSON asked Commissioner Galvin to address the
monetary effect of Amendment 44, as amended.
COMMISSIONER GALVIN replied that the effect of Amendment 44
would be to raise the base tax rate from 22.5 to 25 percent.
Because of the effective date change by a previous amendment, he
said, the increase in revenue is for fiscal year (FY) 07 as well
as FY 08. The total effect is $247 million: $142 million for
the current FY 08 and $105 million for FY 07. With that in
context and given all the changes, the current bill at 22.5
percent rate results in an FY 08 increase in revenue of $773
million and a total FY 07 increase of $139 million, for a total
of $912 million. All these numbers are at the current
forecasted price of $71.65, he noted.
9:27:31 PM
CO-CHAIR JOHNSON requested those numbers at today's price
because that is what [the committee] has been basing things on.
COMMISSIONER GALVIN said he does not have the PPT rate, but that
he does have an $80 price for the current bill.
CO-CHAIR JOHNSON noted that a chart was previously presented to
the committee that showed a $1.4 billion increase just on
progressivity at today's prices.
COMMISSIONER GALVIN said the chart was not generated by DOR.
9:28:35 PM
CO-CHAIR JOHNSON inquired whether today's prices would elevate
DOR's number up to the $1.7 billion that he had been led to
believe was correct or was the chart wrong. Did [the committee]
pass an amendment based on faulty information, he asked. He was
concerned about the large difference and that this could lead to
another revenue forecast shortfall. He requested the real
numbers at today's price.
COMMISSIONER GALVIN said he would have to get the real number
for PPT at today's price. He was not sure where the number came
from because he was not present during the progressivity
amendment. He asked if the committee would like him to get the
numbers right now.
9:30:44 PM
CO-CHAIR JOHNSON stated that it is a number he would like to
see.
COMMISSIONER GALVIN asked what price Co-Chair Johnson is
specifically referring to.
CO-CHAIR JOHNSON responded $95.
COMMISSIONER GALVIN noted that $95 is an all-time high price.
CO-CHAIR JOHNSON said he thought the high was $96.
9:30:55 PM
REPRESENTATIVE SEATON clarified that the request is to see an
annual projection at a price of $95 throughout the entire year.
COMMISSIONER GALVIN noted that it is now November and that there
are real numbers for the first four months of this year.
Running the number at $95, he explained, would be equivalent to
an average price for the entire year of $95, which would mean
that the price would have to go way over $100 in order to
overcome the four months below this.
CO-CHAIR GATTO stated that he is not the one asking for the
numbers, that Co-Chair Johnson is the member making the request.
CO-CHAIR JOHNSON requested using an average for the last five
months because they are real numbers.
COMMISSIONER GALVIN explained that the current forecast price of
$71.65 being used for FY 08 was generated by [DOR's] economic
team as well as experts that were brought in, and that it is
based on the real numbers so far and a projection for the
remainder of the fiscal year. He said he already has the
numbers for an $80 average, but that he would have to rerun
everything if the committee wants it done at a $95 price.
9:33:24 PM
CO-CHAIR JOHNSON agreed to $80. He questioned the forecast
because he thought the average had been over $70 for the past
five months. Is DOR expecting the price to go down, he asked.
COMMISSIONER GALVIN replied yes, the economists are expecting
the price to go down to $66 in FY 09 and continue down from
there.
CO-CHAIR GATTO asked whether these are all based on 720,000
barrels.
COMMISSIONER GALVIN answered that 722,000 barrels is the current
number for this week.
CO-CHAIR JOHNSON said he would take the $80 numbers for
expedience.
9:34:21 PM
REPRESENTATIVE ROSES stated that he has a question on the
progressivity piece for which numbers had been given because he
wants to make sure everyone is operating off the same set of
numbers and the same retroactive date.
REPRESENTATIVE FAIRCLOUGH inquired whether the forecast included
the consequence of all of the amendments that passed that were
underdetermined for credits.
REPRESENTATIVE ROSES continued with his aforementioned question.
He asked whether the retroactivity included in [Amendment 36] is
the same as this retroactive date, and if it is not, which
trumps which.
COMMISSIONER GALVIN said that his numbers are based on
[Amendment 36] and that the retroactivity in this amendment is
what resulted in the numbers having to be calculated for FY 07
as well as all of FY 08. In further response to Representative
Roses, Commissioner Galvin clarified that Amendment 44 does not
have any retroactive date, it would only change the tax rate.
He said that the effect of [Amendment 36] is to change the
effective date of the bill.
9:36:20 PM
REPRESENTATIVE ROSES referred to the governor's recent newspaper
article in which she addresses making sure that the state gets
its fair and equitable share. Given the retroactivity provided
under [Amendment 36] and progressivity rates in the current
bills before both bodies that are much higher than the .2
percent rate in [HB 2001, as introduced], why is the governor
still concerned that we have 25 percent on the base rate, he
asked.
COMMISSIONER GALVIN cautioned that Representative Roses is going
back and forth between retroactivity and progressivity. He
noted that ACES [HB 2001, as introduced] was a balance between a
gross-based floor and a relatively modest progressivity. The
governor has made clear that if there is no longer a floor to
protect the state during low prices, then she would support an
increased progressivity. The progressivity provided in the
current bill with the amendments passed yesterday by the House
Resources Standing Committee is consistent with the governor's
interest with 25 percent as the base rate, he related.
9:38:04 PM
REPRESENTATIVE ROSES inquired whether the governor's objectives
would be met at a 22.5 percent base tax rate if there is no
floor and the entire progressivity is on a marginal rate that is
greatly escalated from [HB 2001, as introduced].
COMMISSIONER GALVIN answered no. When there is no floor and the
prices comes down to where there is no progressivity, [the
administration] believes the rate should be 25 percent. When
the floor is taken out, an increase in progressivity is
appropriate.
REPRESENTATIVE ROSES recalled that his support of the
progressivity in Amendment 2 was contingent upon the base tax
rate being 22.5 percent and that he had reserved the right to
revisit Amendment 2 if the rate was raised to 25 percent. He
requested that Amendment 2 be revisited if Amendment 44 passes.
CO-CHAIR GATTO promised to provide that opportunity.
9:40:27 PM
REPRESENTATIVE FAIRCLOUGH requested that Legal Services be asked
to draft a CS with all the amendments that have been passed so
the committee could see what has been done in totality and
debate the points still in need of consideration during the
light of day when the public can watch.
CO-CHAIR GATTO responded that he had stated at the start that
the committee would meet from Monday to Sunday and that the
committee would use HB 2001(O&G) and consider every amendment
offered by House Resources Standing Committee members. He said
the committee's work is serious but not complicated and that all
committee members had been allowed full and adequate opportunity
to speak. He said it is his intent to continue the meeting
until the bill is moved.
9:45:48 PM
COMMISSIONER GALVIN stated that at a price of $80 and a 22.5
percent base tax rate with progressivity, the difference between
PPT and [HB 2001(O&G), as amended thus far] is $1.166 billion
for FY 08.
CO-CHAIR JOHNSON asked what the number would be if Amendment 44
passed?
COMMISSIONER GALVIN replied that $167 million would be added for
FY 08 at the $80 price.
CO-CHAIR JOHNSON inquired whether that included the roughly $100
million that would be added by one of the amendments accepted
today.
COMMISSIONER GALVIN answered that the $105 million for FY 07 is
fixed because the price was already in place and that it would
be added to this amount as well.
9:47:43 PM
CO-CHAIR JOHNSON asked whether his addition is correct at a
little more than $1.4 billion
COMMISSIONER GALVIN confirmed that if Amendment 44 passed the
amount would be $1.408 billion at the $80 price.
CO-CHAIR JOHNSON opposed Amendment 44. He noted that his
previous estimate of $1.7 billion in tax increases is incorrect
and that $1.4 billion is a more accurate estimate. The tax was
increased by almost $1 billion last year, he said, so in two
years the increase now totals $2.4 billion. Because that was
different than the number he had seen on a progressivity chart
he thought it should be revisited. He disagreed that increasing
the tax rate is simple. It is not money that I am looking at,
he opined, it is the state's economy and jobs.
REPRESENTATIVE WILSON advised that she would be voting against
Amendment 44 because of her concern that it tips the scales too
far and leaves no balance. She recalled what happened in 1986
and that a lot of lives were changed dramatically because of it.
9:51:20 PM
REPRESENTATIVE SEATON addressed the discrepancies in the charts.
He explained that the effect of capital investment is to move
the progressivity down the slope. However, the amount of
investment is company-specific data that cannot be included in
the model, therefore the numbers shown in the charts can be
about 10 percent high. For example, for a large producer with a
large percentage of profits, investment represents only a small
percent of gross revenue; thus, the investment moves a large
producer down the progressivity ladder only slightly.
Conversely, for a small producer with small production,
investment could move the company totally off the progressivity
ladder. He pointed out that the progressivity used in every
model kicked in at $54 and that this is pretty much the target
range where decisions are being made. A stress test is done
down to $35-$40, but progressivity is not effective there at
all. So, he said, the only effective tax rate for the state
within that $40-$70 range after the subtraction of costs is
really the 2.5 percent that is on the table now. At $90, he
continued, progressivity is 12 percent which is $2.3 billion and
the 25 percent baseline is about $4.7 billion. Not shown on the
charts is that this leaves $12.3 billion for the companies.
While progressivity increases the government take, it is also
important to look at the other side of the chart to see how much
is left on the table, Representative Seaton opined. He referred
to the Gaffney, Cline & Associates models that showed virtually
no difference in the internal rates of return between 22.5
percent and 25 percent. Therefore, changing the base rate to 25
percent would not have a negative effect on investment decision
making, he contended.
9:57:00 PM
REPRESENTATIVE ROSES remarked that with the current price over
$90 and a forecast of $71, it would take a considerable decline
to get back to $54 where there is no progressivity. Because he
had not had the time to go through all of this, he said he would
like to move Conceptual Amendment 2 to Amendment 44, "starting
on line 8, ... if a taxpayer has no progressivity taxes ...
their rate would be 25 percent, but those that have a
progressivity would have a rate of 22.5 percent." He requested
Commissioner Galvin and Mr. Porter to speak to Conceptual
Amendment 2 to Amendment 44.
CO-CHAIR GATTO objected to Conceptual Amendment 2 to Amendment
44.
COMMISSIONER GALVIN said the effect of Conceptual Amendment 2 to
Amendment 44 would mean that the tax rate would come down and
then at progressivity it would blip up a little bit. Thus, once
the progressivity is hit it will go up the .2, or whatever it
may be, and immediately drop down to 22.5 plus the .2 percent.
At that particular moment in time there would be a significant
drop in the tax rate by having the margin go up. In response to
further questions from Representative Roses, he stated that the
forecast used for FY 09 was $66 which is $12 higher than $54.
10:00:16 PM
REPRESENTATIVE ROSES calculated that at a drop of $5 per year
from the FY 08 forecast price of $71, it would take about four
years to get down to $54. He said he thought his amendment
would take care of the administration's concern about no floor
and not receiving its fair share when the price gets too low to
have progressivity. In response to Representative Wilson,
Representative Roses said that the rate would be 25 percent when
there is no progressivity and that it would go down to 22.5
percent when there is progressivity.
COMMISSIONER GALVIN appreciated the message, but noted that the
end result would be a strange disincentive because a company
could end up saving perhaps tens of millions of dollars by not
investing that extra dollar to keep its margin from hitting the
progressivity. He pointed out that it is not that the price has
to come down to $54 in order for everybody to experience
progressivity because there can be projects that at an $80 price
will be at the progressivity trigger.
10:03:04 PM
REPRESENTATIVE ROSES asked whether the converse of that would
not also be true because not raising the tax rate from 22.5 to
25 would encourage companies to invest those dollars because
they would not be as severely impacted.
COMMISSIONER GALVIN said not necessarily. At that particular
point in time, if it's at a 25 percent rate, companies would
still get the tax advantage of having that progressivity bring
them down. The question of whether to go from 22.5 to 25
percent is not the same as having progressivity suddenly kick in
and drop the rate to 22.5 percent.
10:04:22 PM
REPRESENTATIVE ROSES said he understood that, but that he is
looking for a compromise. He said his reason for supporting
Amendment 2 is because every expert had testified that to
encourage investment, incentivize more production, and get the
state its fair share, the state needed to take a larger piece
when profits and margins are higher, and then be willing to take
the risk and share the expense when they are lower. He asked
Mr. Porter to speak to his conceptual amendment.
MR. PORTER responded that the effect of Conceptual Amendment 2
to Amendment 44 is the opposite of what he would do. The models
show that the state should set a fair amount on its base rate.
When balancing base rate and progressivity, however, the base
rate should be pushed down and the progressivity pushed up.
This would effect positive economics and stimulate investment.
Pressing the 25 [percent] into the base rate would have a
similar, but not as bad, an effect directionally as would a
gross floor. According to the Gaffney, Cline & Associates
model, even the most profitable portion of a Prudhoe Bay field
results in a relative balance in net present value (NPV) between
the state and the industry, Mr. Porter related. He said this
surprised him because he had thought that [industry's] NPV would
be substantially higher than [the state's] at the current rates;
so, it ends up being a fairly good balance. But, if 22.5
percent is added, [the state's] NPV goes up and [industry's] NPV
goes down, so there is a relative impact. It is not a huge
effect over the very long term, but will it result in industry
changing its opinion on major decisions, he asked. Going from
22.5 to 25 percent would probably not impact the specific
decision for a major project, he advised. However, from a long-
term standpoint regarding investment strategies and
relationship, [the state] would probably be slightly better off
by trying to catch that incremental value at a high side and
maintaining a lower base tax.
10:09:53 PM
REPRESENTATIVE ROSES stated that Mr. Porter's advice is exactly
his reasoning for supporting progressivity that takes a larger
piece of the pie when industry is making more and can afford to
share more and still have profitability in investments, and
takes a smaller piece when prices are lower. That is why he had
supported the 22.5 percent, he said, and why he had also
considered supporting an even lower rate. He withdrew
Conceptual Amendment 2 to Amendment 44.
REPRESENTATIVE FAIRCLOUGH submitted that [the committee] does
not adequately understand the total impact of the numerous
amendments that have been passed. She predicted that there
would be many unintended consequences as a result of not
reviewing the CS in its entirety. She said she did not believe
that the governor's message that the state is open for business
will get out with all that has been done. She said she could
not vote yes without reviewing a CS and knowing the totality of
what has been done.
10:12:50 PM
CO-CHAIR GATTO described his living and investment experiences
in Alaska since 1968 and that despite ups and downs over this
time period the oil companies have done extremely well. He said
he is concerned for the state's future due to the lack of saving
and unavoidable looming expenses. He does not begrudge the oil
companies for making huge amounts of money, he said, but the
state must make a fair share. He hoped there would be no floor
because the state needed to be at risk because it is asking for
more money and that he is okay with being at risk. He saw the
future of the state as prospering better with a 25 percent tax
on the base rate. He said he was stunned at the difference of
opinion within the [Twenty-Fourth Alaska State Legislature] and
that he believed the state was cheated when the base rate was
not established somewhere between 25-30 percent. He said he is
offering the 25 percent tax rate not to raise the rate, but
rather to bring the rate to the level at which it should have
been for the past year.
10:21:04 PM
A roll call vote was taken. Representatives Kawasaki, Seaton,
Guttenberg, Edgmon, and Gatto voted in favor of Amendment 44, as
amended. Representatives Fairclough, Wilson, Roses, and Johnson
voted against it. Therefore, Amendment 44, as amended, was
adopted by a vote of 5-4.
10:22:05 PM
CO-CHAIR GATTO asked whether fiscal notes are available for the
bill at this juncture.
COMMISSIONER GALVIN responded yes.
CO-CHAIR JOHNSON inquired whether there are two sets of fiscal
notes.
COMMISSIONER GALVIN said there is one at 22.5 percent and one at
25 percent.
REPRESENTATIVE FAIRCLOUGH recognized that she has constituents
on both sides of this issue and supported re-visiting of the
issue via the special session. She reiterated her concern that
errors are being made and that increasing taxes by $2 billion
over PPT is too big of a gamble and may cause the global
corporations to leave Alaska. She said her responsibility to
her constituents means that she must look beyond the short-term
of putting dollars into the bank today and consider the long-
term. She supported the progressivity and the structure that
would be going forward, but cautioned that the totality of
legislative actions would not be realized for eight years.
10:27:15 PM
REPRESENTATIVE ROSES said he heard Co-Chair Gatto's support for
25 percent and understood the co-chair's personal story about
investments. He related that up until two years ago every cent
of his personal investments was made within the state.
Therefore, if the oil companies did not continue investing in
Alaska his own investments would crash. Yet, regardless of
this, he came to Juneau to accomplish what the governor was
requesting and had gone beyond what she called for by helping to
pass the progressivity piece. He asked for reconsideration of
Amendment 2.
There being no objection to the reconsideration, Amendment 2 was
again before the committee.
REPRESENTATIVE ROSES explained that his intent is for Amendment
2 to disappear and have the progressivity piece be returned to
the version contained in CSHB 2001(O&G). He encouraged
committee members to defeat Amendment 2 because there would
still be a progressivity piece greater than what existed in PPT
and would still be similar to what the governor had wanted.
10:32:01 PM
CO-CHAIR GATTO supported adoption of Amendment 2.
CO-CHAIR JOHNSON objected to Amendment 2.
CO-CHAIR GATTO further outlined his past business and personal
investments in Alaska and his worry for the future of Alaska's
residents. Oil prices are more likely to go up than down, he
submitted, and it is appropriate for the state to share in the
wealth when prices are high. The key for the state is not only
to save money but to have enough money to save. A 25 percent
tax rate is modest and is the number the state should have had
earlier.
10:35:09 PM
CO-CHAIR JOHNSON stated that the chart and numbers provided by
Representative Seaton are good and, therefore, he still stood by
his number of $1.7 billion. He said that Amendment 2 would
generate an extra $146 million over PPT and, if his numbers are
right, this would be $170 million more than what the governor
had asked for. He supported going back to the progressivity [in
CSHB 2001(O&G)] and urged a vote of no on Amendment 2.
10:38:06 PM
REPRESENTATIVE SEATON said that failure to pass Amendment 2
would result in a gross progressivity with a gross trigger that
is not self-correcting and not self-adjusting for inflation.
Investment would not be stimulated because high cost projects,
like heavy oil, would be hit with progressivity and would be
disadvantaged because it does not work on the net profits and
does not ensure that net profits are available at $30 before
even the lowest progressivity kicks in. This is designed so
that progressivity is lowest at $30, it goes up only two-tenths
of a percent per dollar and then it increases as it goes up and
as everything becomes much more profitable. If we are left with
the other option, he said, it is a straight line and for every
dollar above the trigger there is the same increase in
progressivity that results in the companies being hit just as
hard at the bottom end as at the top end. Turning down
[Amendment 2] would require going back to a gross floor, he
said, because that was the balance that was being struck -
taking more at the high side sooner and dropping off the part
that was detrimental to investment. He urged members to support
Amendment 2.
10:41:49 PM
REPRESENTATIVE ROSES encouraged members to vote against
Amendment 2. He said he did not think the progressivity piece
in CSHB 2001(O&G) would survive travel to or on the House floor.
He said he had heard that the administration liked the Senate
version; therefore, he expected amendments to be introduced for
conforming the House bill to the Senate bill.
CO-CHAIR GATTO agreed that the language would be changed.
However, he said, this committee has the responsibility to do
its job regardless of what might happen in other committees or
on the House floor.
A roll call vote was taken. Representatives Seaton, Guttenberg,
Edgmon, Kawasaki, and Gatto voted in favor of Amendment 2.
Representatives Fairclough, Wilson, Roses, and Johnson voted
against it. Therefore, Amendment 2 was adopted by a vote of 5-4.
10:45:56 PM
REPRESENTATIVE FAIRCLOUGH thanked everyone for their work and
voiced her hope that the bill would be moved out of committee.
REPRESENTATIVE ROSES said there is a lot that he would like say,
but that he had spoken his piece.
CO-CHAIR JOHNSON requested that copies of the fiscal note be
distributed to committee members.
REPRESENTATIVE FAIRCLOUGH inquired what the process would be for
committee members to see the CS in totality and review it for
accuracy. She noted that the vote on the bill as amended will
be occurring prior to being able to see the CS.
CO-CHAIR GATTO said the CS would be generated by Legal Services.
10:47:16 PM
REPRESENTATIVE GUTTENBERG said he is touched by the stories of
Co-Chair Gatto and Representative Roses because he arrived in
Alaska at age 18 to work in the oil patch. Years after his
arrival the industry began a policy, due to economics, of hiring
workers from outside rather than Alaskans. He said that, for
him, this issue is not about being punitive, but rather it is
about standing up for the state and its people. He related that
several years ago there was a Wood Mackenzie report for which
people had to sign confidentiality agreements in order to read,
and that one part of the report talked about how expensive it is
for the oil industry to operate in Alaska. However, he
continued, someone else was able to release another part of the
report that said operating in Alaska is also phenomenally
profitable. This is about taking a small piece from a very
healthy industry, he said, and increasing taxes will not
endanger the industry. Industry views the state as a
competitor, not a partner. A big part of this issue is
exercising the state's sovereignty. He cautioned that lobbyists
represent someone else and should be listened to with a grain of
salt. The state does not have the numbers from industry that
everyone else in the world receives, he argued, and this will
help the state to get there.
10:55:37 PM
REPRESENTATIVE FAIRCLOUGH noted that there is a typo in the
fiscal analysis and that she does not know whether the actual
calculation is affected by the typo.
COMMISSIONER GALVIN inquired whether the typo being identified
is in the progressivity section relating to 30-50.
REPRESENTATIVE FAIRCLOUGH said no, the typo is located "at a
rate of .225".
COMMISSIONER GALVIN responded that this is a "straggler" for
that block from CSHB 2001(O&G).
REPRESENTATIVE FAIRCLOUGH replied that that is her point
exactly. She said she is asking because she does not know if it
is calculated and that these are the problems she is afraid of.
COMMISSIONER GALVIN replied that it will be corrected for the
floor as far as the actual language of that block, but that the
numbers have not changed.
REPRESENTATIVE FAIRCLOUGH said she is worried about the language
in the block and asked whether the numbers shown are correct.
COMMISSIONER GALVIN answered yes, it did not change the numbers
that designate the fiscal impact, it is merely a typo in the
text.
10:57:22 PM
REPRESENTATIVE EDGMON acknowledged the amount of work involved
in putting together the PPT structure from which discussions are
now being built. While much of the current discussion is about
the taxation side of the proposal, he said he believed that the
credits and deductions built into the plan would encourage
investment by both large and small companies. The oil companies
have not said they are leaving Alaska. This is a fair tax
proposal that rides the curve by sharing the risk in the lower
part of the curve and receiving a fair share in the upper part.
11:01:08 PM
CO-CHAIR JOHNSON voiced his fear that the state is heading for
an economic disaster that will creep up slowly but be just as
devastating as a quick disaster like Hurricane Katrina. It will
not affect the people in the oil industry who can afford to
move, he argued, rather it will affect the people who can least
afford it, such as the young and the old. He hoped there would
not be a Hurricane ACES in seven to ten years because his
constituents would be among those put out of work. He said he
prays he is wrong, but fears he is right.
CO-CHAIR GATTO said he is optimistic and that this is the
beginning of a huge success and great future for Alaska. He saw
companies coming to Alaska, not leaving, and he looked forward
to a [gas] pipeline being built. He expected to soon be reading
letters of support from his constituents.
11:09:10 PM
REPRESENTATIVE GUTTENBERG moved to report CSHB 2001(O&G), as
amended, out of committee with individual recommendations and
the accompanying fiscal notes. There being no objection,
CSHB 2001(RES) was reported from the House Resources Standing
Committee.
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 11:10 P.M.
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